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Earnings beat led by better growth, recoveries and contained opex

* CUBK reported a beat on PAT at Rs2.1bn (up 88% yoy) in Q4 vs. est. of Rs1.9bn, mainly driven by higher other income due to higher recoveries from w-offs and lower opex. The bank expects NPA recovery to partly offset weak treasury performance in FY23 and expects RoA to gradually improve to 1.5% from 1.3% in FY22.

* Overall credit growth improved to 12% yoy/7% qoq, led by growth in SME and corporate books, which showed improvement after 7 quarters. Despite weak macros, the bank has guided for mid double-digit growth in FY23 as SME/Corporate growth accelerates.

* Fresh slippages were lower than our expectation at Rs2.2bn (2.4% of loans), as SpiceJet (Rs1bn) remained standard due to Court intervention. However, the bank has made 85% provisions on SpiceJet and expects a reversal once the company’s performance improves. CUBK has guided for 2-2.5% slippages in FY23 vs. 3.5% in FY22.

* We expect the bank’s RoA/RoE to steadily improve to ~1.4-1.6%/13-15% over FY23-25E from 1.3%/12% in FY22, aided by better growth and lower LLP. Retain Buy with a revised TP of Rs180 (Rs200 earlier) based on 1.8x Mar’24E ABV vs. 2.1x FY24E ABV due to higher CoE.

Growth accelerates: Overall credit growth improved to 12% yoy/7% qoq, driven by growth in SME (10% yoy/9% qoq) and corporate books, which finally started to show some improvement after 7 quarters (4% yoy/6% qoq). The retail book remained sluggish, down 1% yoy. CUBK has guided for mid double-digit growth. CASA growth remained strong, leading to a historical-high CASA ratio of 32% and the best-ever CoF of 3.7%, which in turn resulted in healthy NIMs at 4%. On credit card, CUBK plans to launch its own credit card (currently tied up with SBI Cards), which should support growth in the long run

NPAs trending down; restructured pool remains elevated: Fresh slippages were lower than our expectation at Rs2.2bn (2.4% of loans), as spice-jet (Rs1bn) remained standard due to Court intervention. Higher recovery/w-offs led to a 51bps qoq moderation in the GNPA ratio to 4.7%. However, the bank has made 85% provisions on spice-jet and expects a reversal once the company’s performance improves. It has guided for 2-2.5% slippages in FY23 vs. 3.5% in FY22. The restructuring pool remained elevated at Rs22bn (5.4%), but the bank expects the pool to come down as a majority of the customers have started paying installments. Specific PCR improved a bit to 38% but remained sub-optimal, in our view

Outlook and valuation: We expect the bank’s RoA/RoE to steadily improve to ~1.4- 1.6%/13-15% over FY23-25E from 1.3%/12% in FY22, aided by better growth and lower LLP. Retain Buy with a revised TP of Rs180 (Rs200 earlier) based on 1.8x Mar’24E ABV vs. 2.1x FY24E ABV due to higher CoE. Key risks to our call include slower-than-expected business normalization and higher stress in the SME pool.

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