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CUB ripe for a mini-bounceback but not compelling enough for an upgrade

Result Highlights (See “Our View” below for elaboration and insight)

* Asset quality: Gross NPA additions amounted to Rs 2.25bn for the quarter, translating to an annualized slippage ratio of 2.0%.

* Margin picture: NIM at 3.74% was up/down 7bps/-35bps QoQ/YoY, higher QoQ due to rise in yield on advances outpacing the rise in cost of deposits ? Asset growth: Advances grew 3.0%/2.3% QoQ/YoY, driven higher sequentially largely by Retail Traders, JL non-agri, Personal Loans and NBFC loans

* Opex control: Total opex rose 11.4%/17.2% QoQ/YoY, employee expense rose 19.7%/12.1% QoQ/YoY and other expenses rose 4.8%/22.2% QoQ/YoY

* Fee income: CEB and charges fell/rose -1.9%/8.4% QoQ/YoY

Our view – CUB remains close to the bottom of our pecking order

Communication of a bottoming out of asset quality issues has the potential of actuating a mini-bounceback for CUB stock: Recoveries from live accounts amounted to Rs 2.3bn and those from technically written off accounts amounted to Rs 0.61bn. Thus, live account recoveries have surpassed slippages. Management states that there will be a substantial reduction in slippages and credit cost going forward. The ROA guidance for the year is 1.5% driven by NPA recoveries.

A rundown of significant excess liquidity has the potential to cushion the impact from a further inching up of cost of deposits: The cost of deposits has risen 15 bps QoQ to 5.51% whereas, the yield on advances has risen more at 22 bps to 9.77%. The yield on advances rose materially since the full impact of passing on rates was felt during the quarter. The bank does not expect any rate hikes going forward. The CD ratio is 4-5% points lower than pre-Covid levels and the LCR for the bank is about 200%. In terms of guidance, NIM would be similar to current levels, plus or minus 10 bps.

Management continues to guide for 12-15% growth for FY24 on the back of digital lending push: The soft launch for digital lending for MSME loans below Rs 30mn has started. The project is being executed by Newgen Software and is being overseen by BCG. We had stated, in our 1QFY24 result report, that the digital lending strategy reveals an inability for CUB to grow via underlying, organic means.

We maintain ‘Add’ rating on CUB with a revised price target of Rs 155: We value the bank at 1.2x FY25 P/BV for an FY24E/25E/26ERoE profile of 13.1/13.4/13.5%. CUB has always been in the bottom 2 of our pecking order since our sector initiation report dated June 2021.

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