The quarter witnessed a mixed performance from the mid-cap public sector bank, with total income marginally declining 0.16% quarter-on-quarter to ₹7,421.39 crores from ₹7,433.21 crores in Q1 FY26. However, on an annual comparison, total income expanded 4.95% from ₹7,071.43 crores in Q2 FY25. The bank's operating profit before provisions stood at ₹1,613.20 crores, up 3.26% quarter-on-quarter but growing 12.68% year-on-year, indicating improving operational efficiency despite challenging market conditions.
UCO Bank's net interest income for Q2 FY26 reached ₹2,532.72 crores, registering a healthy 5.39% sequential growth from ₹2,403.23 crores in the previous quarter and a robust 10.10% year-on-year expansion from ₹2,300.34 crores. The bank maintained a capital adequacy ratio of 17.89%, comfortably above regulatory requirements, with Tier-1 capital at 15.90%. The provision coverage ratio stood at a strong level, though specific quarterly data was unavailable for Q2 FY26.
Financial Performance: Margin Compression Clouds Growth Story
UCO Bank's Q2 FY26 financial performance presents a nuanced picture of growth tempered by margin pressures. Interest earned grew 1.57% quarter-on-quarter to ₹6,537.17 crores, driven primarily by a 3.01% increase in interest on advances to ₹4,626.12 crores from ₹4,490.89 crores. Income from investments also contributed positively, rising 3.23% to ₹1,615.18 crores. On a year-on-year basis, interest earned expanded 7.55%, reflecting the bank's expanding loan book and improved asset deployment.
However, the bank's interest expenditure remained stubbornly high at ₹4,004.45 crores in Q2 FY26, declining marginally by 0.70% from ₹4,032.78 crores in Q1 FY26. This resulted in compressed margins despite growing interest income. On a positive note, interest costs grew only 5.99% year-on-year compared to 7.55% growth in interest earned, indicating improving cost management. The net profit margin for the quarter stood at 9.48%, while the operating profit margin excluding other income reached 63.41%.
Other income, a critical component for banks, showed volatility, declining 11.33% quarter-on-quarter to ₹884.22 crores from ₹997.20 crores in Q1 FY26. This 11.33% sequential drop in non-interest income affected overall profitability growth. Year-on-year, other income declined 10.96% from ₹993.07 crores in Q2 FY25, suggesting challenges in fee-based income generation and treasury operations.
| Quarter | Interest Earned (₹ Cr) | Net Interest Income (₹ Cr) | Operating Profit (₹ Cr) | Net Profit (₹ Cr) |
|---|---|---|---|---|
| Sep'25 | 6,537.17 | 2,532.72 | 1,613.20 | 619.76 |
| Jun'25 | 6,436.01 | 2,403.23 | 1,562.26 | 607.44 |
| Mar'25 | 6,744.59 | 2,698.49 | 1,698.77 | 652.43 |
| Dec'24 | 6,219.96 | 2,377.68 | 1,585.69 | 638.83 |
| Sep'24 | 6,078.36 | 2,300.34 | 1,431.60 | 602.74 |
| Jun'24 | 6,023.99 | 2,253.56 | 1,321.23 | 550.96 |
| Mar'24 | 5,859.70 | 2,187.36 | 1,272.87 | 525.77 |
| Dec'23 | 5,551.89 | 1,988.07 | 1,119.14 | 502.83 |
Asset Quality Concerns: Rising NPAs Demand Attention
A significant concern emerging from Q2 FY26 results is the deterioration in asset quality metrics. The bank's gross non-performing assets ratio worsened to 2.56% in Q2 FY26 from 2.63% in Q1 FY26, representing a 7 basis points sequential improvement. However, this marks a substantial improvement from 3.18% in Q2 FY25, indicating year-on-year progress. The net NPA ratio improved to 0.43% from 0.45% in the previous quarter and 0.73% a year ago, demonstrating effective resolution mechanisms.
