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Union Bank of India’s shares are down about 3% since its soft June quarter (Q1FY26) business update. The bank’s domestic deposit growth came in at a mere 3.6% year-on-year, and advance growth was 6.7%. The deposit growth rate being almost half of the advance growth rate should not be a big concern in the near future, as Union Bank’s loan-to-deposit ratio is moderate at 73% based on FY25.

It allows the bank to grow its advances faster than deposits, thereby showing higher profit growth in the short term. However, revival in deposit growth is crucial to sustain growth in the long term, as deposits for a bank are like raw material for a manufacturing company.

The bank’s growth rate both in domestic deposits and advances is lower than that of Bank of Baroda (BoB) and Punjab National Bank (PNB), its public sector peers that have released their business updates. These three are among the top five public sector banks in India in terms of balance sheet size. So, it’s not as if the other two banks benefited from a smaller size base that helped report a higher growth rate. While the deposits for BoB and PNB grew 8% and 12%, respectively, advances grew 12% and 10%.

While Union Bank's balance sheet growth rate is moderate, analysts won’t be in a hurry to change their earnings estimates. This is because there are other critical aspects to be monitored, such as net interest margin (NIM), fee-based income, and asset quality, that are not shared in business updates.

While Union Bank’s NIM is likely to come under pressure similar to its peers, with 28% of the loan book being linked to the repo rate, the squeeze may be felt more for a couple of quarters as 50% of its term deposits are expected to be repriced lower in the next six months. After that, there could be some respite on NIM. Still, most analysts have already baked in a reduction of 10 basis points (bps) in NIM to 2.6% for FY26. So, there is unlikely to be a negative surprise unless the Reserve Bank of India (RBI) announces further aggressive repo rate cuts. One basis point is one-hundredth of a percentage point.

Fee income, another big component of core pre-provisioning profit (PPoP), has been an area of strength for Union Bank. Recall that even in FY25, when net interest income (NII) growth was 2%, fee income rose a whopping 26%. Its fee income as a percentage of average assets has been consistently climbing up from 0.54 in FY22 to 0.71 in FY25. Consequently, core return on average assets (RoAA), too, has increased from 0.26% to 0.92% over FY22 to FY25.

Gross slippages or fresh additions to non-performing assets (NPA) had been higher in FY25 at ₹12,000 crore against the management guidance of ₹11,500 crore. There is no guidance given for FY26. If slippages remain elevated, there could be higher credit costs (provisions for bad debts) with an adverse impact on profitability. For a positive surprise in credit costs, the recovery of bad loans has to gain momentum. Though the management was hopeful of more recoveries in FY25, it had fallen short of expectations as some of the pending cases could not be resolved.

Notwithstanding the soft business update, Union Bank, like other top state-run banks, remains a deep value stock. Based on Bloomberg consensus estimates for FY26, Union Bank’s shares trade at a price-to-adjusted book value of 0.9x versus State Bank of India’s (SBI) 1.1x. Of course, valuations of stocks of private sector banks are higher than those of SBI. Union Bank also offers a decent dividend yield of 3.3% based on FY25.

Though valuation is cheap, it may not excite investors seeking growth.

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