City Union Bank has registered a healthy quarterly result on all fronts with strong beat on profitability at ₹1.7bn driven by healthy NIMs, higher non-interest income and lower provisions. In 3QFY21, the bank has made Covid provision of ₹1.25bn translating in the total contingent buffer of ₹4.7bn (~1.3% of loan book), which we believe is reasonable. In 3QFY21, the pro-forma NNPA stood 3.4%, while restructuring book stood at ₹8.1bn (~2.2% of loan book). The management expects the restructuring book to be at ~5% in 4QFY21. Factoring the management guidance for slippages (~3.5% in FY21) and cost to income ratio (~43% in FY21), we estimate a ROA of ~1.1% in FY21. Furthermore, we estimate ROA improvement gradually to ~1.5% by FY23E. We recommend BUY with target price of ₹198 (upside of 19%).
Gazing the core:
Stress to absorb in restructuring book: The bank has reported pro-forma NNPA at 3.4% as on 3QFY21 v/s 2.6% in FY20 owing to unrecognised slippages of ₹11.5bn. The SMA bucket as on 3QFY21 reduced to ₹3.1bn (~85bps of loan book) from ₹6.5bn in the previous quarter. The bank has made additional Covid provision of ₹1.25bn in 3QFY21, which has resulted in satisfactory contingent buffer of ₹4.7bn (~1.3% of book). It carries ₹600mn and ₹300mn for interest reversal and restructuring. The bank may witness spike in restructuring book to ~5% in 4QFY21 from the current level of ~2.2% of book. Factoring higher restructuring and moderate slippages, we estimate the ROA normalization by FY22E at 1.3%.
Credit growth driven by ECLGS:
The bank’s credit growth remained subdued at 6% YoY and 3% QoQ due to a cautious run down in its corporate book (down 7% YoY) and a 10% YoY decline in the Agriculture book. However, growth in gold loan remains strong, while strong Emergency Credit Line Guarantee Scheme (ECLGS) disbursal of ₹19.1bn resulted in higher SME loan growth. The bank expects overall growth for FY21 to be in a mid-to-high single digit. Retail loans, Agriculture loans, MSME loans and large corporate book carries 47.9%, 11.5%, 35.4% and 5.2% of loan book.
Strong deposit traction:
Deposit growth improved during the quarter to 9% YoY and 5% sequentially but lower compared to pre-Covid levels as the bank intends to maintain Loan Deposit Ratio (LDR) on account of lower credit demand. NIM marginally improved 4bps sequentially to 4.2% and we expect it to remain strong with some softness in near term due to interest reversal on NPAs.
Adequate capital buffer:
As on 3QFY21, the bank’s CRAR stood at 17.4% with core equity capital of 16.3% of RWA. We believe the capital buffer to be adequate to maintain the growth momentum and expect no equity dilution soon. The capital drag down by NPAs will be a key monitorable.
Outlook and Valuation:
We expect the bank’s loan book to grow cautiously at CAGR of ~11% over FY21-23E, led by MSME and retail book growth. In our opinion, the bank’s credit cost will normalise by FY22E and estimate return ratio ROA/ROE of 1.5% and 14% in FY23E. We value the standalone entity at 2x FY23E BVPS (₹99) and arrive at a target price of ₹198. We recommend a BUY with a potential upside of 19%.
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