Brokerage firm Prabhudas Lilladher has increased its target price for Union Bank of India to Rs 200, while maintaining its current rating. The upgrade follows strong quarterly results driven by improved margins. However, the firm notes that deposit mobilization remains a key area for investors to track as the bank navigates current liquidity constraints.
Brokerage firm Prabhudas Lilladher has revised its target price for Union Bank of India to Rs 200, adjusting from its previous target of Rs 190. This revision comes after the bank reported a solid quarterly performance, with operating profits surpassing expectations by 3.2 percent. The firm continues to maintain an 'Accumulate' rating, suggesting a balanced view based on the bank's recent operational progress.
Margin Improvement and Profitability
The bank's performance was notably supported by an increase in its net interest margins, which rose by 6 basis points sequentially to reach 2.86 percent. Net interest margin is a key measure of bank profitability, reflecting the difference between interest earned on loans and interest paid on deposits. This improvement was largely driven by a strategic decision to move away from lower-yielding assets. By focusing on more profitable lending areas, the bank managed to improve its core profitability metrics during the quarter.
Liquidity and Growth Challenges
While the bank has shown efficiency, the report also highlighted the importance of deposit growth. The loan-to-deposit ratio, which measures how much of a bank's lending is funded by customer deposits, has reached approximately 86 percent. This high level indicates that the bank is using a large portion of its existing deposits to support its loan book. To manage liquidity, the bank recently mobilized USD 2.2 billion in Foreign Currency Non-Resident (FCNR) deposits.
Looking ahead, analysts project a steady loan growth of 12.5 percent annually through fiscal years 2026 to 2028. However, the current loan-to-deposit ratio suggests that the bank may have limited space for further aggressive credit expansion unless it can grow its deposit base at a similar pace.
For investors, the primary area to monitor is the bank's ability to mobilize deposits in a competitive interest rate environment. Since the banking sector is currently facing broader liquidity pressure, deposit growth will be crucial for maintaining both credit expansion and profit margins. Investors may watch for future updates on deposit inflows and any changes to the bank’s lending strategy, as these factors will determine whether the bank can continue its current growth trajectory without facing margin pressure.