The results reflect a banking sector grappling with competitive pressures on lending rates whilst simultaneously demonstrating the fruits of sustained efforts in balance sheet clean-up. Union Bank's performance comes against the backdrop of India's public sector banks navigating a challenging environment of moderating credit growth and persistent deposit mobilisation pressures. The bank's ability to maintain profitability whilst aggressively provisioning for bad loans underscores improving operational resilience, though margin compression remains a concern that warrants close monitoring.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Interest Earned | ₹26,650 Cr | ₹27,296 Cr | ₹27,695 Cr | ₹26,958 Cr | ₹26,708 Cr |
| Net Interest Income | ₹8,812 Cr | ₹9,113 Cr | ₹9,514 Cr | ₹9,240 Cr | ₹9,047 Cr |
| Net Profit | ₹4,249 Cr | ₹4,116 Cr | ₹4,985 Cr | ₹4,604 Cr | ₹4,720 Cr |
| Net Interest Margin | 2.67% | 2.76% | 2.87% | 2.91% | 2.90% |
| Gross NPA % | 3.29% | 3.52% | 3.60% | 3.85% | 4.36% |
| Net NPA % | 0.55% | 0.62% | 0.63% | 0.82% | 0.98% |
Financial Performance: Profitability Holds Amid Margin Headwinds
Union Bank's Q2 FY26 financial performance presented a study in contrasts. Total income declined marginally by 0.43% quarter-on-quarter to ₹31,646.06 crores, whilst registering a 1.22% year-on-year decline. Interest earned contracted to ₹26,650.24 crores from ₹27,295.56 crores in the previous quarter, reflecting competitive pricing pressures in the lending market. More concerningly, net interest income fell 3.29% sequentially to ₹8,812.37 crores, accompanied by a 9-basis-point compression in net interest margin to 2.67%.
Despite top-line pressures, the bank demonstrated resilience at the bottom line. Net profit expanded 3.25% quarter-on-quarter to ₹4,249.08 crores, supported by reduced provisioning requirements. Provisions and contingencies declined to ₹1,396.73 crores from ₹1,664.51 crores in Q1 FY26, reflecting improving asset quality. This allowed profit before tax to rise 3.30% sequentially to ₹5,417.22 crores. However, the year-on-year comparison revealed a 9.97% decline in net profit, indicating that whilst sequential momentum exists, the bank faces headwinds in sustaining the elevated profitability levels achieved in the previous year.
The margin compression warrants particular attention. Union Bank's NIM of 2.67% represents a steady decline from 3.09% in March 2024, a trajectory that mirrors industry-wide challenges. Rising deposit costs, competitive loan pricing, and a flattening yield curve have collectively pressured spreads. The bank's CASA ratio, whilst stable at 32.56%, remains below the 34.20% recorded in March 2024, indicating ongoing challenges in mobilising low-cost deposits. This structural shift in deposit mix naturally exerts upward pressure on funding costs.
Margin Dynamics: The Balancing Act
Union Bank's declining NIMs reflect a sector-wide phenomenon where banks are caught between competitive loan pricing and elevated deposit costs. The 20-basis-point sequential decline from 2.87% in March 2025 to 2.67% in September 2025 suggests intensifying pressure. However, the bank's ability to maintain profitability through lower provisioning requirements demonstrates operational flexibility. The key question for investors: can the bank stabilise margins around current levels, or is further compression inevitable?
Asset Quality Excellence: NPAs at Multi-Year Lows
The standout achievement in Q2 FY26 was Union Bank's continued progress on asset quality metrics. Gross non-performing assets declined to 3.29% from 3.52% in the previous quarter and 4.36% a year ago, representing a 107-basis-point year-on-year improvement. More impressively, net NPAs compressed to just 0.55%, down from 0.62% sequentially and 0.98% year-on-year. This places Union Bank amongst the better-performing public sector banks on asset quality parameters.
The provision coverage ratio strengthened to 95.13% from 94.65% in Q1 FY26, indicating robust buffers against potential loan losses. This high coverage ratio, combined with declining absolute NPA levels, suggests that the bank's balance sheet clean-up efforts have reached an advanced stage. The reduction in provisioning requirements to ₹1,396.73 crores from ₹2,755.81 crores in Q1 FY25 reflects this improved asset quality, directly contributing to bottom-line growth.
Union Bank's advance-to-deposit ratio stood at 70.96%, indicating adequate lending headroom whilst maintaining liquidity buffers. The bank's loan book has demonstrated healthy growth, with advances rising from ₹8,70,776 crores in March 2024 to ₹9,53,513 crores in March 2025, representing a 9.51% annual expansion. This growth, achieved whilst simultaneously improving asset quality, underscores improving underwriting standards and risk management practices.
