Union Bank’s profitability and capitalisation to cushion impact of RBI measures on risk weights: MOFSL report

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Union Bank of India expects an impact of 50-60 basis points (bps) on its capital to risk-weighted assets ratio (CRAR) and 45-47 bps on CET (common equity tier)-1 capital due to the increase in risk weights on consumer credit, according to a Motilal Oswal Financial Services Ltd (MOFSL) report.

The public sector bank is closely monitoring the risk in the retail segment.

However, strong profitability and healthy capitalisation levels will cushion the impact of the recent RBI measures on risk weight, emphasised the report, which is based on an interaction that the bank’s top management had with the analysts.

The RBI issued a circular on November 16, increasing risk weights on unsecured personal loans, credit cards, and lending to non-bank finance companies (NBFCs) by 25 percentage points.

Loan growth: Healthy traction

The report noted that the bank is witnessing healthy traction in loan growth, led by continued strength in retail segment. Corporate and SME segments are also seeing improving trends.

“The bank is seeing good traction in steel, cement, power and infrastructure sectors. Overall, the management expects credit growth to be ~10-12 per cent in FY24,” MOFSL said.

On the deposit front, the bank is growing retail deposits at a steady pace with an aim of growing deposits through CASA (current account, savings account)/retail term and not via bulk deposits.

The bank has excess liquidity of ₹77,000 crore and will utilise this to fund growth, the report said.

“The bank thus expects a 20-30 bps increase in lending yields on a sequential basis. Thus, the bank expects NIM (net interest margin) to remain at around 3 per cent by end of FY24,” per the report.

Robust asset quality

Union Bank’s asset quality continues to improve with a constant moderation in NPA (non-performing asset) ratios, MOFSL said.

Slippages have primarily been led by the MSME segment, while the corporate segment has remained fairly strong.

Overall, the bank expects recoveries of ₹16,000 crore (₹78,000 crore already made in 1HFY24), while it expects slippages of ₹13,000 crore in FY24, the broking firm said.

The bank recovered about ₹15,000 crore in 1HFY24 from written-off accounts and expects to recover ₹4,000 crore by FY24 end.