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Relatively better days ahead but stock remains low in our pecking order

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 2.21bn for the quarter, translating to an annualized slippage ratio of 2.2%.

* Margin picture: NIM at 4.01% was up1 bpsQoQas cost of deposits declined more than yield of advances

* Asset growth: Advances grew 7.2%/11.2% QoQ/YoY driven sequentially by goldbacked agri loans and MSME loans

* Opex control: Total opex fell-5.9%/-8.7% QoQ/YoY, employee expenses fell/rose -15.1%/5.9% QoQ/YoY and other expenses rose/fell 2.4%/-17.3% QoQ/YoY

* Fee income: CEB and charges rose 9.3%/2.6% QoQ/YoY

Our view – Relatively better days ahead but stock remains low in our pecking order

Recoveries were healthy for the quarter and management guided for an improvement in gross slippage ratio for FY23: Recoveries and upgrades from live accounts amounted to Rs 2.11bn for 4QFY22, implying net NPA addition of Rs 0.1bn for the quarter. Recoveries from technically written off accounts amounted to Rs 0.66bn, implying grand total recoveries and upgrades exceeded gross slippages, as guided for earlier. Slippage ratio in FY23 is expected to be in the range of 2-2.5%. Management explained that, of the Rs 21.84bn worth of restructured book, clients representing only Rs 1.49bn of the book are availing moratorium, effectively speaking. Management pointed out that SMA2 book used to be 5-7% in the pre-Covid days but has declined to 1.36%, which includes accounts from ECLGS and restructured book.

Net interest margin was broadly stable sequentially and management guided for further stability in NIM: Management stated that margin would stay at current levels plus or minus 10-20 bps with both lending and deposit rates to be on the rise. The share of EBLRlinked loan is 70% in overall loan book.

Management is now guiding for loan growth in the range of low to mid double digits for FY23: The bank had, previously, guided for a loan growth of mid to high single digits for FY22 and achieved about 11%. Management clarified that, if conditions are conducive, the bank will grow their book better than stated guidance for FY23. In terms of loan mix, in the fourth quarter, less than a third of the loan growth came from gold loans. Going forward, the share of non-gold loans is expected to rise.

We maintain ‘Add’ rating on CUB with an unchanged price target of Rs 145: We value the bank at 1.5x FY23 P/BV for an FY23E/24E RoE profile of 12.7/13.9%.

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