Asset Quality Transformation
Key Achievements: Union Bank has achieved a remarkable turnaround in asset quality, with gross NPAs declining from 4.76% in March 2024 to 3.29% currently—a 147-basis-point improvement. Net NPAs at 0.55% represent best-in-class levels amongst large public sector banks. The provision coverage ratio of 95.13% provides substantial cushion against future credit costs. This transformation from a stressed balance sheet to one characterised by improving quality represents a fundamental re-rating catalyst.
Capital Position: Strong Buffers Support Growth
Union Bank maintained a robust capital adequacy ratio of 17.07% as of September 2025, comfortably above regulatory requirements. The Tier-1 capital ratio stood at 15.58%, providing substantial buffers for future growth. Whilst the CAR declined 96 basis points sequentially from 18.03%, this primarily reflects balance sheet expansion rather than capital erosion. The bank's shareholder funds increased from ₹96,968.97 crores in March 2024 to ₹1,12,975.21 crores in March 2025, bolstered by retained earnings.
The bank's return on equity reached 14.81% on a trailing basis, significantly higher than the sector average and reflecting improving profitability. This ROE, achieved whilst maintaining conservative leverage, demonstrates efficient capital deployment. The return on assets of 1.22% similarly positions Union Bank favourably within the public sector banking cohort, indicating that the bank generates healthy returns on its asset base.
| Capital Metric | Sep'25 | Jun'25 | Mar'25 | Regulatory Minimum |
|---|---|---|---|---|
| Total CAR | 17.07% | 18.03% | 18.02% | 11.50% |
| Tier-1 CAR | 15.58% | 16.58% | 16.24% | 9.50% |
| Provision Coverage Ratio | 95.13% | 94.65% | 94.61% | N/A |
| ROE | 14.81% | N/A | N/A | N/A |
Peer Comparison: Attractive Valuation Discount
Union Bank's valuation metrics present a compelling case relative to public sector banking peers. Trading at a price-to-earnings ratio of 7.06x, the bank commands a discount to State Bank of India's 13.30x multiple, despite comparable return on equity profiles. Union Bank's ROE of 14.81% actually exceeds SBI's 13.77%, suggesting that the valuation discount may not be entirely justified by fundamentals.
The price-to-book ratio of 1.05x places Union Bank at the lower end of peer valuations, matched only by Punjab National Bank and Bank of Baroda. This modest premium to book value, combined with improving asset quality and stable profitability, indicates potential for valuation expansion. The dividend yield of 2.83% exceeds most peers, providing income support whilst the bank's transformation story unfolds.
| Bank | P/E Ratio | P/BV Ratio | ROE % | Dividend Yield |
|---|---|---|---|---|
| Union Bank of India | 7.06 | 1.05 | 14.81% | 2.83% |
| State Bank of India | 13.30 | 1.83 | 13.77% | 1.49% |
| Bank of Baroda | 8.11 | 1.06 | 13.09% | 2.76% |
| Punjab National Bank | 9.14 | 1.05 | 11.53% | 2.33% |
| Canara Bank | 7.34 | 1.26 | 17.21% | 2.65% |
| Indian Bank | 9.33 | 1.46 | 15.67% | 1.98% |
Relative to private sector peers, Union Bank naturally trades at a discount reflecting governance structures and operational efficiency differentials. However, within the public sector cohort, Union Bank's combination of improving asset quality, stable profitability, and attractive valuation multiples positions it favourably. The bank's market capitalisation of ₹1,36,641.54 crores ranks it amongst the top five public sector banks, providing adequate liquidity for institutional investors.
Valuation Analysis: Attractive Entry Point Emerges
At the current price of ₹179.00, Union Bank trades at compelling valuation multiples that reflect both the progress achieved and concerns about margin sustainability. The P/E ratio of 7.06x represents a significant discount to the broader market and even to banking sector averages. The PEG ratio of 0.41x suggests that the market is undervaluing the bank's growth trajectory, with historical net profit CAGR of 65.85% over five years far exceeding the valuation multiple.
The price-to-book ratio of 1.05x appears particularly attractive given the improving quality of the underlying loan book. With gross NPAs at 3.29% and provision coverage at 95.13%, the book value increasingly represents tangible, high-quality assets rather than legacy problem loans. Historical precedent suggests that as public sector banks complete their balance sheet repair cycles, price-to-book multiples tend to expand towards 1.3-1.5x levels, implying 25-40% upside from current levels.
