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RoA to normalize gradually; management stability, strong capital comforting

* Despite lower NIM due to subdued growth and interest reversal, CUB reported higherthan-expected PAT at Rs1.1bn (vs. estimate of Rs0.8bn) in Q4FY21 mainly due to contained LLP and tax reversals.

* GNPA ratio was down at 5.1% (vs. pro forma of 6% in Q3) due to higher write-offs, while restructuring was on guided lines at 5% of loans. Amid the raging second Covid-19 wave, CUB expects lower slippages/NPA formation in FY22 vs. FY21. CUB’s specific PCR remains moderate at 43%, but it carries a contingent buffer of Rs1.6bn (0.4% of loans).

* CUB expects credit growth to remain moderate and NPA formation/LLP to be front-loaded in H1FY22. However, it expects RoA to gradually normalize to its traditional range of 1.5- 1.6% over H2FY22-FY23, led by better growth, better margins and lower LLP.

* Notwithstanding near-term asset quality concerns on account of the second Covid-19 wave, we retain Buy with a TP of Rs220 (based on 2.5x FY23E ABV), taking comfort in its ability to claw back superior return ratios (RoA/RoE at 1.6%/15%), strong capital position (Tier I at 18.5%) and management stability.

Slower growth, interest reversal weigh on NIM, but set to improve:

Credit growth remains sluggish at 6.6% yoy/0.7% qoq, mainly dragged by corporate (down 20% yoy) and a 12% yoy fall in the Agri portfolio. However, growth in gold loan remained strong, while strong ECLGS disbursals of Rs19.6bn resulted in higher SME loan growth. NIM declined 44bps qoq to 3.7% mainly due to interest reversal on NPA and interest waiver. The bank believes that the impact of the second wave on growth will be limited, but lack of ECLGS lending could keep the overall growth trajectory in check. However, steady improvement in CASA reflecting in moderating cost of fund and lower NPA formation should lead to gradual improvement in NIM.

Stress formation in FY22 to be lower vs. FY21 due to partial lockdowns:

Reported GNPA was down qoq at 5.1% vs. pro forma GNPA of ~6% in Q3, mainly due to higher write-offs. Overall restructuring pool was is in line with management’s earlier guidance at 5% of loans (including Rs5.9bn under the Covid-19 resolution framework). SMA2 pool as of Mar’21 has substantially declined to 2% from high levels of 6% in Dec’19, but the second wave could disrupt the stress normalization. Amid the raging pandemic, CUB expects lower slippages/NPA formation in FY22 vs. FY21 due to partial lockdowns, and thus lower economic impact. The bank’s specific PCR remains moderate at 43%, but it carries a contingent buffer of Rs1.6bn (0.4% of loans).

Outlook and valuation:

We have slightly trimmed our FY22/FY23 earnings estimates by 1%/5%, factoring in lower growth, partly offset by lower LLP. However, we expect the bank’s RoA/RoE to claw back to its traditional high level of 1.6%/15% by FY23E, led by better growth and gradual moderation in credit cost. We retain Buy with a TP of Rs220 (2.5x FY23E ABV vs. 2.4x earlier). Key risks to our call include slower-than-expected business normalization and higher stress in SME pool.

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