Buy City Union Bank Ltd For Target Rs. 200 By JM Financial Services
Good quarter; strong outlook
CUBK reported a PAT of INR 2.9bn (+13%/1% YoY/QoQ, +2% JMFe) driven by a) stable NII (+10%/2% YoY/QoQ) and b) strong fee income (+59%/34% YoY/QoQ); partially offset by higher opex growth of ~11%/8% YoY/QoQ. NIMs remained stable at 3.6% (+2bps QoQ) and credit costs remained flat at 61bps. Asset quality continued to improve, with GNPA/NNPA at 3.09%/1.25% (-21bps/-14bps QoQ) and PCR rising to ~60%. Loans grew +14%/3% YoY/QoQ, supported by strong growth in traditional products. Deposits increased at healthy rate +14%/9% YoY/QoQ, with CASA ratio improving to 29%. Mgmt. expects loan growth to be ~2%-3% higher than system loan growth and gross slippages to decline to ~INR 6.5–7bn in FY26 (vs 8.1bn in FY25). We believe bank’s limited exposure to unsecured segments bodes well for maintaining healthy asset quality. We expect loan CAGR of 16% during FY25-27E with avg. RoA/RoE of 1.5%/12.5% in FY26/27E. Stock currently trades at 1.1x FY27E BVPS, offering an attractive risk-reward profile. We revise our FY26/FY27 earnings estimates upwards by +4%/+8%, respectively, to reflect improving operating performance. Maintain BUY rating with a revised target price of INR 200, valuing the bank at 1.2x FY27E BVPS (vs old TP of INR180, 1.1x FY27E BVPS).
* Loans/deposits growth momentum remains strong: Loan book stood at INR 521bn (+14% YoY, +3% QoQ), driven primarily by traditional segments—commercial real estate (+16% QoQ), MSME (+9% QoQ), and retail (+9% QoQ). Mgmt. remains focused on granular growth with an emphasis on building a well-diversified portfolio. Gold loans are expected to grow at a steady rate, which was converted into fixed rate loans earlier this year. We forecast loan CAGR of 16% over FY25–FY27E. On the liabilities front, deposit growth remained robust at 14% YoY and 9% QoQ, led by strong traction in CA (+28% QoQ), along with steady growth in TD (+8% QoQ) and SA (+6% QoQ). As a result, CASA ratio improved 80bps QoQ to 28.5%. CD ratio moderated 452bps QoQ to 82%, reflecting the strong deposit accretion, while mgmt. targets a CD ratio of 85%. We project deposit CAGR of 15% over FY25–FY27E.
* Steady and in-line operating performance: CUBK reported a broadly in-line PAT of INR 2.9bn (+13% YoY, +1% QoQ; +2% vs JMFe), supported by stable NII growth (+10% YoY, +2% QoQ, +1% JMFe) and strong traction in non-interest income (+43% YoY, +10% QoQ; +12% JMFe), driven largely by fee income (+59% YoY, +34% QoQ). Operating expenses grew faster than expected at (+11% YoY, +8% QoQ, +4% vs JMFe), resulting in a 164bps QoQ increase in the cost-to-income ratio to 48.2%. Reported NIMs remained stable at 3.6% (+2bps QoQ), with both calculated yields and cost of deposits rising 7bps sequentially. Mgmt. guides for NIMs to remain around the current 3.6% level and expects the cost-to-income ratio to improve gradually over the next 1–1.5 years.
* Asset quality continues to improve; slippages within guidance: Asset quality improved with GNPA/NNPA ratios declining 21bps/14bps QoQ to 3.09%/1.25%, respectively. PCR improved by 157bps QoQ to 60.1%. While gross and net slippages remained slightly elevated at 2.1% and 0.2%, respectively, gross slippages for FY25 were within guided range of INR 8bn (1.83% of opening net advances). Credit cost remained stable at 61bps for the quarter. Mgmt. has guided for gross slippages of INR 6.5–7bn in FY26, supported by of stronger recoveries going forward. We build avg. credit costs of ~60bps over FY26– FY27E.
* Valuation and view: With a strong capital position (CAR at 23.8%), a robust tech backbone enabling co-lending initiatives, and recoveries consistently outpacing slippages, we believe CUBK is well-positioned to sustain its growth trajectory. Bank’s limited exposure to unsecured segments also bodes well for maintaining healthy asset quality. Stock currently trades at 1.1x FY27E BVPS, offering an attractive risk-reward profile. Sustained growth momentum, coupled with prudent risk management, should support further re-rating of the stock. We revise our FY26/FY27 earnings estimates upwards by +4%/+8%, respectively, to reflect improving operating performance. Maintain BUY rating with a revised target price of INR 200, valuing the bank at 1.2x FY27E BVPS
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SEBI Registration Number is INM000010361
