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Union Bank continued to report sub-par credit growth, at 10% YoY, but better loan yields led to sustained margin expansion for the 2nd quarter in a row to 3.18% (up by 5bps QoQ). This, coupled with lower provisions, led to a strong 6% beat on our PAT at Rs35bn (up 90% YoY). Given its healthy capital (CET 1 at 13% after a capital raise in a 3rd attempt), we believe Bank should accelerate loan growth, while staying focused on containing margin slippage. Bank has been exhibiting strong control on the asset quality front with GNPA ratio sharply improving by 97bps QoQ to 6.4% due to a combination of lower slippages and higher w-offs. That said, Bank still has a higher restructured pool at 1.7% which it should aim to run off at the earliest. We hoist up FY24-26E earnings by 8-11% and expect the bank to deliver healthy RoA/RoE of 1%/15-17%. Currently, we maintain a HOLD on the stock and value it at 0.8x Sep-25E P/ABV, with new TP of Rs105/sh (Rs95 earlier). Our preferred picks in midcap PSB space remain Indian Bank and Canara Bank

Growth remains sub-par, but NIM expands owing to better loan yields

Union Bank continues to report sub-par credit growth at 10% YoY/4% QoQ due to slower growth across business segments, more so in the corporate book. Bank has revamped its retail banking division, the benefit of which in terms of growth is yet to be seen. Deposit growth too remains moderate, at 9% YoY/1% QoQ, with CASA at 34%. However, NIM continued to expand for the second quarter in a row at 5bps QoQ to 3.2%, while most PSBs report marginal contraction during 2Q. With strong capital on its side (CET 1 at 13% after a capital raise in a 3rd attempt), we believe the bank should accelerate loan growth, while remaining focused on containing margin slippage.

Lower slippages + higher write-offs led to sharp decline in GNPA ratio

Bank has seen steady moderation in gross slippage – Rs26bn/1.4% of loans which, coupled with its strategy to accelerate w-offs, led to 97bps QoQ decline in GNPA ratio to 6.4%. Bank has steadily increased its specific PCR to 81% and intends to bring down the NNPA ratio, from the current 1.3% to <1%, led by continued reduction in GNPA ratio and improving PCR, which should keep LLP slightly elevated. That said, the bank still has a higher restructured pool at 1.7% and should look to run it off at the earliest.

We retain HOLD with revised TP of Rs105/share

We have revised our earnings upwards by 8-11% for FY24-26E and expect the bank to deliver healthy RoA/RoE of 1%/15-17%, respectively. Currently, we maintain a HOLD rating on the stock and value it at 0.8x Sep-25E P/ABV, with revised TP of Rs105/share (vs Rs95 earlier). Our preferred picks in the mid-cap PSB space remain Indian Bank and Canara Bank. Key risks for Union Bank: Emerging asset-quality risk in the SME space and further moderation in growth as macros deteriorate.

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