⚠️ Asset Quality Watch
Whilst UCO Bank has made significant strides in reducing its NPA ratios over the past year, the sequential movement in gross NPAs warrants close monitoring. The bank's provision coverage ratio stood at 96.88% in Q1 FY26, providing a strong buffer against potential credit costs. However, investors should watch for any further deterioration in asset quality metrics in upcoming quarters, particularly given the challenging macroeconomic environment and potential stress in certain lending segments.
The bank's capital adequacy ratio of 17.89% in Q2 FY26 declined from 18.39% in Q1 FY26 but remained well above the regulatory minimum of 11.50%. The Tier-1 capital ratio stood at 15.90%, down from 16.35% quarter-on-quarter, suggesting capital deployment for growth initiatives. The CASA ratio, a key indicator of low-cost deposit mobilisation, was reported at 36.91% in Q1 FY26, down from 37.91% in Mar'25, indicating pressure on attracting current and savings account deposits.
UCO Bank's return on equity of 7.84% for Q2 FY26, whilst positive, remains modest compared to industry leaders. This metric indicates that the bank generates ₹7.84 of profit for every ₹100 of shareholder equity, suggesting room for improvement in capital efficiency. The return on assets stood at 0.67%, reflecting the bank's ability to generate profits from its asset base, though this too lags behind private sector peers.
Balance Sheet Strength: Steady Growth in Advances and Deposits
UCO Bank's balance sheet exhibited healthy expansion during FY25. Total deposits grew 11.56% year-on-year to ₹293,542.18 crores as of Mar'25 from ₹263,129.77 crores in Mar'24, demonstrating the bank's ability to mobilise funds despite intense competition. Advances expanded at an even faster pace of 18.18% to ₹215,134.58 crores from ₹182,021.87 crores, indicating robust credit demand and the bank's willingness to lend.
The bank's borrowings increased substantially by 13.25% to ₹28,687.49 crores in Mar'25 from ₹25,331.44 crores in Mar'24, reflecting additional funding requirements to support loan growth. Shareholder funds strengthened to ₹30,884.90 crores from ₹27,213.79 crores, growing 13.49% year-on-year, primarily driven by retained earnings and capital infusion. The book value per share stood at ₹22.20, providing a reference point for valuation assessments.
Loan-to-Deposit Ratio Analysis
UCO Bank's advances-to-deposits ratio stood at approximately 73.29% as of Mar'25, calculated from advances of ₹215,134.58 crores and deposits of ₹293,542.18 crores. This ratio indicates healthy deployment of mobilised deposits into income-generating assets whilst maintaining adequate liquidity buffers. The ratio has improved from previous years, suggesting better asset-liability management and optimisation of the balance sheet for profitability.
Peer Comparison: Competitive Positioning in Public Sector Banking
Within the public sector banking landscape, UCO Bank occupies a middle position in terms of valuation and operational metrics. The bank's price-to-book value ratio of 1.23x positions it between Central Bank of India (0.92x) and Punjab & Sind Bank (1.57x), suggesting market recognition of its improving fundamentals whilst acknowledging execution risks.
| Bank | P/BV Ratio | Dividend Yield | ROA (%) | Net NPA (%) | Gross NPA (%) | CAR (%) |
|---|---|---|---|---|---|---|
| UCO Bank | 1.23 | 0.96% | 0.68% | 0.45% | 2.63% | 16.35% |
| Bank of Maharashtra | 1.40 | 2.60% | 1.64% | 0.18% | 1.72% | 14.96% |
| Central Bank | 0.92 | 0.79% | 0.94% | 0.49% | 3.13% | 15.48% |
| Bank Of India | 0.72 | 3.19% | 0.92% | 0.75% | 2.92% | 15.14% |
| Punjab & Sind Bank | 1.57 | 0.00% | 0.71% | 0.91% | 3.34% | 16.02% |
UCO Bank's return on assets of 0.68% trails Bank of Maharashtra's industry-leading 1.64% and Central Bank's 0.94%, highlighting the profitability gap the bank needs to bridge. However, its net NPA ratio of 0.45% compares favourably with Bank of India (0.75%) and Punjab & Sind Bank (0.91%), demonstrating superior asset quality management amongst select peers. The bank's capital adequacy ratio of 16.35% is the highest amongst the peer group, providing a comfortable cushion for growth and absorbing potential credit shocks.
