Buy City Union Bank Ltd For Target Rs.228 - Emkay Global
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On course to claw back best-ever RoA
* CUBK reported a strong 26% beat on PAT at Rs2.8bn (up 23% YoY) and its best-ever RoA of 1.7% (reported) in Q2. This was mainly led by sharp improvement in margins (up 14bps QoQ to 4.1%) and lower LLP, as NPAs continue to trend down. Bank expects profitability to remain strong in H2 on the back of better growth and continued moderation in NPAs.
* Overall credit growth was modest at 13% YoY/4% QoQ, mainly due to sluggish corporate growth (down 5% QoQ). However, the bank expects growth to see further improvement in H2 which should be led by SME/corporate growth acceleration. That said, we believe deposit growth will need to catch up too and thus lead to slight moderation in margins.
* Fresh NPAs remain elevated at Rs2.6bn/2.8% of loans, but higher recovery/w-off led to 29bps QoQ declinein GNPA, to 4.4%. Spice Jet (o/s at Rs825mn) has started settlement of dues in a phased manner and the last installment will be paid in Jun-23. The bank carries 100% provision on this and should thus see gradual reversal.
* We expect the bank to claw back its highest RoA/RoE so far, of 1.6%/15%, aided by accelerating growth, healthy margins and lower LLP. We retain BUY with revised TP of Rs228/share (Rs200 earlier), based on 2x Sep-24E ABV.
* What we like: Improvement in asset quality and strong margin delivery. What we do not like: Moderate credit-growth vs peers as well as deposits-growth.
* Growth set to improve: Overall credit growth was moderate at 13% YoY/4% QoQ due to sluggish corporate growth. However, the bank expects growth to improve to 15-18% (mainly back-ended), which will be led by acceleration in the SME/corporate book. Deposits growth too was moderate at 8% YoY/2% QoQ and thus needs to improve, for funding the accelerating credit growth. Bank managed 14bps QoQ improvement in margins to 4.1% in Q2, but could temper a tad in H2, as deposits growth/CoF pick up pace.
* NPAs trend down, led by better recoveries/w-offs: Fresh slippages remain elevated at Rs2.6bn/2.8% of loans, but better recoveries/upgrades and w-offs led to 29bps reduction in GNPA ratio to 4.4%. As per Management, Spice Jet (o/s at Rs825mn) has started settlement of dues in a phased manner, with the last installment to be paid in Jun-23. Bank carries 100% of provision on this account and hence any recovery would lead to reversal of provisions. The restructured pool too has declined to Rs19.6bn/4.7% of loans, and the performance of the book seems to be satisfactory.
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