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Pre-existing valuation premium prevents us from turning bullish

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 2.62bn for the quarter, translating to an annualized slippage ratio of 2.4%.

* Margin picture: NIM at 4.09% was up 14bps QoQ due to higher yield on advances and Loan to Deposit ratio.

* Asset growth: Advances grew 4.3%/12.3% QoQ/YoY, driven sequentially largely by Agri, MSME and Non Agri Jewel Loans

* Opex control: Total opex fell/rose -3.5%/3.3% QoQ/YoY, employee exp. rose 6.4%/11.2% QoQ/YoY and other expenses fell -11.6%/-3.5% QoQ/YoY

* Fee income: CEB and charges fell/rose -6.0%/9.3% QoQ/YoY

Our view – Pre-existing valuation premium prevents us from turning bullish

Asset quality outcomes are broadly under control with management flagging healthy recovery performance: Recoveries and upgrades amounted to Rs 2.28bn, which compare well with the gross slippage figure of Rs 2.62bn. The SMA2 book stood at 2.26%, which is well contained compared with historical levels. The all-inclusive restructured standard book amounts to Rs 19.65bn or 4.6% of gross advances. 87% of this book has been making repayments regularly, of which 25% are making advance payments even though billing has not started.

Risk of margin compression in the near term seems relatively lower compared with the system, given residual repricing and elevated liquidity: Management stated that there is some more rise to happen in yield on advances due to the repo rate hikes already effected. The bank has been slow in raising deposit rates as it is having sufficient liquidity. The LCR for the bank is above 200% whereas, the excess SLR is Rs 30-35bn.

Management re-iterated full year loan growth guidance of 15-18% for FY23, with back-ended execution: For the quarter, sequential loan growth was driven by the breadand-butter MSME segment, which grew 6.0% QoQ.Agri loans and Non-Agri Jewel Joans jumped 8.5% and 9.8% QoQ, respectively.

We maintain ‘Add’ rating on CUB with a revised price target of Rs 215: We value the bank at 1.9x FY24 P/BV for an FY23E/24E/25E RoE profile of 12.8/14.2/15.2%.

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