Buy City Union Bank For Target Rs. 200 - Emkay Global Financial Services Ltd
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Better growth, lower LLP to help reclaim its high RoA trajectory
* CUBK reported a beat on PAT at Rs2.2bn (up 28% yoy) vs. estimate of Rs1.9bn, mainly driven by higher recoveries from write-offs and lower provisions. The bank expects higher growth and NPA recovery in FY23, which should drive-up RoA to 1.5% from 1.3% in FY22.
* Overall credit growth remains moderate at 13% yoy. However, the bank has renewed its growth guidance from low to mid-high, double-digit growth in FY23, as the bank expects SME/corporate growth to accelerate. This should keep margins in good health.
* Fresh slippages were higher at Rs2.7bn (3% of loans) due to seasonally weak Q1 (a phenomenon seen across banks). The bank’s Spice Jet exposure has moved out of SMA and it plans to recover all dues by Q1FY24. The bank carries nearly 100% provision on the same. CUBK continues to guide for 2-2.5% slippages in FY23 vs. 3.5% in FY22.
* We expect the bank’s RoA/RoE to steadily improve to 1.4-1.6%/13-15% over FY23-25E from 1.3%/12% in FY22, aided by better growth and lower LLP. We retain Buy with a revised TP of Rs200 (Rs180 earlier), based on 1.9x June’24E ABV. CUBK remains one of our preferred picks in the small-mid cap space.
* Growth set to accelerate: Overall credit growth remains moderate at 13% yoy/-0.4% qoq. However, the bank expects growth to improve to mid-high double digits, mainly led by better growth trajectory in SME and corporate. CASA growth has moderated after a long time, with CASA ratio slipping a bit from its historical high to 32%. Cost of funds remained largely flat at 3.7%, but lower yield on loans possibly due to slower growth/interest reversal on NPAs led to slight moderation in NIM to 3.95%. The bank expects NIM to be around 3.95% +/-10-15bps.
* Higher slippages, but recoveries/write-offs keep NPAs in check: Fresh slippages were higher than our expectation at Rs2.7bn (3% of loans). However, higher recoveries/writeoffs led to nearly flat GNPA ratio at 4.7%. The bank’s Spice Jet exposure has moved out of SMA and it plans to recover all dues by Q1FY24. The bank carries nearly 100% provision on the same. Thus, any recovery would lead to reversion of provisions. The bank has guided for 2-2.5% slippages in FY23 vs. 3.5% in FY22. The restructuring pool has moderated a bit, but it remains elevated at Rs20bn (5.1%). As per management, more than >50% of the restructured pool has come out of the moratorium, where repayment has been relatively satisfactory.
* Outlook and valuation: We expect the bank’s RoA/RoE to steadily improve to 1.4- 1.6%/13-15% over FY23-25E from 1.3%/12% in FY22, aided by better growth and lower LLP. We retain Buy with a revised TP of Rs200, based on 1.9x June’24E ABV. Key risks to our call include slower-than-expected business normalization and higher stress in the SME pool.
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