Can Union Bank maintain its momentum after a 13% stock surge?

Synopsis

The loan book grew by 9.5% to ₹9.5 lakh crore while deposits rose by 7.2% to ₹13.1 lakh crore year-on-year compared with 6.7% and 3.8% growth in the previous quarter, respectively. Credit growth was buoyed by 22.1% increase in retail loan book and 12.5% rise in the micro, small, and medium enterprises (MSME).

ET Intelligence Group: The stock of Union Bank of India has gained 13% in three trading sessions since the bank declared strong growth in the fourth quarter profit last Thursday led by lower provisioning, stable margins, and higher other income. The public sector bank reported improving asset quality during the quarter amid traction in retail credit growth. Analysts have maintained a "buy" rating on the stock with 12-14% upside. The bank's credit and deposit growth picked up during the March quarter following lower growth in the previous quarter.

The loan book grew by 9.5% to ₹9.5 lakh crore while deposits rose by 7.2% to ₹13.1 lakh crore year-on-year compared with 6.7% and 3.8% growth in the previous quarter, respectively. Credit growth was buoyed by 22.1% increase in retail loan book and 12.5% rise in the micro, small, and medium enterprises (MSME).

Agencies

"With a cleaner balance sheet, adequate capital and strong deposit base, we expect credit growth for the bank to mirror system credit growth in the medium term," stated Anand Rathi Research in a report.

Fresh slippages increased sequentially to ₹2,483 crore from ₹1,820 crore due to a sharp 52% and 56% jump in slippages of agriculture and MSME categories.

Despite this, the gross nonperforming asset (NPA) ratio shrank sequentially to 3.6% from 3.9% due to moderation in the retail and corporate category and improved recoveries. The bank's gross NPA has fallen significantly over the past few quarters from 7.5% in the March 2022 quarter. The bank's management expects slippages to moderate in the coming quarters.

Net interest income (NII) rose by modest 0.8% to ₹9,514 crore year-on-year in the March 2025 quarter. However, higher other income and lower tax outgo aided 50.6% increase in net profit at ₹4,984.9 crore.

The bank showed resilience on the margin front despite moderating interest rate cycle and helped by sequentially lower cost of funds. Net interest margin (NIM) fell by four basis points sequentially and 22 basis points year-on-year to 2.87%. In the near term, while the interest rate on floating rate assets will moderate due to the 50 basis points cut in the repo rate, deposit rates will be revised downwards with a lag. This is likely to put pressure on NIM, which the bank expects to mitigate through active deposit cost management.

"Credit costs have been under control, and with healthy asset quality, they are expected to remain benign," mentioned Motilal Oswal Financial Services in a report.

The brokerage expects the bank to deliver return on assets of 1,1% and return on equity of 15.2% by FY27. It has reiterated a "buy" on the stock with a target price of ₹145, implying an FY27 forward price-book multiple of 0.9. The stock was last traded at ₹130.7 on Tuesday on the BSE.

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