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Healthy quarter; growth guidance revised upwards…

About the stock: City Union Bank is an old private sector bank with focus on MSME and agri loans that form 61% of overall advances.

* Strong presence in south India with 644 out of total 727 branches

* Total 99% of bank’s advances are secured in nature

Q1FY23 Results: Healthy performance led by strong business growth.

* Advances grew 12.5% YoY to | 40934 crore. Deposits up 9.3% YoY with CASA growth at 25% YoY

* NII up 17.3% YoY, 4.8% QoQ. NIMs declined marginally 6 bps QoQ at 3.95%

* GNPA down 5 bps QoQ to 4.65%. Restructured book declined to ~5%

What should investors do? City Union Bank’s share price has increased by ~25% in the past five year. Healthy capitalisation, secured loans and improving asset quality trend are key positives.

* We maintain our BUY rating on the stock

Target Price and Valuation: We value City Union Bank at ~2x FY24E ABV and revise our target price from | 200 to | 215 per share.

Key triggers for future price performance:

* The management revised their credit growth guidance upwards to 15-18%, which is encouraging. Business momentum to see uptick from here on

* Opex to remain elevated, though steady margin at ~4% and business growth to aid operational performance and return ratios

* Asset quality hiccups fading away as incremental stress formation under control

Alternate Stock Idea: Apart from City Union Bank, in our coverage we also like CSB Bank.

* CSB Bank is a south based private sector bank with Kerala contributing ~48% of total business. Changed strategy in various aspects of lending has led to transformation and improved performance in the past few years

* BUY with a target price of | 250

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