Buy Union Bank of India Ltd for the Target Rs. 145 by Motilal Oswal Financial Services Ltd
Healthy other income and low tax rate drive PAT beat
Business growth recovers a bit in a busy 4Q
* Union Bank of India (UNBK) reported 4QFY25 PAT of INR49.8b (50.6% YoY, 8% beat), led by better other income and a lower tax rate.
* NII grew 0.8% YoY to INR95.1b (up 3.0% QoQ, in line). NIMs declined by 4bp QoQ to 2.87% as yields declined and CoF pressure persisted.
* Loan book grew 9.5% YoY/3.6% QoQ to INR9.5t, while deposits grew 7.2% YoY/7.7% QoQ. Thus, CD ratio declined by 284bp QoQ to 72.8%.
* Fresh slippages increased by 30% QoQ to INR25.7b from INR19.7b in 3QFY25 amid higher slippages from the agri and SME segments, while healthy recoveries and upgrades led to improvement in GNPA/NNPA ratios by 25bp/19bp QoQ to 3.6%/0.63%. PCR ratio increased to 83.1%.
* We largely maintain our earnings estimates for FY26/FY27, and expect the bank to deliver RoA/RoE of 1.1%/15.2% by FY27E. Reiterate BUY with a TP of INR145 (based on 0.9x FY’27E ABV).
Asset quality improves; CD ratio falls to 72.8%
* UNBK reported 4QFY25 PAT of INR49.8b (50.6% YoY, 8.4% beat), led by better other income and a lower tax rate, offset by higher opex and in-line NII. In FY25, earnings grew 31.8% YoY to INR179.8b. We estimate FY26E earnings to grow to INR185b.
* NII inched up 0.8% YoY to INR95.1b (up 3.0% QoQ, in line). NIMs declined by 4bp QoQ to 2.87%, as yields declined and CoF pressure persisted.
* Other income grew 18.1% YoY/25.9% QoQ to INR55.6b (18% higher than MOFSLe), aided by SR provision write-back of INR7.87b, a trend seen across all PSU banks.
* Opex increased by 19.6% QoQ (down 3.1% YoY, 13% higher than MOFSLe), as employee expenses rose due to recognition of PLI provisions. As a result, overall C/I ratio increased by 377bp QoQ to 48.9%. PPoP, thus, grew by 17.9% YoY/2.8% QoQ to INR77b (in line).
* Business growth has seen some revival, with advances growth of 9.5% YoY/ 3.6% QoQ to INR9.5t. Retail grew at a healthy 22.1% YoY/7.4% QoQ, while MSME grew by 4.6% QoQ and large corporate grew 4.8% QoQ. Agri book declined by 3.7% QoQ.
* Deposits grew by 7.2% YoY/7.7% QoQ to INR13.1t, led by healthy seasonal flows in CA deposits. As a result, CASA ratio improved 9bp QoQ to 33.5%. Overall CD ratio thus declined by 284bp QoQ to 72.8%.
* Fresh slippages increased by 30% QoQ to INR25.7b from INR19.7b in 3QFY25, while healthy recoveries and upgrades led to improvement in GNPA/NNPA ratios by 25bp/19bp QoQ to 3.6%/ 0.63%. PCR ratio increased to 83.1%. SMA pool declined to 0.42%.
Highlights from the management commentary
* With a 50bp cut in the repo rate, the bank—having 28% of its book linked to the repo rate—expects a delay in deposit repricing. It is actively managing deposit costs to mitigate margin pressure.
* For FY26, the bank aims to align its credit growth with GDP growth of around 6% and inflation at 4%, forming the basis of its credit expansion strategy.
* The bank reported a reversal of SR amounting to INR7.87b.
* Slippages rose in the MSME and agriculture segments. For large restructured agricultural accounts, the bank has taken necessary actions. Additionally, automation in asset classification has led to increased recognition of slippages in MSMEs.
Valuation and view
UNBK reported a steady quarter, driven by healthy other income and a lower tax rate, leading to earnings beat. Margins moderated due to cost pressures, while yields slid as policy rates declined. Business growth in FY25 was tepid as the bank adopted a conservative approach with a focus on pricing. Deposit growth was muted and below the stated guidance for FY25; however, CASA improved amid healthy CA flows in 4Q. Management expects NIMs to have a negative bias in 1HFY26 due to the decline in policy rates and expects them to recover in 2HFY26. Slippages inched up QoQ, although due to a technical reason, while healthy recoveries and upgrades led to a decline in asset quality ratios. Credit costs have been under control, and with healthy asset quality, they are expected to remain benign. We largely maintain our earnings estimates for FY26/FY27, and expect the bank to deliver RoA/RoE of 1.1%/15.2% by FY27E. Reiterate BUY with a TP of INR145 (based on 0.9x FY’27E ABV).
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