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Overall credit growth remains sub-par for Union Bank (UNBK) at 8% YoY, but the bank managed to report a ~11% PAT beat at Rs50bn (RoA of 1.3%), mainly due to lower provisions as banks paused to build provisions towards ECL in Q3. Going forward, the mgmt guides to accelerate credit growth, led by the RAM segment. UNBK strategically shed bulk deposits, leading to lower CoF and thus 9bps QoQ margin improvement, but we believe core deposit growth remains a challenge for the bank (up ~0.5% YoY) and thus could keep margins in check amid another repo rate cut expected in 4Q. Overall NPA ratios are trending down, given contained fresh slippages and continued recovery in the corporate pool, but we believe the bank needs to accelerate ECL provisions. Factoring in Q3 earnings beat and better growth guidance, we raise our FY26-28E earnings by ~1-8%. We also lift our TP by 14% to Rs160 (from Rs140) on factoring in earnings upgrade and rolling forward to 0.9x Dec-27E ABV. After the recent rally, the stock is trading at ~1x FY27E/0.9x FY28E ABV for a relatively sub-par growth, CASA, and RoA profile vs large peers, and thus, retain REDUCE

Sub-par growth in Q3; but management guided for growth acceleration In Q3, UNBK reported modest credit growth of 8% YoY versus system and also most of its peers growing at 12-14% YoY. Deposit growth too remains sub-par at ~0.5% YoY, leading to a sharp jump in LDR to 81%, which looks unsustainable. This coupled with shedding of high-cost bulk deposits and CRR cut led to a 9bps QoQ improvement in NIM to 2.8%. The management has guided to match or surpass system loan growth, which looks to be a tall task and could hurt margins in the process. Core deposit growth too remains a challenge, and thus, the bank needs to address the same at the earliest.

Lower slippages/w-offs and pause on ECL buffering led to contained provisions Gross slippage moderated to a low of Rs18.5bn/0.8% of loans, while healthy recoveries led to a 23bps QoQ improvement in the GNPA ratio to 3.1%. This coupled with pause on standard asset provisioning as a build-up toward ensuing ECL implementation by 1-Apr27 led to lower provisions and thus earnings beat. While SMA-1 and SMA-2 levels >Rs50mn remained steady at 0.3% of loans, SMA-0 declined to Rs14.7bn/0.15% of loans. However, the SMA pool below Rs50mn is high at Rs240-250bn/2.4-2.5% of loans. As a part of the RBI relief scheme for MSMEs, the bank has extended loan moratorium to 78 borrowers with exposure to the tune of Rs5bn/0.05% of loans

We retain REDUCE We raise our TP by 14% to Rs160 (from Rs140) on factoring in earnings upgrade and rolling forward to 0.9x Dec-27E ABV. After the recent rally, the stock is trading at 1x FY27E/0.9x FY28E ABV for a relatively sub-par growth, CASA, and RoA profile vs large peers and thus retain REDUCE. Key risks: Emerging asset-quality risk in the MSME space.

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