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CUBK reported robust performance for Q2FY25 with higher than estimated growth & profitability. PAT rose by 8% QoQ to INR 2.8bn mainly driven by strong NIM (3.67%, +13 bps QoQ) driving 8 bps expansion in RoA to 1.59%. Business momentum remained strong as loan/deposits growth picked up 5% each sequentially. With double digit growth in H1FY25, management is confident to take loan growth at par with industry in FY25E. Further, it expects the focus on retail secured products such as micro-LAP, housing to start adding to incremental growth from Q4 onwards. Assets quality improved with GNPA declined 34bps QoQ to 3.54%.

Strong core performance; business growth picks-up

CUBK delivered strong Q2 performance with robust core operating performance. NIM expanded by 13 bps QoQ to 3.67% led by an increase in yield (9.8% vs 9.6% QoQ). Driven by strong margin, core PPOP grew by 8.7% QoQ driving core PPOP/AA to 1.7% (vs 5-quarters avg. of 1.3%). Management guided for NIM of 3.60 (+/- 10 bps) for FY25E. Opex continued to remain elevated at 4.6% QoQ as the bank continued to invest in digitals/staff addition though C/I ratio improved to 47.1% (49.3% QoQ) on strong income. Management expects C/I ratio to remain in range of 48- 50% in FY25E before declining further going forward with digital spending started generating additional income. Loan (net) grew by 12.0% YoY/4.8% QoQ on the back good growth in traditional segments such as MSME (5.1% QoQ) and gold (8.0% QoQ). As per management, there is good visibility of growth in traditional segments to reach at a industry level. Assets quality improved as GNPA reduced by 34bps QoQ to 3.54% (4.66% YoY) on contained slippages & continued strong R&Utrend. Management expects assets quality improvement to continue and guided for net NPA of 1.20-1.25% for FY25E.

Valuation:

Q2 performance looks strong on growth, profitability and assets quality fronts. In H1FY25, loan book grew by 12% YoY in line with double digit growth guidance. Management is confident to achieve industry level growth in FY25 and surpass it when new focused retail secured products start delivering growth from Q4 onwards. With digital transformation underway, the bank noticed significant improvement in TAT; it expects boost to growth in future due to digital infra development driven by improvement in branch productivity and better decision making. We expect pick-upin growth, healthy NIM (~3.5%) and contained credit cost (~0.6%) to keep RoA >1.5% over FY25-26E. While the bank is likely to generate 150 bps excess return over CoE, ROE trajectory is forecasted to remain contained <13.0%. We maintain our ‘ADD’ rating with target price of INR 175/sh valuing bank at P/ABV 1.3x Sep’2027.