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Strong NII and lower provisions drive earnings beat NIMs improve 6bp QoQ to 2.86%

* Union Bank of India (UNBK) reported 2QFY27 PAT of INR55.4b (up 30% YoY/4% QoQ, 11% beat), led by strong NII growth and lower provisioning.

* NII improved by 20% YoY/5% QoQ to INR105.8b (8% above est.), aided by strong NIMs (up 6bp QoQ to 2.86% vs. est. 2.68%). NIM uptick was largely driven by lower cost of deposits.

* Loan book grew 19.4% YoY/5.6% QoQ to INR11.3t, while deposits grew 6.9% YoY/2.8% QoQ. As a result, the CD ratio rose to 85.8%. Management retains its guidance of growing the loan book in line with industry trends.

* Fresh slippages declined by 11.5% QoQ to INR19.1b vs. INR21.6b in 1QFY27. GNPA/NNPA ratios improved 23bp/5bp QoQ to 2.42%/0.42%. PCR was stable QoQ at 82.9%.

* We raise our FY27E earnings by 5%, factoring in the improving earnings trajectory, and project FY27E RoA/RoE at 1.3%/16.5%. Retain Neutral with a TP of INR200 (1.0x Mar’28E ABV).

Business growth picking up; CD ratio rises to 85.8%

* UNBK reported 2QFY27 PAT of INR55.4b (30% YoY, 11% beat), driven by strong NII growth and lower provisioning. NII improved by 20% YoY/5% QoQ, with NIMs improving by 6bp QoQ to 2.86% (est. 2.68%).

* Other income rose 1% QoQ/fell 7% YoY to INR46.5b amid flat core fee income.

* Opex rose 2% QoQ/7% YoY (4% higher than MOFSLe). C/I ratio, thus, rose to 46.8% (vs. 45.3% in 1Q). PPoP improved 19% YoY (1% QoQ) to INR81.1b (6% beat).

* Advances growth was healthy at 19.4% YoY/5.6% QoQ to INR11.3t, led by strong growth in MSME (7.2% QoQ), corporate (3.8% QoQ) and steady growth in the RAM segment (14.7% YoY/4.5% QoQ). Within retail, growth was led by VF (up 5.2% QoQ) and steady growth in housing (+3.7% QoQ).

* Deposits grew 6.9% YoY/2.8% QoQ to INR13.2t, with a sharp uptick in CA deposits (10% QoQ). CASA ratio came in at 34.9% (down 17bp QoQ). CD ratio picked up to 85.8% (up 230bp QoQ).

* Fresh slippages declined 11.5% QoQ to INR19.1b, while healthy recoveries and upgrades led to an improvement in GNPA/NNPA ratios by 23bp/5bp QoQ to 2.42%/0.42%. PCR ratio was stable at 82.9%.

* Credit costs came in at 0.21% vs. 0.38% in 1QFY27, with the bank creating INR2b of additional standard asset provision. The bank expects ECL transition provisioning of INR55b, against which INR10b management overlay is already made.

Valuation and view

UNBK reported a healthy quarter on the back of strong NII and lower-than-expected provisioning as NIMs improved 6bp QoQ. Loan growth was healthy, led by RAM segment even as deposit growth continued to lag loan growth. Though the bank remains cautious on bulk deposits, leading to LDR inching up further. Management has guided for loan growth in line with systemic growth, with a continued focus on margin-accretive expansion. The bank has built a standard asset provision buffer of INR10b (including ~INR2b created in 2Q), while the estimated ECL transition impact stands at INR55b. Asset quality continued to improve overall, with credit costs and slippages contained. We raise our FY27E earnings by 5%, factoring in an improving earnings trajectory, and project FY27E RoA/RoE at 1.3%/16.5%. Retain Neutral with a TP of INR200 (1.0x Mar’28E ABV).

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