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Our view – Negative net slippages a sign of things to come

Asset quality – Slippages remained under control while recoveries continued their healthy trend: For the quarter, Gross NPA additions had amounted to Rs 1.78bn, implying an annualised gross slippage ratio was 1.5%, while recoveries and upgrades amounted to Rs 1.92bn. The calculated annualised credit cost was 34bps in 1Q. The management has guided that the slippages for FY25 would be lower than Rs 8.0bn and the current level of recoveries to continue for 4-6 quarters.

Balance sheet growth – For the first time in last 10 years, loan growth has not sequentially turned negative in a seasonally weak 1Q: Whole bank advances grew 0.1%/9.8% QoQ/YoY driven sequentially by Agri, Jewel Non-Agri, Housing and NBFC segment. All MSME loans including renewal of loans below Rs 75mn are now processed digitally. Also, 60-70% of the bank’s total loan book and 75-80% of non-gold loan book are eligible for the digital process. CUB is looking towards launching new products i.e. LAP, Home loans, Affordable Home Loans and Micro-LAP by September 2024. The management has guided that they are working towards enhancing the current ~10% YoY advances growth momentum to higher levels

Net interest margin - Margin has shrunk due to various factors but cost of funds has almost peaked:NIM at 3.54% was down -12bps/-13bpsQoQ/YoY, sequentially lower due to lower yield on advances. Change in regulation required penal interest on stressed loans to be accounted under Other Income instead of Interest on Loans. Excluding the impact of the penal interest circular NIM would have been 3.6%. Management has guided that the cost of funds for CUB has almost peaked.

We maintain a ‘BUY’ rating on CUB with an unchanged price target of Rs 210: We value the bank at 1.5x FY26 P/BV for an FY25E/26E RoE profile of 11.4/11.6%. We had upgraded CUB in report dated Feb 2024 for the first time in 3 years.

Other Aspects (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio at 49.3% was down/up by -191/736bps QoQ/YoY and the Cost to assets was at 2.1% down/up by -8/24bps QoQ/YoY

* Fee income: Core fee income to average assets was at 0.6%, up 3bps both QoQ and YoY

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