Prabhudas Lilladher has updated its outlook on Union Bank of India, revising the target price to Rs 190 while maintaining an 'Accumulate' rating. The adjustment follows a quarter where higher net interest income boosted core profitability, though potential margin pressure from deposit competition remains a key factor for investors to monitor.
Prabhudas Lilladher recently updated its financial outlook for Union Bank of India, adjusting its target price to Rs 190 from the previous Rs 200. This change comes after the bank reported a recent quarterly performance where core operating profit surpassed analyst estimates by 4.6%. The primary driver for this performance was an increase in net interest income, which is the difference between the interest a bank earns from loans and what it pays to depositors.
Factors Influencing Profitability
The bank reported a 16 basis point sequential improvement in its net interest margins, reaching 2.8%. This growth was supported by the effective use of excess cash and an increase in the loan-to-deposit ratio. However, the brokerage firm noted that this margin improvement may face pressure in the coming periods. As the bank works to accelerate deposit growth to support its loan book, rising costs for these deposits could lead to a moderation in margins. The bank has set a goal for loan growth to outpace the industry average by 1% for FY27, while analysts estimate a loan growth rate of about 10.5% between FY26 and FY28.
Asset Quality and Financial Context
Investors are also evaluating the impact of a one-time charge of Rs 60 billion related to expected credit losses. This charge reflects the bank’s provision for potential future loan defaults, a standard practice in banking to ensure balance sheet health. The brokerage firm is currently analyzing the long-term impact of this specific provision. Furthermore, deposit growth for the bank has been relatively slow, recorded at 3.5% year-on-year in the first quarter of FY27. This slower pace of deposit collection remains a challenge for banks across the sector as they compete to maintain adequate liquidity to fund new credit.
Looking Ahead
The future performance of Union Bank of India will depend on its ability to balance loan growth with the rising cost of deposits. While the bank’s core operations showed resilience in the recent quarter, the sustainability of these margins will be a key metric. Investors may track future regulatory filings and management commentary regarding the normalization of liquidity and the bank's strategy to attract more retail deposits, which are essential to sustain its lending activities without putting excessive pressure on interest margins.