The dividend yield of 0.96% positions UCO Bank in the middle of the pack, below Bank of Maharashtra's attractive 2.60% and Bank of India's 3.19%, but above Punjab & Sind Bank's zero dividend policy. This modest payout reflects the bank's strategy of retaining earnings to strengthen capital and support balance sheet expansion, though it may not appeal to income-focused investors seeking higher current returns.
Valuation Analysis: Fair Pricing with Limited Upside
At the current market price of ₹30.91, UCO Bank trades at a price-to-earnings ratio of 15.50x based on trailing twelve-month earnings, representing a fair valuation relative to its growth trajectory and risk profile. The price-to-book value ratio of 1.21x suggests the market assigns a modest premium to the bank's net worth of ₹22.20 per share, acknowledging improving fundamentals whilst remaining cautious about execution risks.
The bank's PEG ratio of 0.76x suggests the stock may offer value relative to its earnings growth potential, as ratios below 1.0 typically indicate undervaluation. However, this metric should be interpreted cautiously given the volatility in banking sector earnings and the challenges in sustaining high growth rates. The stock's 52-week range of ₹26.83 to ₹52.00 indicates significant volatility, with the current price 40.56% below the peak, reflecting market concerns about the banking sector and UCO Bank's specific challenges.
The valuation grade has stabilised at "Fair" since August 2025, having previously oscillated between "Fair" and "Attractive" categories. This assessment reflects the market's balanced view of UCO Bank's prospects—recognising improvements in asset quality and profitability whilst acknowledging margin pressures, modest returns ratios, and execution risks inherent in public sector banking operations.
Shareholding Pattern: Government Dominance with Minimal Institutional Interest
UCO Bank's shareholding structure is dominated by government ownership, with the President of India holding 90.95% as of Sep'25, unchanged from the previous two quarters. This substantial promoter holding provides stability and eliminates concerns about hostile takeovers, though it may limit free float availability and trading liquidity for investors.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 90.95% | 90.95% | 90.95% | 0.00% |
| FII | 0.13% | 0.14% | 0.44% | -0.01% |
| Mutual Funds | 0.21% | 0.20% | 0.09% | +0.01% |
| Insurance | 3.15% | 3.23% | 3.44% | -0.08% |
| Other DII | 1.17% | 1.31% | 1.83% | -0.14% |
| Non-Institutional | 4.39% | 4.17% | 3.25% | +0.22% |
Foreign institutional investor holdings declined to 0.13% in Sep'25 from 0.14% in Jun'25 and 0.44% in Mar'25, indicating reduced international investor confidence in the stock. The number of FII holders decreased from 25 to 21 over the quarter, suggesting institutional exodus rather than concentration. This trend raises concerns about global investor perception of UCO Bank's prospects and the broader public sector banking space.
Mutual fund holdings showed marginal improvement to 0.21% from 0.20%, with the number of mutual fund holders increasing from 14 to 20, indicating some domestic institutional interest. However, the absolute holding remains negligible, suggesting mutual funds remain largely underweight on UCO Bank. Insurance company holdings declined to 3.15% from 3.23%, whilst other domestic institutional investors reduced exposure to 1.17% from 1.31%, reflecting cautious positioning by institutional investors.
Non-institutional holdings increased to 4.39% from 4.17%, with the number of non-institutional holders rising to 850,029 from 843,920, indicating retail investor accumulation. This trend suggests retail investors view the current levels as attractive, though institutional caution remains evident. The absence of promoter pledging eliminates one risk factor, providing comfort on governance and financial stability.
