Union Bank margins improve as lower costs drive first-quarter earnings beat

Investment View and Valuation

Motilal Oswal Financial Services Limited described Union Bank of India's Q1 FY27 performance as steady, with revenue broadly in line and an earnings beat driven by lower operating-cost intensity and lower-than-expected provisioning. The broker retained its Neutral rating and raised earnings estimates by 5 per cent.

The target price is Rs 190, based on 0.9 times March 2028 estimated adjusted book value, compared with the current market price of Rs 172.

Q1 FY27 Financial Performance

Provisioning was lower than expected, supporting the earnings beat. The improvement in net interest margin and operating efficiency also contributed to stronger-than-anticipated profitability.

Loan and Deposit Trends

Loan growth remained stable, with advances rising 13.3 per cent year on year and 1.8 per cent quarter on quarter to Rs 10.7 trillion. Corporate loans increased 2.4 per cent quarter on quarter, while the retail, agriculture and micro, small and medium enterprise segment grew 11.6 per cent year on year and 1.6 per cent quarter on quarter.

Retail growth was led by vehicle finance, which increased 5.7 per cent quarter on quarter, and housing, which grew 2.4 per cent. Deposits grew only 3.5 per cent year on year and declined 1.8 per cent sequentially to Rs 12.8 trillion.

Current-account deposits fell 12 per cent quarter on quarter, while savings-account deposits were flat sequentially. CASA remained broadly stable at 35.1 per cent. The credit-deposit ratio increased 296 basis points quarter on quarter to 83.6 per cent, highlighting the gap between loan and deposit growth. The liquidity coverage ratio improved to 123 per cent.

Asset Quality and Provisioning

Asset quality continued to improve despite fresh slippages rising 3 per cent quarter on quarter to Rs 21.5 billion. The gross NPA ratio improved by 17 basis points quarter on quarter to 2.65 per cent, while the net NPA ratio improved by 1 basis point to 0.47 per cent. The provision coverage ratio remained stable at 82.8 per cent.

Management has built a Rs 8 billion standard-asset provision buffer, including about Rs 7 billion created in Q4 FY26. This is against an estimated expected-credit-loss transition impact of Rs 60 billion.

Management Outlook

Management expects further net interest margin improvement through a lower cost of funds while maintaining the current credit-deposit and liquidity coverage ratios. The bank guides for loan growth of 1 per cent above system growth, with emphasis on margin-accretive expansion.

• The bank aims to reduce bulk deposits to 15 per cent of total deposits from 19 per cent currently.
• Cumulative ECLGS disbursements are expected to reach Rs 140 billion to Rs 150 billion, of which Rs 100 billion has been disbursed.
• Union Bank has mobilised USD 106 million of FCNR(B) deposits and targets USD 1.5 billion to USD 2 billion, approximately Rs 200 billion, during the current FCNR(B) window.

Estimates and Key Balancing Factors

MOFSL forecasts an 11.8 per cent loan CAGR over FY26 to FY28 and estimates FY27 return on assets of 1.3 per cent and return on equity of 15.3 per cent.

The key positive factors identified in the report are improving margins, cost control and asset-quality improvement. These are balanced against slower deposit mobilisation, a higher credit-deposit ratio, normalising credit costs and the prospective expected-credit-loss transition provision requirement.