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Union Bank of Colombo PLC: research report

Moderately overvaluedbearishSep 22, 2026

The evidence points bearish because the shares charge 19.8 rupees per rupee of trailing profit, far above bank peers. The counterweight is June profit growth of 136%.

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Why bearish

  • The P/E is 19.8 times versus a 6.79 times banks and finance median, placing it at the 88th percentile of sector valuations.
  • The latest audited annual return on equity was only 3.2%, which leaves limited earnings support for a premium earnings multiple.
  • A 1:16 rights issue was announced on 31 August to strengthen Tier 1 capital, but it will add shares if completed.

Against this. June-quarter net profit rose 136.2% year-on-year and both operating and net margins were the best of eight comparable June quarters.

Operating margin
35.5%sector 40.4%
from 24.6% a year earlier
Net margin
17.8%sector 17.8%
from 8.3% a year earlier, revenue +10.8%
Return on equity
3.2%sector 13.0%
full year to Dec 31, 2025
P/E
19.3sector 6.9
earnings Rs 0.60 per share
P/B
0.61sector 0.94
book Rs 19.00 per share
Dividend yield
0.00%sector 2.16%
trailing twelve months

Current figures, updated daily from filings to Jun 30, 2026. The report below was written on Sep 22, 2026. Sector figures are the median of 54 listed companies in the same sector.

Overview

Union Bank is a Sri Lankan commercial bank focused on retail, SME and corporate banking, with digital and branch-based distribution. The latest quarter showed a marked improvement in profitability, with record June margins on a comparable-basis history, while the bank has also announced a capital-raising rights issue to underpin balance-sheet expansion.

Price performance

At LKR 11.90 on 22 September 2026, the share was down 11.0% over six months while the ASPI gained 0.6%, showing material underperformance over that window. It sits near the bottom of its 52-week range, while recent volatility and trading volume are both below its own one-year norms.

The three-year record contains three falls of 15% or more, with the deepest 36% decline not yet recovered. Liquidity is a material practical constraint: median daily turnover was LKR 231,361, and a LKR 1 million order is more than everything that trades on a typical day (432% of it).

Valuation

The P/E of 19.8 times means the market price is 19.8 rupees for every rupee of trailing earnings, versus a 6.79 times sector median. It ranks at the 88th percentile among sector peers, so the price is expensive relative to most listed financial companies despite the recent profit acceleration.

The P/B of 0.63 means a buyer pays 63 cents for each rupee of net assets, and it is cheaper than 73% of days since February 2012. That discount is more understandable alongside the latest audited ROE of 3.2%, which shows the bank has generated a modest return on shareholders' capital. No dividend is on record in the last two years, so there is no income yield to offset the high P/E.

News and sentiment

Coverage was about normal for Union Bank, with 11 material articles over 90 days: six positive, five neutral and none negative. Results reported on 31 July included LKR 997 million of group PBT for the first half and LKR 249 million of income from the sale of UB Finance shares, making part of the reported improvement non-recurring.

The bank announced a 1:16 rights issue on 31 August at LKR 10.46 per share. The filing describes the issue terms, but its ex-date has not been set and completion remains subject to approvals.

Financials

June-quarter revenue rose 10.8% year-on-year to LKR 2.7 billion, while operating profit increased 59.9% to LKR 961 million. Net profit rose 136.2% to LKR 481 million, meaning profit grew much faster than revenue as the bank retained more income after costs.

No gross margin is supplied for this lender. Operating margin widened from 24.6% to 35.5%, and net margin from 8.3% to 17.8%; both were the best of eight comparable June quarters. The operating and net margins show that the latest quarter delivered the strongest June conversion of income into profit in the available group-basis record.

Below-the-line items absorbed LKR 480 million, up from LKR 398 million a year earlier, so finance, tax and other non-operating charges still take a substantial share of operating profit. The latest audited full-year ROE of 3.2% relates to the year ended December 2025, not the stronger June 2026 quarter.

Risks

The principal balance-sheet risk is the bank's high lender leverage: total liabilities were 7.93 times equity at December 2025, up from 6.7 times a year earlier. For a bank, deposits are part of that funding base, but this level means changes in asset quality, funding costs or securities values can have an amplified effect on shareholders' equity.

The latest earnings uplift also has a repeatability question. The first-half result reported on 31 July included LKR 249 million from selling UB Finance shares, which is disposal income rather than recurring banking income. Sector conditions add uncertainty: Treasury-bill yields reversed higher in September after an eleven-week decline, increasing the relevance of lending-price and securities-book movements for banks.

Outlook

As at 22 September 2026, the next interim filing covers the quarter ending 30 September and is expected between 6 and 14 November. It should clarify whether the stronger June profitability was sustained after the disposal-related income identified in the first-half reporting.

As at 22 September 2026, the announced rights issue had no ex-date; the exchange-based window runs from 25 September to 19 December. Completion would add Tier 1 capital and capacity for loan-book growth, while adding shares; the available data cannot show the eventual use of proceeds, credit performance or the earnings contribution from additional lending.

About this report. Generated on Sep 22, 2026 from market data up to Sep 22, 2026, 11 material news articles over 90 days and financials to Jun 30, 2026, and scored 39 of 100 on value (moderately overvalued) when it was written. Every figure is drawn from EquityLK's own data on this company. AI research can contain errors, so treat it as a starting point, not investment advice.

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