The dividend yield of 2.83% provides downside protection whilst investors await potential re-rating. The bank's dividend payout has been sustainable, with the latest dividend of ₹4.70 per share representing a reasonable payout from earnings. Combined with capital appreciation potential, total return expectations appear favourable at current valuations.
"Union Bank's transformation from a stressed balance sheet to one characterised by industry-leading asset quality metrics, combined with attractive valuation multiples, presents a compelling risk-reward proposition for patient investors."
Shareholding Pattern: Institutional Confidence Building
The shareholding pattern reveals gradually building institutional confidence in Union Bank's transformation story. Foreign institutional investors increased their stake to 7.86% in September 2025 from 7.70% in June 2025, marking the fourth consecutive quarter of FII accumulation. Since December 2024, FII holdings have expanded by 140 basis points, indicating growing international investor interest in the bank's improving fundamentals.
Mutual fund holdings similarly edged higher to 3.76% from 3.64% in the previous quarter, with a notable 79-basis-point increase from 2.97% in September 2024. This steady accumulation by domestic institutional investors suggests improving conviction in the bank's medium-term prospects. Insurance companies maintained stable holdings at 7.66%, representing a substantial institutional ownership base.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 74.76% | 74.76% | 74.76% | 0.00% |
| FII | 7.86% | 7.70% | 7.11% | +0.16% |
| Mutual Funds | 3.76% | 3.64% | 3.46% | +0.12% |
| Insurance | 7.66% | 8.03% | 7.85% | -0.37% |
| Other DII | 0.28% | 0.27% | 0.33% | +0.01% |
The Government of India's stable 74.76% promoter holding provides governance stability, though it limits free float available for trading. The absence of promoter pledging eliminates concerns about forced selling or governance compromises. With 615 FIIs and 33 mutual funds holding stakes, the stock enjoys reasonable institutional participation, though scope exists for further accumulation as the transformation story gains broader recognition.
Stock Performance: Exceptional Returns Across Timeframes
Union Bank's stock performance has been nothing short of remarkable, delivering 71.87% returns over the past year compared to the Sensex's 9.01% gain—a stunning alpha of 62.86 percentage points. The three-year return of 127.30% significantly outpaced the Sensex's 38.38%, whilst the five-year return of 439.97% demonstrates the magnitude of the bank's transformation and market recognition thereof.
Recent momentum has been particularly strong, with the stock delivering 30.66% returns over three months versus the Sensex's 1.66%, generating 29 percentage points of alpha. Year-to-date, the stock has risen 16.38% compared to the Sensex's 2.15% decline, positioning Union Bank amongst the top performers in the banking sector. The stock trades just 0.56% below its 52-week high of ₹180.00, having rallied 77.67% from its 52-week low of ₹100.75.
| Period | Union Bank Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | 7.64% | -1.85% | +9.49% |
| 1 Month | 17.18% | -2.20% | +19.38% |
| 3 Months | 30.66% | 1.66% | +29.00% |
| 6 Months | 21.77% | 1.38% | +20.39% |
| 1 Year | 71.87% | 9.01% | +62.86% |
| 3 Years | 127.30% | 38.38% | +88.92% |
| 5 Years | 439.97% | 68.18% | +371.79% |
The stock's technical indicators uniformly signal bullish momentum, with MACD, Bollinger Bands, KST, and OBV all showing positive trends. The stock trades above all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—indicating strong underlying momentum. The adjusted beta of 0.42 suggests lower volatility than the broader market, providing relative stability during market corrections whilst participating in upside moves.
Investment Thesis: Quality Improving, Valuation Compelling
Union Bank's investment thesis rests on four pillars: improving asset quality, stable profitability despite margin pressures, attractive valuation multiples, and positive technical momentum. The bank has successfully navigated the most challenging phase of balance sheet repair, with NPAs declining to multi-year lows and provision coverage reaching comfortable levels. This foundational improvement in balance sheet quality provides a platform for sustainable profitability.
The proprietary Mojo Score of 78/100 reflects this balanced assessment, with positive ratings across near-term drivers (financial trend: positive, technicals: bullish), quality (good), and valuation (attractive). The bank's quality grade has improved from "below average" historically to "good" currently, reflecting the sustained improvement in financial performance. The financial trend indicator turning positive in the most recent quarter signals that operational momentum remains intact despite margin pressures.
The key risks to the thesis include further margin compression, slower-than-expected credit growth, and potential asset quality stress in specific sectors. However, the bank's conservative provisioning practices and improving underwriting standards provide buffers against these risks. The 65.85% five-year CAGR in net profits demonstrates the bank's ability to navigate challenges whilst delivering strong growth.