Stock Performance: Significant Underperformance Across Timeframes
UCO Bank's stock has delivered disappointing returns across most timeframes, significantly underperforming both the benchmark Sensex and the broader public banking sector. The stock declined 31.58% over the past year compared to the Sensex's 3.64% gain, resulting in a negative alpha of 35.22 percentage points. This underperformance reflects investor concerns about the bank's ability to sustain profitability growth and improve return ratios.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -2.86% | +1.76% | -4.62% |
| 1 Month | +1.38% | +1.52% | -0.14% |
| 3 Months | -4.48% | +2.06% | -6.54% |
| 6 Months | +1.54% | +6.87% | -5.33% |
| Year-to-Date | -29.51% | +7.44% | -36.95% |
| 1 Year | -31.58% | +3.64% | -35.22% |
| 2 Years | -24.85% | +26.38% | -51.23% |
| 3 Years | +166.01% | +43.73% | +122.28% |
The year-to-date performance has been particularly disappointing, with the stock declining 29.51% compared to the Sensex's 7.44% gain, resulting in a negative alpha of 36.95 percentage points. This sharp underperformance reflects the broader challenges facing public sector banks, including regulatory pressures, margin compression, and concerns about asset quality in a slowing economy. The stock's beta of 1.20 indicates higher volatility than the market, amplifying both gains and losses.
On a positive note, the three-year return of 166.01% demonstrates the stock's ability to deliver substantial gains over longer periods, significantly outperforming the Sensex's 43.73% return with a positive alpha of 122.28 percentage points. This longer-term outperformance reflects the bank's successful turnaround from its troubled past, including resolution of legacy NPAs and return to sustained profitability. However, recent performance suggests this positive momentum has stalled.
The stock's risk-adjusted return of -0.79 over the past year, combined with high volatility of 40.06%, places it in the "high risk, low return" category—an unfavourable combination for investors. The stock currently trades below its 200-day moving average of ₹33.64 but above shorter-term averages, indicating a medium-term downtrend with recent stabilisation attempts. Technical indicators present a mixed picture, with MACD showing mildly bullish signals on weekly charts but bearish on monthly timeframes.
Investment Thesis: Quality Improves But Momentum Weakens
UCO Bank's investment thesis rests on four key pillars: near-term financial trends, fundamental quality, valuation attractiveness, and technical momentum. The bank's financial trend turned positive in Jun'24 and has remained stable for five consecutive quarters, indicating consistent operational performance. This positive trend is supported by improving operating profit and net interest income, though concerns about non-operating income dependency persist.
The bank's quality grade improved to "Good" in Jun'25 from "Average" in Mar'25, reflecting enhanced operational metrics and balance sheet strength. This quality improvement is evidenced by declining NPA ratios, improving capital adequacy, and consistent profitability. However, the bank's return on equity of 7.84% remains modest compared to industry leaders, indicating room for further improvement in capital efficiency and profitability.
Valuation remains "Fair" at current levels, with the stock trading at 15.50x trailing earnings and 1.21x book value. This fair valuation suggests limited upside potential unless the bank can demonstrate sustained improvements in return ratios and margin expansion. The technical trend remains "Mildly Bearish," having changed from "Bearish" in mid-September 2025, indicating weak price momentum despite fundamental improvements.
"UCO Bank's turnaround story continues, but the pace of improvement has moderated. Whilst asset quality metrics show encouraging trends and profitability remains positive, margin pressures and modest return ratios limit the investment appeal at current valuations."
Key Strengths & Risk Factors
✅ KEY STRENGTHS
Improving Asset Quality: Gross NPA ratio declined to 2.56% from 3.18% year-on-year, with net NPA at just 0.43%, demonstrating effective resolution mechanisms.
Strong Capital Position: Capital adequacy ratio of 17.89% provides comfortable buffer for growth and absorbing credit shocks, highest amongst peer group.
