Union Bank shares up 65% in 6 months. Emkay Global's target price suggests 15% potential downside

Shares of Union Bank have climbed 26 per cent in the last one month, taking its six-month gains to 65 per cent. The rally in Union Bank has been mostly in line with other PSU and stocks, which climbed 18-52 per cent in the last one month. Analysts said PSB stocks have risen due to better growth and asset-quality outcome and the latest capital-positive investment guidelines.

"Union Bank too has benefited from the overall positivity, in addition to its recent effective attempt to boost capital via a fruitful QIP (Rs 5,000 crore at Rs 86.6 per share), leading to an improving return profile; relatively cheap valuations (pre up-move) have led to sharp gain (12 per cent in the past week). Union Bank’s has been a huge turnaround story among PSBs recovering from 3 straight years of losses (FY18-20) caused by forced merger of smaller PSBs and thereafter the hit form Covid," Emkay Global said in a note.

The brokerage noted that Union Bank reported a healthy return on asset (RoA) of 0.7 per cent and return on equity (RoE) of 12 per cent in FY23. It expects the bank to report FY24-26E RoA of 0.9 per cent and RoE of 14-15 per cent, led by better growth and contained provisions.

Union Bank, Emkay said, undertook a major management and HR revamp and is  strengthening its retail and digital banking, which should help it capture the new-age lending opportunity.

"Once capital-starved, it has now emerged as one of the well-capitalized banks (CET 1@12.3% pre-money in 1Q) and should get further boost (of 85bps) from the latest QIP. Post the recent up-move, Bank’s valuation gap (at 0.9x; BOB too at 0.9x) with peers has largely shrunk," the domestic broking firm said.

For now, Emkay Global has a 'HOLD' rating on the stock. It said it would revisit our target price of Rs 95 as soon as it gets better clarity on Union Bank's growth plans post the QIP. On Wednesday, the stock was trading 0.80 per cent lower at Rs 111.15. At this price, Emkay's target suggests a potential 14.52 per cent downside for the stock.

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