Buy City Union Bank Ltd For Target Rs.250 by Prabhudas Liladhar Capital Ltd
Margin trajectory a key monitorable
CUB saw a decent quarter with core PPoP beating PLe by ~11% led by better NII and lower opex. Fee was a miss due to lower processing fees driven by softer loan offtake. Bank reiterated guidance of growing loans 2-3% above industry; we are factoring loan CAGR of 17.5% over FY26-28E. Portfolio mix is guided to be: gold at 31-32%, MSME at 55-60% and secured retail 10%. We raise NIM for FY27/28E by 5bps but trim fees by ~10%; net impact on core PAT is mildly positive. One-time ECL impact could be 60- 65bps while sustainable effect on credit costs may be 4-5bps. We keep multiple at 1.7x but increase TP to INR 250 from INR 233 as we roll forward to Sep’28 ABV. Retain ‘BUY’.
Decent quarter. Beat on core PPoP due to better NII/opex; fee was a miss:
NII was a beat at INR 8.2bn (PLe INR 7.9bn) due to better NIM (calc.) at 3.83% (PLe 3.67%); reported NIM was down 9bps QoQ to 3.78%. Loan/deposit growth were in-line at 26.1%/20.7% YoY. CASA ratio was down 105bps QoQ to 26.6%. Other income was more at INR 2.4bn (PLe INR 2.3bn) due to treasury; fees/TWO recovery were lower. Opex at INR 4.8bn was 4.2% lower (PLe INR 5bn) mainly due to other opex. Core PPoP at INR 5.3bn was 11% above PLe; PPoP was INR 5.8bn. GNPA was better at 1.73% (PLe 1.81%) due to lower net slippage. Gross slippage was INR 1.95bn (PLe INR 2.05bn); recovery was better at INR 1.8bn (PLe INR 1.69bn). Provisions were INR 780mn. Core PAT was 8% above PLe at INR 3.42bn; PAT was INR 3.8bn.
Loan growth was higher but back-ended:
MSME growth was guided to exceed system by 2-3%, despite a slight drop in utilization levels from 73% to 70%. EU agreement is likely to positively influence future business prospects, particularly in regions like Tirupur. ECLGS sanction was INR 8bn till date and total sanctions could reach INR 20-25bn. Gold portfolio is expected to remain at 31-32% of loans, MSME at 55-60% and secured retail ~10%. Gold loan avg. LTV is 62% with agri-gold LTV being 5-7% higher than non-agri. Bank reiterated guidance of growing advances 2-3% above industry, led by MSME, gold and secured retail.
NII surprises again; cost of funds to be watched:
Management expects the cost of deposits to remain around 5.6-5.7%. NIM is guided at 3.65-3.70% over next few quarters, potentially impacted by a 5bps rise in deposit cost. NII has surprised positively over the last few quarters which was aided by gold loan yields that were up by 20-25bps over last year. We raise NIM by 5bps in FY27/28E to ~3.4%.
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SEBI Registration number is INH000000933