Consistent Profitability: Five consecutive quarters of positive financial trend since Jun'24, with net profit growing 2.82% year-on-year in Q2 FY26.
Balance Sheet Expansion: Advances grew 18.18% year-on-year in FY25, indicating robust credit demand and lending appetite.
Government Backing: 90.95% government ownership eliminates takeover risks and provides implicit support during challenging times.
⚠️ KEY CONCERNS
Modest Return Ratios: ROE of 7.84% and ROA of 0.67% lag private sector peers, indicating suboptimal capital efficiency.
Margin Compression: Other income declined 11.33% quarter-on-quarter, affecting overall profitability growth despite rising interest income.
Weak Stock Momentum: Stock declined 31.58% over past year with mildly bearish technical trend, reflecting investor concerns.
Limited Institutional Interest: FII holdings at just 0.13% and declining, mutual fund holdings at 0.21%, indicating lack of institutional conviction.
CASA Pressure: CASA ratio declined to 36.91% from 37.91%, indicating challenges in mobilising low-cost deposits.
High Non-Operating Income Dependency: Non-operating income constitutes 86.26% of profit before tax, raising sustainability concerns.
Outlook: What to Watch in Coming Quarters
🎯 POSITIVE CATALYSTS
NPA Resolution Progress: Further decline in gross and net NPA ratios below 2.50% and 0.40% respectively would signal sustained asset quality improvement.
Margin Expansion: Stabilisation or improvement in net interest margins above 3.00% would boost profitability and investor confidence.
ROE Improvement: Sustained ROE above 8.50% for multiple quarters would demonstrate enhanced capital efficiency.
Institutional Accumulation: Increase in FII and mutual fund holdings indicating renewed institutional interest.
🚨 RED FLAGS
Further NPA Deterioration: Sequential increase in gross NPA ratio above 2.70% would raise asset quality concerns.
Margin Compression: Net interest margin falling below 2.90% would pressure profitability significantly.
CASA Decline: CASA ratio falling below 36.00% would increase funding costs and squeeze margins.
Institutional Exit: Continued decline in FII and insurance holdings signalling loss of institutional confidence.
Investors should closely monitor the bank's ability to sustain asset quality improvements whilst expanding its loan book. The trajectory of net interest margins in the coming quarters will be critical, particularly given the competitive intensity in the banking sector and potential interest rate movements. Management's success in diversifying income sources and reducing dependency on non-operating income will determine the sustainability of profitability growth.
The bank's capital position remains strong, but deployment efficiency needs improvement. Investors should watch for initiatives to improve return on equity through better asset mix, pricing discipline, and operational efficiency improvements. Any material changes in government shareholding policy or privatisation discussions would be significant catalysts, though such developments appear unlikely in the near term.
The Verdict: Hold for Existing Investors, Wait for Fresh Entry
Score: 52/100
For Fresh Investors: Not recommended for fresh purchases at current levels. Wait for either a significant price correction below ₹28.00 or clear evidence of sustained margin expansion and ROE improvement above 9.00% before initiating positions.
For Existing Holders: Continue holding with a 12-18 month investment horizon. The bank's improving asset quality and strong capital position provide downside protection, though upside potential appears limited at current valuations. Consider partial profit booking if stock rallies above ₹35.00.
Fair Value Estimate: ₹32.00-₹34.00 (3.53% to 10.03% upside from current levels)
Rationale: UCO Bank's turnaround story continues with improving asset quality and consistent profitability, earning it a "Good" quality grade. However, modest return ratios (ROE 7.84%, ROA 0.67%), margin pressures, weak technical momentum, and minimal institutional interest limit investment appeal. The fair valuation at 15.50x earnings and 1.21x book value offers limited upside unless the bank demonstrates sustained improvements in profitability metrics. The stock merits a HOLD rating for existing investors who can afford to wait for the improvement story to play out, but fresh investors should seek better risk-reward opportunities in the banking space or wait for a more attractive entry point.
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
