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Operational performance steady…

About the stock: City Union Bank is an old private sector bank with focus on MSME and trading loans that form 52% of overall advances.

* Strong presence in south India with 630 out of total 702 branches

* Total 99% of bank’s advances are secured loans

Q1FY22 Results: PAT was boosted by other income and low credit cost.

* NII up 2.4% YoY, 4.5% QoQ at | 448 crore, NIMs up 14 bps QoQ to 3.86%

* Other income up 34.9% QoQ helped by ~3.5x rise in treasury income

* C/I ratio down 991 bps to 40.5%; provisions fell 28.7% QoQ to | 170 crore

* Loan book up 5.4% YoY while deposit growth was at 8.7% YoY

* GNPA up 48 bps QoQ to 5.59% while restructuring up 46 bps QoQ to 5.45%

What should investors do?

City Union Bank’s stock price has given over 30% returns in the past five years. Healthy capitalisation, secured nature of loans, strong liability franchisee are key positives that would help it to sail through turbulent times.

* We retain our BUY rating on the stock

Target Price and Valuation: We value CUB at ~2.3x FY23E ABV and maintain target for the stock at | 200 per share.

Key triggers for future price performance:

* High level of secured book raises chances for better recovery

* Strong and dependable liability franchisee to help contain funding costs

* The bank has strong operating metrics that enable consistent performance

* Return ratios to improve with RoE, RoA expected at 12.4%, 1.4%, respectively

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

* CSB Bank has shown meaningful transformation in its overall performance in the past few years and currently focuses on gold and SME loans.

* BUY with target price of ₹380

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