Union Bank of India shares: Analysts remain bullish on PSU lender, see up to 34% upside potential

Brokerage firms continue to remain positive on Union Bank of India after the state-run lender hosted its analyst meet, attended by multiple leading brokerage firms. Majority of the brokerage see a meaningful upside in the stock, suggesting up to 34 per cent potential gains in the counter.

Brokerage firms are swearing by the asset quality outlook of the lender with focus on delivering profitable growth. However, they remain watchful on near-term margins and cautious over sub-par growth which is an irritant. However, the valuations appear inexpensive, following recent corrections in the stock.

Shares of Union Bank of India dropped nearly 2 per cent to Rs 115.05 against its previous close at Rs 117.25 on Monday. However, the stock settled at Rs 115.75 on Tuesday, down 1.28 per cent, commanding a total market capitalization around Rs 88,000 crore. The stock is down 33 per cent from its 52-week high at Rs 172.45 hit in June 2024.

"We came out of the analyst meeting with a positive outlook on asset quality (delinquencies and bad loan recoveries) for the bank," said Kotak Institutional Equities. "While NIM and business growth might be weak in the medium term, the bank has room to preserve profitability in a healthy range through the lever on credit cost," said with a 'buy' and a target price of Rs 155.

Union Bank has been reporting a healthy performance, with earnings driven by healthy revenue and controlled provisions. Fresh slippages have been under control, which, coupled with healthy recoveries and upgrades, has resulted in an improvement in asset quality ratios, said Motilal Oswal. A lower credit cost and controlled restructuring provide a better outlook on asset quality.

"Loan growth is expected to trend at ~11%, aided by healthy growth in the RAM segment. Margins are also expected to remain in the guided range of 2.8-3 per cent despite the rate cut, supported by higher MCLR-linked loans. We estimate loans to grow at 10 per cent over FY25-27E, with RoA/RoE at 1.1 per cent/15.5 per cent by FY26E, added with a 'buy' tag and a target price of Rs 135.

Union Bank of India reported a 28.24 per cent YoY rise in its net profit to Rs 4,604 crore during the quarter ended December 31, 2024 (Q3FY25), driven by healthy growth in non-interest income. The public sector lender's net interest income (NII) grew marginally by 0.79 per cent YoY to Rs 9,240 crore, while its net interest margin (NIM) moderated to 2.91 per cent in the reported quarter.

Stable margins, lower opex and moderation in credit costs led to strong profitability for Union Bank of India, with its RoA coming at 1.3 per cent. Headline asset quality and PCR improved, said Anand Rathi, citing lower slippages; stable margins; improvement in CASA’s share; and decent traction in retail books as key positives. It had a target price of Rs 144 with a 'buy' tag in post Q3 results.

On the other hand, Emkay Global Financial Services has maintained a 'reduce' rating on the stock citing the performance marked by sharp slowdown in credit growth and intermittent asset quality hiccups lately. However, higher recovery from the write-off pool, lower operational cost, and tax rate have aided the bank’s profitability, it said.

"We have upgraded earnings estimates by 9 per cent for FY25E and expect the RoA/RoE to log at around 1.2 per cent/18 per cent, which could slip back to 1 per cent/13 per cent by FY27E as growth and margin take a hit and operational cost normalizes," Emkay said with a target price of Rs 120. "We prefer better-quality players like Indian Bank, State Bank of India and Bank of Baroda, given their healthy return ratios, management credibility, stability, and reasonable valuations," it added.