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ECLGS and Gold loan to lead growth

City Union Bank Ltd (CUB), the oldest private sector bank in India, is a mid-sized commercial bank headquartered in Tamil Nadu, having a network of 700 branches and 1,780 ATMs spread across the country and a loan book size of Rs.35,437cr

* Total Business grew by 8% YoY with advances growing at 8% supported by strong growth in ECLGS (Emergency Credit Line Guarantee Scheme) and Gold Loan.

* Net Interest Income grew by 14% YoY with NIM improving by 20bps YoY and 4bps QoQ.

* We expect Advances to grow at a CAGR of 8.8% and Deposits to grow at CAGR of 10.5% over FY20-23.

* GNPA/NNPA stands at 2.94%/1.47% against 3.44%/1.81% during Q1FY21 on account of lower recognition. We expect elevated slippage levels, however, expect it to be in control due to restructuring of MSME books.

* We recommend Buy rating on the stock with a revised roll forward target price of Rs 208 based on 2.5x Adj BVPS of FY23E.

Moderate business growth supported by ECLGS and Gold Loan

In Q3FY21, banks total business grew by 8% YoY with deposits growing at 9% YoY and 4.5% sequentially while advances grew 8% YoY and 3% sequentially. ECLGS and Gold Loan led the growth in advances. Through ECLGS scheme, bank has so far sanctioned Rs.2049 Cr and disbursed Rs.1911Cr which is about 5.1% of total advances. Total Gold loan outstanding as on Q3FY21 stands at Rs. 5533 Cr (Rs. 4537 Cr as on Q2FY21). We expect advances to growth at 10% in FY21. 12.75% in FY22 and 8.8% in FY23. CASA ratio improved to 27.49% (25.70% during Q2FY21) with savings deposit growing at 16.5% QoQ and demand deposit at 0.8% QoQ.

NII growth led by improvement in NIM

Net Interest Income (NII) for the quarter grew by 14% YoY and 3% sequentially aided by 1% YoY decline in interest income and 12% reduction in interest expenses. NIM improved 20bps YoY and 4bps QoQ to 4.16% because of 33bps QoQ and 95bps YoY decrease in cost of fund. Yield of Funds declined 32bps QoQ and 73bps YoY to 7.94%. During the quarter, bank has made an additional provision of Rs.125 Cr towards Covid contingencies and holds total provision of Rs.465Cr which is 1.2% of total advances. Provision coverage ratio of the bank stands at 73%. Pre-Provision profit of the bank increased 48.5% YoY and 19.2% QoQ owing to higher other income. Net Profit of the bank decreased 12% YoY to Rs. 170 Cr owing to higher provision while increased 8% sequentially. ROA for the quarter stands at 1.29% and ROE at 12.03%. We expect ROA and ROE to reach pre-covid levels by FY22.

Lower NPA due to standstill

GNPA/NNPA for the quarter stands at 2.94%/1.47% against 3.44%/1.81% during Q2FY21 because of zero addition during the quarter. Collection efficiency stands at 89% of loan book. During the quarter, 60 standard accounts to the tune of Rs.321Cr has been restructured. Total loan restructured during 9MFY21 stands at Rs.807Cr which is 2.2% of total advances. Bank has identified Rs.917Cr of MSME and Rs.320Cr of non MSME books which need to be restructured in coming quarters. The bank hold a provision of Rs.31.6 Cr against the requirement of Rs.26.3 Cr. We expect GNPA/NNPA to be 5.71%/2.97% in FY21, 5.26%/2.74% during FY22 and 4.44%/2.31% in FY23.

Outlook and valuation

We expect the growth in advances to be driven by ECLGS and Gold Loan. Bank is expected to reach pre-covid levels of ROA and ROE by FY22. Even though provisioning is expected to remain high due to higher slippages in coming quarters, restructuring of MSME loan book will keep NPA under control. We therefore remain positive and value the stock at 2.5x FY23E Adj BVPS and recommend Buy rating with a roll forward upward target price of Rs.208.

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