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ECLGS and Gold loan to drive disbursement

City Union Bank Ltd (CUB), the oldest private sector bank in India, is a mid-sized commercial bank headquartered in Tamil Nadu, having a network of 702 branches and 1,724 ATMs spread across the country and a loan book size of Rs.37,021cr

* Total Business grew by 8% YoY with advances growing at 7% supported by strong growth in ECLGS (Emergency Credit Line Guarantee Scheme) and Gold Loan.

* Net Interest Income grew by 2% YoY while declined 12.4% QoQ with NIM declined by 44bps sequentially due to interest reversal.

* We expect Advances to grow at a CAGR of 10.5% and Deposits to grow at 8.5% over FY20-23.

* GNPA/NNPA stands at 5.11%/2.97% against 2.94%/1.47% during Q3FY21 due to NPA recognition. Slippage for FY21 stands at 3.01%. We expect elevated slippage levels, however, expect it to be in control due to restructuring of MSME books.

* We recommend Buy rating on the stock based on 2.4x Adj BVPS of FY23E with a target price of Rs 208 .

Continuous improvement seen in CASA

In Q3FY21, banks total business grew by 8% YoY with deposits growing at 9% YoY and 3% sequentially while advances grew 7% YoY and 1.4% sequentially. Growth in advances was led by higher ECLGS and Gold loan disbursement. Through ECLGS 1, 2 and 3 scheme, bank has so far disbursed Rs.2,096Cr which is about 5.65% of total advances.

Total Gold loan outstanding as on Q4FY21 stands at Rs.6,540cr (Rs.5533cr as on Q3FY21). We expect advances to growth at a CAGR of 10.5% over FY20-23 and deposit to grow at CAGR of 8.5%. CASA ratio improved to 29.1% (27.5% during Q3FY21) with savings deposit growing at 6.2% QoQ and demand deposit at 17% QoQ while term deposit grew by 0.5%.

Interest reversal offset NII growth

Net Interest Income (NII) for the quarter grew by 2% YoY while it declined 12.4% sequentially aided by 6% YoY decline in interest income and 12% reduction in interest expenses. Decline in interest income was due to interest reversal on NPA accounts amounting to Rs.125cr during the quarter. However, considering the provision of Rs.55cr made in this regard during Q2 and Q3, net reversal for the quarter stands at Rs.70cr. As a result reported NIM showed a sequential dip of 44bps to 3.72% with yield of funds declining 54bps sequentially.

Due to this, cost to income ratio also spiked to 50.4% against 36.2% last quarter. During the quarter, bank made additional NPA provision of Rs.177cr over and above Rs.309Cr written back from Covid provision. Net Profit of the bank was at Rs.111cr against net loss of Rs.95Cr during Q4FY20 and Rs.170cr as on Q3FY21. ROA for the quarter stands at 0.84% against 1.29% in the previous quarter and ROE at 7.85% against 12.03%. We expect ROA and ROE to reach pre -covid levels from second half of FY22.

Lower NPA due to standstill

GNPA/NNPA for the quarter stands elevated at 5.11%/2.97% against 2.94%/1.47% during Q3FY21 because of NPA recognition during the quarter. However, slippages has reduced to Rs.1,110cr against Q3FY21 pro forma slippage of Rs.1,134cr. Slippage ratio for FY21 stands at 3.01% which is in line with the management expectation. In view of second wave, slippages are expected to remain elevated in the coming quarter. Bank has so far restructured advances amounting to Rs.1,849cr which is about 5% of total advances. In Q4FY21, bank has restructured 1,086 borrower accounts valuing Rs.1,116cr.

Outlook and valuation

We expect the growth in advances to be driven by ECLGS and Gold Loan. Bank is expected to reach pre-covid levels of ROA and ROE by H1FY22. Even though we expect higher slippage due to the impact of second wave, restructuring of MSME loan book will keep NPA under control. We therefore remain positive and value the stock at 2.4x FY23E Adj BVPS and recommend Buy rating with a roll forward upward target price of Rs.208.

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