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Decent quarter; Asset quality to improve

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 1,720 ATMs spread across the country and a loan book size of Rs.38,012cr

* Total Business grew by 10% YoY with advances growing at 7% supported by strong growth in Gold Loan while deposits grew by 12% YoY.

* Net Interest Income grew by 1% YoY and 7% QoQ with NIM improving to 4.03% compared to 3.86% sequentially due to lower cost of funds.

* We expect Advances to grow at a CAGR of 9.9% and Deposits to grow at 9.7% over FY21-23.

* GNPA/NNPA stands at 5.58%/3.48% against 5.59%/3.49% during Q1FY22 due to controlled slippages. Management expect slippages for FY22 to be lower than FY21.

* We recommend Buy rating on the stock based on 2.3x Adj BVPS of FY23E with a target price of Rs 190 .

Advances growth led by Gold portfolio

In Q2FY22, banks total business grew by 10% YoY with deposits growing at 11.8% YoY and 3.8% sequentially while advances grew 7.3% YoY and 4.4% sequentially. Growth in advances was driven by Gold loan which grew by 73% YoY and comprises 21% of the overall loan book. Total Gold loan outstanding as on Q2FY22 stands at Rs.7,849cr against Rs.4,537cr an year ago. On the deposit front, CASA grew by 26% YoY as savings deposit grew by 27% YoY and demand deposit by 23%. CASA ratio of the bank stood at 28.96%, C-D ratio of the bank declined to 82% during the quarter compared to 86% during Q2FY21. We expect advances to growth at a CAGR of 9.9% over FY21-23 and deposit to grow at CAGR of 9.7%. Capital Adequacy Ratio of the bank stands comfortable at 19.24% compared to 17.36% in Q2FY21.

Improvement in margins aided profitability

Net Interest Income (NII) for the quarter grew by 6.8% QoQ and 0.7% YoY as interest income grew by 2.5% QoQ while de-grew by 3.7% and interest expense de-grew by 1.1% QoQ and 7.1% YoY due to lower cost of fund. Net Interest Margin improved to 4.03% against 3.86% during previous quarter as cost of funds declined from 4.09% in Q1FY22 to 3.93% during Q2FY22. Other income of the bank grew 19.7%/3.6% YoY/QoQ while operating expenses grew by 6.2%/6.0%YoY/QoQ. As a result pre-provision profit of the bank grew by 5.3% YoY and 5.8% sequentially. Bank’s provision for the quarter stood at Rs.148cr compared to Rs.170cr during previous quarter and Rs.177cr in Q2FY21. Bank;s PAT grew by 15.5% YoY and 5.2% QoQ due to a combined effect of improved margins, high other income and lower provisioning. Bank’s PCR stood at a comfortable 62% compared to 63% in Q1FY22. Bank has given an ROE of 11.96% and ROA of 1.32% against 11.81%/1.29% during previous quarter.

NPA levels stable

GNPA/NNPA for the quarter were stable at 5.58%/3.48% against 5.59%/3.49% during Q1FY22. Gross slippage during the quarter reduced to Rs.297.4cr compared to Rs.482.2cr during previous quarter. Management expects slippages for FY22 to remain below FY21 level and therefore slippages are expected to improve further in the coming quarters. SMA-2 for the bank stood at 2.8% compared to 3.2% in Q1FY22. Total restructured book as a percentage of gross advances stood at 5.90% amounting to Rs.2,247.8cr during the quarter.

Outlook and valuation

Bank has shown a decent performance during the quarter with improved margins and stable asset quality. We expect asset quality to improve as economic activity normalizes leading to lower slippages and high recoveries. Bank has also been consistent in delivering good return ratios. We therefore remain positive and value the stock at 2.3x FY23E Adj BVPS and recommend Buy rating with a target price of Rs.190.

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