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Fee income upgrade to protect cut in NIM

Quick Pointers:

* Core earnings higher due to beat on fees; slippages see a blip.

* Loan growth guided to sustain. Secured retail growth trending well.

CUB saw a good quarter with beat on core PAT due to stronger fees led by insurance and processing fees. Sales focus has led to better insurance fees and bank sees more scope to enhance this stream. Reported NIM slightly improved QoQ as lower yielding loans were shed. While the bank is targeting stable NIM for FY26E, repo rate cut would impact NIM. CUB met its slippage guidance of Rs8bn for FY25 and it expects slippages for FY26 to be lower at Rs7bn; PCR has touched 60%. This implies that provisions may be steady in near term (54bps in FY25). We cut NIM for 26/27E by 6bps each due to rate cuts and increase opex by ~2% led by secured retail focus. This would be offset by upgrade in fees by ~11.5%. With core RoA profile of 1.4%, we keep multiple at 1.4x but raise TP to Rs210 from Rs200 as we roll forward to Mar’27. Retain ‘BUY’.

* Good quarter; core PAT beat due to better fees. Slippages were higher: NII was fairly in-line with PLe at Rs6bn; NIM (calc.) was lower at 3.36% (PLe3.41%). However, reported NIM inched up by 2bps QoQ to 3.6%. Credit growth was 14.4% YoY (PLe 14%) while deposit accretion was higher at 14.1% YoY (PLe 11.7%). LDR decreased QoQ to 82% from 84.8%. Other income was higher at Rs2.5bn (PLe Rs2.2bn) due to higher fees. Opex at Rs4.1bn was 2.3% above PLe led by staff cost. Core PPoP at Rs4.1bn was 5% above PLe; PPoP was Rs4.4bn. Asset quality was a tad weaker as GNPA was 3bps more at 3.09% owing to higher slippages. Provisions were at Rs780mn (PLe Rs757mn). Core PAT was a 6.5% beat to PLe at Rs2.7bn while PAT was Rs2.9bn (PLe Rs2.7bn).

* Credit growth guided to sustain; reported yields increased QoQ: Credit growth was healthy at 5.4% QoQ driven by MSME, gold and CRE. Loan growth is guided to be 2-3% more than the system in FY26 as retail secured lending would also start supporting overall accretion. Its share is 1.9% in total advances as was guided; Bank expects it to reach Rs30bn (~5.0% share) by FY26 end and 8-9% by FY27/28 end. Despite a rate cut of 25bps in Feb’25 and EBLR share of ~45% (at T+1), reported loan yields increased by 12bps QoQ as the bank shed lower yielding loans to the tune of Rs7.5bn – Rs5.8bn of IBPC (yield 6%) and Rs1.7bn of NBFC loans (yield 8%). Full year reported NIM was stable at ~3.6% in FY25 vs FY24; banks expects NIM to range from 3.5-3.7% in FY26.

* Strong fee income led by insurance; asset quality may improve further: Fees surprised positively led by insurance and processing fees. Sales focus has led to better insurance fees and management sees more scope to enhance this stream. Hence, we raise fee income for FY26/27E by 11%. On opex, bank guided a cost to income of ~50% since opex would remain elevated owing to focus on secured retail. Over FY25-27E, we expect opex CAGR (15.5%) to exceed loan CAGR (14%). Slippages for FY25 were Rs8.15bn vs guidance of Rs8bn; bank expects slippages to moderate to Rs7bn in FY26. As PCR has touched 60%, provision costs could be lower than our estimates of 55bps.

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