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Staff cost evolution promising but growth questions remain

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 2.97bn for the quarter, translating to an annualized slippage ratio of 3.2%.

* Margin picture: NIM at 4.03% was up 17 bps QoQ as cost of deposits declined while yield on advances rose

* Asset growth: Advances grew 4.4%/7.3% QoQ/YoY driven by gold-backed agri loans

* Opex control: Total opex rose 6.0%/6.2% QoQ/YoY, employee expenses fell/rose -1.8%/5.9% QoQ/YoY and other expenses rose 13.7%/6.5% QoQ/YoY

* Fee income: CEB and charges rose 7.5%/12.3% QoQ/YoY driven by a general rebound in business activity

Our view – Staff cost evolution promising but growth questions remain

Management stated that requirement of personnel per branch for incremental branches will be significantly lower: For new branches, 4-5 employees would be required per branch, which is a dramatic shift from the current 8.3 average. In recent quarters, there has been employee count reduction attributable to the fact that manual transactions via branches have declined by ~50% post Covid, allowing the bank to not recruit following employee departures. This seems to be same broad reason why CUB management feels it can manage with lower employee count in new branches.

Management continued to guide for a mid to high single digits growth in FY22: Management has, previously, guided for a long-term loan CAGR of 10-15% for bread-andbutter MSME loans. Furthermore, management sounded cautious about the long-term prospects of their gold loan business, citing limitations such as idiosyncratically low yield of 8-9%, high cost structure and branch activation limited to rural and semi-urban centres

Management sounded comfortable on asset quality talking of front-loaded slippages, slow-burn restructured book, low LGD and a smaller SMA book: Management reiterated that slippages for FY22 would be slightly below FY21 levels. They further stated that 20-25% of their restructured book (total book being 6.1% of advances) could slip but over 2-3 years. Prospective LGD could worsen 500 bps from historical levels of 20- 25%. SMA2 declined 60 bps QoQ to 2.75% compared with pre-pandemic levels of 5-7%.

We maintain ‘Add’ rating on CUB with a revised price target of Rs 180: We value the bank at 1.8x FY23 P/BV for an FY22E/23E/24E RoE profile of 10.8/12.8/14.0%.

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