Buy Union Bank of India Ltd For Target Rs. 145 - Prabhudas Liladhar Capital Ltd
Superior earnings with a strong balance sheet
Quick Pointers:
* Core PBT beat due to higher NII and fees; asset quality improved.
* For FY26/27E, due to increase in NII/fees we raise core PAT by avg. 6%.
UNBK saw a strong quarter owing to beat on all fronts i.e. NII, fees and asset quality resulting in core PBT being 9.4% above PLe. NII was 1.8% higher as NIM was cushioned due to (1) shedding of high cost bulk deposits in the last quarter and (2) avoiding disbursal of lower yielding loans. Loan growth was muted at 9.5% YoY; over FY25-27E we are factoring a loan CAGR slightly lower than the system at 10%. Asset quality was superior as net slippages were lower led by controlled gross slippages and healthy recoveries while provisioning for Q4’25 at 68bps was mainly driven by increase in PCR, which was a positive. UNBK has been reporting better quality earnings over the last few quarters; we increase core PAT for FY26/27E by avg. 6%. With core RoA of 0.9x in FY27, stock is valued at 0.7x on Mar’27 ABV suggesting a 24% discount to SBI. We keep multiple at 0.9x but raise TP to Rs145 from Rs140. Retain ‘BUY.’
* Strong quarter led by better NII, fees and asset quality; tax rate was lower: NII was higher at Rs95.1bn (PLe Rs93.5bn). NIM (calc.) was better at 2.75% (PLe2.71%). Reported NIM saw 4bps QoQ blip to 2.87%. Loan/deposit growth was in-line at 9.5%/7.2% YoY. LDR decreased to 72.8% (Q3’25-75.6%). CASA ratio was stable at 32.6%. Other income was a beat at Rs55.6bn (PLe Rs42.1bn) due to higher fees and MTM gains. SR provision reversal included in treasury was Rs7.9bn. Opex at Rs73.7bn was 2.3% above PLe led by higher other opex. Core PPoP at Rs49.1bn was 4.0% above PLe; PPoP was Rs77bn. Asset quality improved as GNPA fell by 25bps QoQ to 3.60% due to lower net slippages. Provisions were lesser at Rs15.4bn (PLe Rs16.9bn); PCR rose QoQ to 83% from 79%. Core PBT was a 9% beat; tax rate was lower at 19% (PLe 27%). Core PAT was 21.3% above PLe at Rs34.8bn while PAT was Rs49.8bn.
* Sequential loan growth was broad based: Credit accretion at 3.65% QoQ was broad based led by retail (7.4%), corporate (4.5%) and SME (4.6%). Loan growth was muted as bank avoided disbursal of lower yielding loans. Within retail, growth was driven by home, auto education. Agri fell by 3.7% QoQ due to which overall loan accretion was soft. Bank avoided to give a loan/deposit guidance, however, we are factoring a loan/deposit CAGR of 10% over FY25- 27E. UNBK is focused reducing share of higher cost deposits; bulk deposits make up 27% of total deposits. Focus on garnering CASA continues.
* NIM a key monitorable; asset quality improves: NIM fall was contained due to 1) curtailed high-cost bulk deposits leading to fall in deposit cost and 2) change in risk profile to increase yield. 50% of TDs are expected to mature within 6 months and 28% of the loan book is repo-linked. Due to further rate cuts, we expect NIM for FY26 to decline by 11bps YoY to 2.58%; fall in deposit cost can be faster which may lead to NIM upgrade. Other opex in Q4FY25 was a miss and grew by 22.5% QoQ largely led by PSLC purchase and CSR spend. Implied tax rate was lower as bank shifted to new tax regime.
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