IGI Logo

Growth challenges persist, revival key

Core soft, lower credit costs cushion earnings

City Union Bank’s (CUBK IN) Q3 PAT at INR 2.5bn was below estimates, on softer core profitability even as lower credit cost cushioned the impact . Key highlights were: a) persistent growth challenges – Loan growth at sub-3% YoY (up 0.8% QoQ), which remained under the radar, b) NIM dip of 24bps QoQ, following one-time (FITL) impact, excluding which the impact was much lower and c) sustained asset quality improvement (negative net slippages), which fed into lower credit cost. The discussion hereon will be centered around growth revival and outcomes of strategic changes made by CUBK. The divergence between peers and CUBK has been reasonably wider this cycle and closing the gap may be critical to drive a re-rating.

Operational parameters on soft pedal; growth revival, the key

CUBK saw a loan growth at sub-3% YoY/up 0.8% QoQ, lower than estimated and lower than its earlier guidance. With this, CUBK lowered FY24 growth guidance to higher single-digit growth from 12-14% earlier. Going forward, CUBK expects benefits from digital transformation initiatives to play out, which may aid growth (per management, monthly growth run-rate has started to improve, a key monitorable). NIMs declined 24bps QoQ, following one-time FITL impact of INR 250mn, which fed into lower NII. We believe CUBK may still face growth versus margin conundrum in the near term, and thus the consequent strain on core profitability.

Asset quality – Continued improvement; sustenance, the key

Slippages declined to 1.7% (versus 2.1% QoQ). This with better recovery/upgrades fed into negative net slippages, consequently leading to lower GNPLs (down 3.3% QoQ to 4.47%). Credit cost was much lower. Performance was strong, but sustenance is crucial in the backdrop of softer core to deliver steady return ratios.

Valuation: Reiterate Accumulate with a revised TP of INR 158

While CUBK has historically been one of the most profitable regional banks in India, past two years have been difficult. Even as asset quality has possibly marked a turnaround, we believe challenges in core profitability may persist, which may call for some time correction till investors see a definitive turnaround, which may take a few quarters. We introduce FY26E estimates and roll to September 2025E, leading to a raised TP of INR 158 (from INR 145). Maintain Accumulate.

Above views are of the author and not of the website kindly read disclaimer