Key Strengths & Risk Factors
KEY STRENGTHS ✓
- Asset Quality Leadership: Gross NPA at 3.29% and net NPA at 0.55% represent multi-year lows and best-in-class metrics amongst large PSU banks
- Robust Provisioning: Provision coverage ratio of 95.13% provides substantial cushion against future credit costs and demonstrates conservative risk management
- Strong Capital Buffers: CAR of 17.07% and Tier-1 ratio of 15.58% provide adequate headroom for balance sheet expansion without capital raising
- Attractive Valuation: P/E of 7.06x and P/BV of 1.05x represent significant discounts to intrinsic value given improving fundamentals
- Improving ROE: Return on equity of 14.81% demonstrates efficient capital deployment and positions the bank favourably versus peers
- Institutional Accumulation: FII and mutual fund holdings increasing consistently over recent quarters signals building confidence
- Exceptional Stock Performance: 71.87% one-year return with positive alpha across all timeframes validates the transformation story
KEY CONCERNS ⚠
- Margin Compression: NIM declining from 3.09% to 2.67% over five quarters reflects competitive pressures and rising funding costs
- CASA Ratio Pressure: Current account savings account ratio of 32.56% down from 34.20% increases dependency on costlier term deposits
- YoY Profit Decline: Net profit down 9.97% year-on-year despite sequential growth indicates sustainability challenges at elevated levels
- Limited Free Float: Government holding of 74.76% restricts liquidity and institutional participation potential
- Sector Headwinds: Banking sector facing moderating credit growth and persistent deposit mobilisation challenges
- Execution Risk: Sustaining asset quality improvements whilst growing the loan book requires consistent underwriting discipline
- Valuation Run-up: Stock trading near 52-week highs limits immediate upside and increases vulnerability to profit-booking
Outlook: What to Watch
POSITIVE CATALYSTS
- NIM Stabilisation: Any signs of margin compression bottoming out would remove a key overhang on the stock
- Continued NPA Improvement: Further decline in gross NPAs below 3% would enhance balance sheet quality perception
- Credit Growth Acceleration: Loan book expansion above 12-15% annually whilst maintaining asset quality would drive earnings growth
- CASA Ratio Recovery: Improvement in low-cost deposit mix would support margin expansion and profitability
- Valuation Re-rating: P/BV expansion towards 1.3-1.5x levels as transformation gains broader market recognition
RED FLAGS
- Further Margin Decline: NIMs falling below 2.5% would raise concerns about sustainable profitability levels
- Asset Quality Reversal: Any uptick in NPAs or slippages would undermine the transformation narrative
- Provisions Increase: Rising credit costs would directly impact bottom-line growth and return ratios
- Weak Deposit Growth: Inability to mobilise deposits would constrain loan book expansion and market share
- Institutional Selling: Reversal of FII/MF accumulation trend would signal deteriorating confidence
The forward outlook for Union Bank hinges critically on management's ability to stabilise net interest margins whilst sustaining asset quality improvements. The bank operates in a challenging environment characterised by competitive intensity and regulatory oversight, yet has demonstrated operational resilience. Investors should monitor quarterly NIM trends, slippage ratios, and deposit growth metrics as key indicators of the bank's ability to navigate current headwinds.
The Verdict: Compelling Value Play with Manageable Risks
Score: 78/100
For Fresh Investors: Union Bank presents an attractive entry opportunity at current valuations. The combination of significantly improved asset quality, stable profitability, and compelling valuation multiples (7.06x P/E, 1.05x P/BV) creates a favourable risk-reward profile. The 2.83% dividend yield provides income support whilst the transformation story unfolds. Investors should accumulate on dips towards ₹165-170 levels for optimal risk-reward.
For Existing Holders: Continue holding with conviction. The stock's 71.87% one-year return reflects genuine fundamental improvement rather than speculative excess. Whilst margin pressures warrant monitoring, the bank's asset quality leadership and attractive valuation provide downside protection. Consider booking partial profits above ₹185 to manage portfolio risk, but maintain core holdings for potential re-rating as transformation gains broader recognition.
Fair Value Estimate: ₹210-220 (17-23% upside potential based on 1.2-1.3x P/BV and sustained ROE of 14-15%)
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ 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. Past performance does not guarantee future results. The views expressed are based on publicly available information and data as of January 14, 2026, and are subject to change. The author and publication do not hold positions in Union Bank of India and have no business relationship with the company.
