Buy City Union Bank Ltd For Target Rs.184 - Anand Rathi Share and Stock Brokers
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Challenging quarter, earnings outlook stays strong; Buy
CUB’s Q3 FY23 profitability declined, with the RoA down 38bps q/q to 1.34% on account of higher provisions due to a Rs2.59bn divergence in reported FY22 GNPA. Ahead, we expect slippages to ease since most of the stress related to the pandemic has already been recognized. Now, the focus shifts towards business growth. We expects loan growth to pick up from current levels and earnings to improve. We maintain a Buy, at a TP of Rs184 (earlier 220), valuing it at 1.5x P/ABV on its FY25e book.
Divergence leads to elevated slippages.The RBI’s supervisory process for CUB (for FY22) showed a gross NPA divergence of Rs2.59bn (13% more than reported). The incremental impact of this divergence was ~Rs1.4bn, which was recognised in Q3 FY23. The divergence was on account of interpretation issues and unrelated to 90dpd norms. Ahead, with the bulk of the accounts (stressed on account of Covid’19-related restrictions) already delinquent in the last 3-4 quarters, we expect modest slippages from now. The standard restructured book declined ~12% q/q to Rs17.3bn (~4% of the loans).
RoA should hold near 1.5%. The RBI’s supervisory process for CUB (for FY22) showed a gross NPA divergence of Rs2.59bn (13% more than reported). The incremental impact of this divergence was ~Rs1.4bn, which was recognised in Q3 FY23. The divergence was on account of interpretation issues and unrelated to 90dpd norms. Ahead, with the bulk of the accounts (stressed on account of Covid’19-related restrictions) already delinquent in the last 3-4 quarters, we expect modest slippages from now. The standard restructured book declined ~12% q/q to Rs17.3bn (~4% of the loans).
Valuation. Our Feb’24 target of Rs.184 is based on the two-stage DDM model. This implies a ~1.4x P/BV and ~1.5x P/ABV multiple on its FY25e book. Risks: Higher slippages, lower-than-expected loan growth.
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