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Promising quarter, predictability setting in

City Union Bank (CUBK IN) reported a promising Q3, with strong delivery across key metrics – PAT at INR 2.86bn – above consensus (8% beat). The highlights were: a) improving growth momentum (gross loan grew >3.5% QoQ, 14.5% YoY), b) better core profitability and c) continued asset quality improvement (negative net slippages), while credit cost looked optically higher on rising coverage (up >340bps QoQ to 58.6%).

The discussion hereon will be centered around growth sustainability and outcomes of strategic changes made by the bank. CUBK has already invested in these (setting sales culture, revamping retail team, digital transformation etc.) and thus, outcomes become critical and may drive future narratives. Last few quarters have shown encouraging trends and predictability seems to be setting in. Maintain BUY.

Operational parameters improve; sustaining growth, the key:

Q3 was characterized by better-than-expected growth outcomes – loan (gross) grew 3.5% QoQ. Growth trajectory is becoming more predictable as CUBK is overcoming transitionary challenges reasonably well. The bank has not yet availed the benefit of new retail portfolio (likely to see gradual benefit starting from Q4FY25), which will further add to growth trajectory.

Delivery on this remains a key variable. Interestingly, better core fee and controlled opex fed into improved core profitability growth. CUBK has invested heavily, which may keep costs elevated, near term, but this was quintessential and may define future capability, which is the right move, as per our assessment. Also, turning rate table may initially put pressure on NIMs and we are conservative in our estimates to that extent.

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Asset quality improvement sustained; higher credit cost on rising coverage:

Q3 was yet another quarter of negative net slippages, leading to lower GNPLs (down 1.9% QoQ to 3.36%). However, credit cost looked higher as it shored up coverage (up >340bps QoQ to 58.6%). Performance was strong, but sustained pace is crucial (we see this trend to sustain) in the backdrop of higher cost metrics to deliver steady return ratios.

Maintain BUY with TP raised to INR 205:

CUBK has historically been one of the most profitable regional banks, but past few years have been difficult. We believe operational parameters are starting to turn as changes made by CUBK are starting to take shape. Performance in the past few quarters does suggest a definitive turn-around. We see CUBK being more predictable and this consistency will aid a re-rating. Thus, we raise our target multiple to 1.4x (from 1.3x earlier), leading to a raised TP of INR 205 (earlier INR 188). We maintain BUY.

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