Union Bank of India has received BUY recommendation from research house Prabhudas Lilladher with a revised target price of Rs160, upgraded from Rs150 based on an latest performance of the bank. Despite a mixed Q2FY26 performance marked by a disappointment in core pre-provision operating profit (PPoP) due to weaker net interest margins (NIM) and operational expenses (opex), the bank showed commendable progress in asset quality. With improved gross non-performing asset (GNPA) ratios, solid recovery efforts, and a strategic shift to higher-yield retail, agriculture, and MSME (RAM) segments, the bank targets a loan growth rebound to system levels in H2FY26. Investors should monitor growth-margin dynamics closely as profit forecasts for FY27/28E have been marginally trimmed by 6% due to expected challenges in NII and opex. Overall, the asset quality improvement underpins the "BUY" call with Rs142 current market price offering upside potential to the Rs160 target.

Research House Recommendation

Prabhudas Lilladher Pvt. Ltd. reaffirms a "BUY" rating on Union Bank of India (UNBK IN) with an elevated target price of Rs160 from Rs150. The rating reflects the bank's improving asset quality and expected recovery of earnings momentum in H2FY26 despite short-term margin pressures. The target is anchored on a 0.9x multiple on Sep 2026 adjusted book value, emphasizing prudent valuation amid a cautious near-term earnings outlook.

Q2FY26 Mixed Operational Performance

Union Bank posted a core PPoP miss of 3.3%, primarily driven by contraction in NIM and higher operating expenses. Net interest income (NII) came in at Rs88.1 billion, below estimates, with the calculated NIM at 2.55%, down from previous quarters. While loan growth remained muted at 0.2% QoQ and 5.7% YoY, deposit growth was modest. Core PAT at Rs31.5 billion exceeded estimates, reflecting benefits from higher non-interest income and prudent provisioning strategies. Operational expenses rose 1.6% QoQ, pressuring profitability, but other income jumped on the back of fees and a significant IT refund.

Asset Quality Advancements Serve as a Silver Lining

A key highlight was asset quality improvement. Gross slippage ratio was contained at a lower 94 basis points against the expected 1.2%, aided by a bulky Rs6 billion upgrade/write-back in credit costs. GNPA ratio declined to 3.29% from prior quarters, with net NPA falling more steeply to 0.55%, positioning the bank ahead of its peers on this front. Standard asset provisions were increased by Rs4.4 billion to gear up for an expected expected credit loss (ECL) framework transition. Provisions curbed to Rs14 billion, significantly below estimates, boost near-term earnings visibility.

Challenging Growth and Margin Dynamics

Loan growth remains subdued; corporate and agricultural loans shrank QoQ by 2.6% and 1.9%, respectively, while retail and SME segments showed healthy upticks of 4.1% and 2.0%. The bank aims to raise the share of its RAM book from the current 55% to 58%, leveraging better yields and cross-selling opportunities. However, loan growth has averaged only 1.4% over the past seven quarters, raising concerns on momentum. NIM contraction arises from faster yield erosion compared to funding cost decline, despite a reduction in high-cost bulk deposits by almost 22% YoY. The management anticipates NIM to stabilize by Q3FY26 and improve thereafter due to deposit rate cuts and CRR easing.

Financial Estimates and Targets

The bank trimmed FY27 and FY28 core profit after tax (PAT) growth estimates by approximately 6%, factoring lower NII growth and rising opex. However, the expected GNPA ratio improvement from 3.3% to 2.0% by FY28 supports earnings quality. Return on equity (RoE) is projected to moderate to 12.8%-12.5%, and the price-to-book multiple remains attractive at 0.8-0.7x.

Capital Adequacy and Risk Metrics

Union Bank displays strong capital buffers, with the capital adequacy ratio (CAR) expected to improve to 23.7% by FY28, and Tier 1 capital rising to 17.6%. Proactive provisioning for standard assets and upcoming ECL norms provides resilience against asset shocks. The coverage ratio at 83.8% underpins robust risk mitigation. Credit cost is anticipated to stay stable around current levels, contributing to smoother earnings trajectories.

Strategic Outlook and Investor Guidance

Management envisions system-level loan growth to materialize in H2FY26, with advancement in the high-yield RAM segment leading the growth charge. Continued CASA accretion and reduction in costly bulk deposits should bolster margins from Q3FY26 onwards. Fee income revival, including PSLC income resuming to FY25 levels, adds incremental earnings streams. Investors are advised to closely track growth-margins interplay and operating expense trends, as these factors hold the key to sustained profitability recovery.

Current Market Position and Performance Metrics

The stock has delivered a 22% absolute return over the last 12 months, outperforming benchmarks and reflecting improving fundamentals. The combination of attractive valuation multiples and prospective asset quality gains makes Union Bank a compelling opportunity for investors seeking steady banking sector exposure.

Conclusion: Buy with a Target of Rs160

Union Bank of India emerges from Q2FY26 results with a mixed operational narrative but a positive asset quality trajectory that justifies optimism. The cautious earnings downgrade is offset by strategic advances in growth segments, margin stabilization expected in H2FY26, and resilient capital adequacy. Prabhudas Lilladher's recommendation to "BUY" with a target price of Rs160 reflects confidence in the bank's ability to rebound, making it an attractive proposition for investors focused on value and quality in the mid-sized public sector banking space. Investors should, however, remain vigilant of evolving margin pressures and monitor loan growth closely.