Union Bank targets faster loan growth, higher margins as deposit costs ease

Union Bank of India is expected to sustain earnings growth over the coming quarters, supported by improving net interest margins, stable asset quality and loan growth that is likely to outpace the banking system, while slower deposit mobilisation remains an area to watch.

The bank is targeting loan growth at least one percentage point above the industry, aided by a focus on margin-accretive lending, while lower funding costs are expected to support further expansion in net interest margins, Motilal Oswal Financial Services said in a report.

The brokerage expects Union Bank to deliver a return on assets (RoA) of 1.3% and return on equity (RoE) of 15.3% in FY27, while projecting a loan CAGR of 11.8% over FY26-FY28.

Union Bank reported a 30% year-on-year rise in June-quarter net profit to Rs 53.3 billion, driven by lower operating expenses and provisions. Net interest income grew 10% year-on-year to Rs 100.4 billion, while net interest margin improved 16 basis points sequentially to 2.80%, helped by a lower cost of deposits.

Loan growth to outpace industry

The brokerage expects loan growth to remain healthy after advances rose 13.3% year-on-year in the June quarter, supported by corporate lending and steady growth across the retail, agriculture and MSME (RAM) segments.

Within retail, vehicle finance and housing loans continued to drive growth, while management expects margin-accretive lending to remain the key focus.

However, deposit growth is expected to remain under scrutiny after deposits rose only 3.5% year-on-year and declined sequentially, resulting in the credit-deposit ratio increasing to 83.6%. Management plans to gradually reduce the share of bulk deposits to 15% from 19% over the medium term.

Asset quality to remain stable

The brokerage expects asset quality to remain resilient after gross and net non-performing asset ratios improved to 2.65% and 0.47%, respectively, during the quarter. Provision coverage remained healthy at 82.8% despite a marginal increase in fresh slippages.

Management expects further improvement in margins through a lower cost of funds while maintaining the loan-to-deposit ratio and liquidity coverage ratio around current levels.

The bank has also mobilised around USD 106 million under the FCNR(B) deposit scheme and is targeting USD 1.5-2 billion during the current mobilisation window.

While the bank estimates an expected credit loss (ECL) transition impact of around Rs 60 billion, it has already created a management overlay provision of Rs 8 billion, providing a buffer ahead of implementation.

The brokerage raised its earnings estimates by around 5%, citing stronger margin performance and lower operating expenses, but maintained a 'Neutral' rating on the stock with a revised target price of Rs 190, noting that sustained deposit growth and execution on loan expansion will remain key factors to monitor.