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Growth and PCR gathering momentum; upgrade to ADD

CUBK posted a ~6% beat in earnings with PAT/RoA at Rs2.9bn/1.6%. This was mainly due to healthy margins (up by 13bps QoQ) and other income, partly offset by higher provisions as the bank finally starts to accelerate its otherwise lower PCR (a major irritant). CUBK has also delivered a healthy double-digit growth of 12% YoY/5% QoQ on the back of pick-up seen in its MSME, GL, and Corporate book. This growth has been achieved without any meaningful traction in the retail business — which once picks up, could further accelerate growth. GNPA/NNPA ratio was down to 3.5%/1.6%, which the bank plans to lower further through contained slippages and higher recoveries/w-offs. Factoring in the improving growth trajectory as well as margin and asset quality trajectory, we upgrade CUBK to ADD from Reduce; we revise FY25-27E earnings by 2-5% and raise our TP to Rs170 (vs Rs160), rolling forward on 1.2x Sep-26E ABV. Further re-rating will be conditioned on smooth transformation of the bank into a retail cum SME bank and the management transition

Better credit growth and margin delivery after long

CUBK reported a healthy double-digit credit growth at 12% YoY/5% QoQ, primarily on account of better growth in its core Agri/Non-Agri Gold loan (GL), HL, and corporate loan book. Some pick-up (5% QoQ) was also seen in its traditional MSME loan book following the digi-transformation. Bank is also planning to expand its retail GL book. Margins also saw an uptick of 13bps QoQ to 5.6% in 2Q, mainly due to better growth/loan yields. The management guides to sustain its RoA@1.5%, while gradually building up the retail book – benefit of which should mostly be seen in its growth and RoA over FY25-26E.

Headline NPA ratio improves and so also the specific PCR

Fresh slippages were contained at Rs1.8bn/1.7% of loans, which coupled with better recoveries/higher w-offs led to 34bps/25bps QoQ reduction in GNPA/NNPA ratios to 3.5%/1.6%, respectively. The restructured book currently stands at 1.8% of overall loans (vs 2.1% in Q1). The management has indicated that it will now shift its focus on ramping-up its specific PCR, which remains sub-par vs peers at 55%, and has guided for NNPA of ~1.2-1.25% for FY25E.

Upgrade to ADD from Reduce

Factoring in the improving growth trajectory as well as margin and asset quality trajectory, we revise FY25-27E earnings by 2-5% and raise our TP to Rs170 (vs Rs160), rolling forward on 1.2x Sep-26E ABV. Thus, we upgrade our rating to ADD from Reduce. Further re-rating will be conditioned on smooth transformation of the bank into a retail cum SME bank and the management transition.

Key risks:

Macro risks reflecting via asset quality deterioration in its core SME book, higher ECL impact, and KMP attrition in its retail banking team.

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