Union Bank earnings gain from margins, credit growth and improving asset quality

Investment View

Anand Rathi Research’s October 20, 2026 result update maintains its BUY rating on Union Bank of India following a strong Q2FY27 performance. The broker believes that accelerating credit growth, margin expansion, contained operating expenses and improving asset quality should support steady profitability.

Union Bank of India reported Q2FY27 RoA of 1.4 per cent and RoE of 16.2 per cent, both ahead of Anand Rathi’s estimates.

Credit and Deposit Growth

Net advances increased 19.4 per cent year on year in Q2FY27, accelerating from 13.3 per cent in Q1FY27. Domestic advances grew 17.4 per cent, led by corporate loans, which increased 23.6 per cent, and MSME loans, which rose 22.4 per cent. Retail and agriculture advances grew 11.2 per cent and 12.7 per cent respectively.

Overseas advances increased 52.2 per cent year on year, with around 70 per cent of the US$2.25bn FCNR(B) mobilisation deployed overseas. Management has guided for FY27E credit growth broadly in line with the banking system, at around 18 to 19 per cent.

Deposit growth improved to 6.9 per cent year on year and 2.8 per cent quarter on quarter in Q2FY27. CASA deposits grew 14.7 per cent year on year and retail term deposits rose 9.7 per cent, while bulk deposits declined 9.3 per cent. The CASA ratio was 34.9 per cent. The loan-to-deposit ratio increased as credit growth outpaced deposit growth.

Margins and Core Profitability

Net interest margin improved 6 basis points quarter on quarter to 2.86 per cent. A 10 basis point improvement in loan yields and a higher loan-to-deposit ratio more than offset a 2 basis point increase in cost of funds. Anand Rathi expects further margin improvement because around 53 to 55 per cent of Union Bank of India’s loan book is repo-linked.

Non-interest income declined 7 per cent year on year due to lower treasury income and recoveries from the technically written-off pool. However, operating expenses rose only 1.9 per cent year on year, well below balance-sheet growth. Core operating profit consequently increased 29 per cent year on year.

Asset Quality and Provisions

Asset quality continued to improve. Gross slippages declined to 71 basis points in Q2FY27 from 82 basis points in Q1FY27 and 91 basis points in Q2FY26. Net slippages were 14 basis points, compared with 37 basis points in Q1FY27 and negative 1 basis point in Q2FY26. NPA trends improved across portfolios.

The bank estimates an expected-credit-loss transition impact of around Rs55bn and has created an additional Rs10bn buffer, including Rs2bn created in Q2FY27. This buffer is excluded from the provision coverage ratio.

Estimates, Valuation and Risks

Anand Rathi raised its FY27E and FY28E net interest income estimates by 5.3 per cent and 6.0 per cent respectively. Profit after tax estimates were raised by 8.2 per cent and 8.5 per cent respectively.

The broker’s Rs221 12-month target price is derived using a two-stage dividend discount model and values the stock at 1 times FY29E price to adjusted book value. The forecasts are supported by improving margins, contained operating expenses and moderate credit costs.

Key risks: Lumpy slippages in the corporate book and higher-than-expected credit costs under the expected-credit-loss framework.