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CUB on track to miss both growth and asset quality guidance

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 4.39bn for the quarter, translating to an annualized slippage ratio of 4.1%.

* Margin picture: NIM at 3.88% was down -21bps/-12bps QoQ/YoY as interest on advances worth Rs 320mn was not recognized during the quarter.

* Asset growth: Advances grew 0.7%/12% QoQ/YoY, driven sequentially largely by Agri, MSME and Commercial Real Estate loans

* Opex control: Total opex fell/rose -0.8%/0.8% QoQ/YoY, employee exp. fell - 10.2%/-5.2% QoQ/YoY and other expenses rose 8.5%/6.4% QoQ/YoY

* Fee income: CEB and charges rose 0.5%/11.4% QoQ/YoY

Our view – CUB on track to miss both growth and asset quality guidance

Management flagged that CUB would miss prior full year loan growth guidance of 15- 18% for FY23: Overall loan book grew at just 0.7% QoQ, placing YoY growth at 12% YoY, which is slower than banking system growth. Bread-and-butter MSME loans, which are 44% of total loan book, grew just 1.1% QoQ. Agri loans provided a cushion to overall growth, growing 4.5% QoQ and forming 20% of total loan book. Non-agri jewel loans were flat sequentially, comprising 9% of overall loan book. In terms of guidance for FY24, management could only flag “double-digit” growth.

NIM for the quarter was negatively impacted by a one-off, while management guided for stability in margin: The non-recognition of interest worth Rs 320mn that led to the sequential margin shrinkage was due to some lapse in paperwork for reporting the same as per government’s requirement and management expects it to be sorted in 4QFY23.

Slippages were elevated in 3Q as CUB addressed the divergence observations of the RBI: The divergence in RBI’s and management’s assessment in recognising NPA (both gross and net) as of FY22 amounted to Rs 2.59bn and the same was communicated in 3Q. Of this, Rs 0.6bn has been recognised in 1H and Rs 0.13bn had been closed and hence, gross NPA worth Rs 1.86bn were recognised in 3Q. Of this, Rs 0.47bn got upgraded within the quarter. Slippage ratio for FY23 is now expected to be 2.5-2.8% instead of 2-2.5% guided earlier. FY24 slippage ratio is expected to be sub-2.5%.

We maintain ‘Add’ rating on CUB with a revised price target of Rs 190: We value the bank at 1.7x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.9/13.9/14.9%.

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