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Potential stress rises ahead of estimates

Despite higher-than-expected LLPs, CUBK’s 3Q earnings were ~22% ahead of estimates on the back of a strong operating performance, driven by (1) an uptick in NIMs, (2) elevated treasury gains, and (3) better operating leverage. However, the pace and quantum of potential stress evolving at the bank, disappointed, especially when set against the backdrop of improving macros and consequently, peers’ performance. We reduce our earnings estimates by ~7% over FY22-23E; we maintain BUY with a target price of INR 192.

* Pro forma stress evident: On a pro forma basis, slippages for 9MFY21 came in at ~INR11.5bn (nearly 85%+ of FY21E guidance of 3.5%). While the management did not explicitly disclose pro forma GNPLs, we estimate that this number was ~6%. Collection efficiency dipped from ~95% in September to ~89% in December. Further, the bank restructured close to ~2.2% of loans until 3QFY21 and the management continues to guide for the total stock of such assets reaching ~5% by the end of the year. The sharper than expected surge in stress (pro forma albeit) prompts us to revise our FY21 slippage/ GNPA estimates to 4.8/6% from 4/5.2% earlier.

* Provisions remain elevated: CUBK continued to make elevated provisions at INR2.2bn (22% ahead of our estimates). COVID-19 provisions for the quarter came in at INR1.3bn, taking the total stock of such provisions to INR4.7bn (1.3% of loans). Despite significant COVID-19 related provisions held by the bank, relative to those of its peers, we raise our LLP estimates in tandem with our NPL estimates to 1.6% over FY21-23E.

* Growth improves: Advances clocked a growth of 7.9% YoY vs. 6.5% in the previous quarter. Much of the incremental growth was driven by gold loans and disbursals under the ECLGS scheme (INR20.8bn) as CUBK made disbursals to most eligible borrowers. Further, the management indicated an overlap of ~20% between recipients of ECLGS disbursals and restructured accounts. We build in a loan growth of ~13% CAGR over FY21-23E.

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