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Good Quarter; Growth Momentum Improves & Expected to Sustain!

Est. Vs. Actual for Q1FY26: NII – BEAT; PPOP – BEAT; PAT – BEAT

Changes in Estimates post Q1FY26

FY26E/FY27E: NII: +1.1/+1.8; PPOP: +2.2/+2.6; PAT: +2.7/+3.0

Recommendation Rationale

* Growth visibility healthy; Momentum to Continue: CUB’s growth engine has started to fire, and the management is confident of the momentum to continue, supported by healthy growth visibility in its core segments. Thus, the management has indicated that barring any macro uncertainties, CUB will continue to deliver ~15-16% credit growth in FY26. The bank does not expect any meaningful impact of the tariffs on its core MSME export-oriented customers. Currently, the bank’s exposure to export-oriented MSMEs is ~Rs 1,200 Cr, of which only 20% exports are to the USA. These customers expect a marginal 2-3% drop in their profitability owing to the imposition of tariffs. Moreover, they have been aiming at diversifying their risk by increasingly focusing on European markets. The bank is on track to ramp up its retail portfolio with a focus on Home Loans, Affordable Housing, and LAP. CUB intends to scale this business primarily through its existing branch network (80% contribution) with support from the DSA channel. We expect CUB to deliver a healthy 15% CAGR credit growth over FY25-28E.

* NIMs to be Defended at 3.5% for FY26: Despite ~70% of CUB’s portfolio being floating rate (of which ~48% is EBLR-linked), the management remains confident of defending margins at 3.5% in FY26. The impact of the Jun’25 rate cut would reflect on Q2 margins (expected to range between 3.45-3.5%); however, as the rate actions on deposits reflect in the CoF, NIMs are expected to find support. The bank has reduced its TD rates in Apr’25 and has taken rate action on SA deposits in Jun’25, the benefit of which will reflect meaningfully from H2 onwards. Moreover, the bank had given certain customers loans at discounted rates, and the pass-on of the repo rate cut to these customers would be lower. We expect a NIM delivery in FY26 to be in line with the guidance, with improvement likely in FY27. Margins are likely to hover between 3.5-3.6% over FY26-28E.

* Asset Quality Improvement to Continue: The management remains confident of asset quality improvement continuing, led by controlled slippages and healthy recoveries. The pace of recoveries is expected to outpace slippages even in FY26. While the bank has not seen any signs of stress emerging in the MSME segment, it will continue to actively monitor the dynamic situation. The management has indicated that CUB will not shy away from decelerating growth in case of asset quality stress. The SMA2 has seen a steady decline and stood at ~1.6% vs 2.2% YoY and flat QoQ. Thus, with no major asset quality challenges in sight in both the MSME and newly launched Retail Portfolio, we expect credit costs to remain under check at 60bps (+/-5bps) over FY26-28E. PCR is likely to range between 63-65%.

Sector Outlook: Positive

Company Outlook: We expect CUB’s superior RoA delivery on 1.5-1.6% over the medium term to continue supported by (1) Buoyant growth sustaining, (2) Ability to maintain NIMs in a narrow range of 3.5-3.6%, (3) Strong and improving Asset quality, keeping credit costs under control and (4) Gradual improvement in Opex ratios. Near-term challenges on margins would be visible; however, we believe CUB remains well poised to deliver a strong Advances/NII/Earnings growth of 15% each over FY25-28E. Sustenance of growth trends should drive stock performance.

Current Valuation: 1.8x FY27E ABV; Earlier Valuation: 1.5x FY27E ABV

Current TP: Rs 270/share. Earlier TP: Rs 225/share

Recommendation: We maintain our BUY recommendation on the stock.

Alternate BUY Ideas from Our Coverage

DCB Bank (TP – Rs 165); IDFC First Bank (TP – Rs 83)

Financial Performance:

* Operational Performance: CUB’s advances growth was ahead of our estimates (+16/2% YoY/QoQ) and was led by healthy growth in gold book (+31/5% YoY/QoQ), while MSME segment growth was flat QoQ. Deposits growth also improved to 20/3% YoY/QoQ, led by strong growth in TDs (+24/5% YoY/QoQ). CASA deposits grew by 11% YoY/flattish QoQ. CASA ratio stood at 27.3% vs 29.5/28.5% YoY/QoQ. C-D Ratio improved to 82.2% vs 83.5% QoQ.

* Financial Performance: NII grew by 15/4% YoY/QoQ with NIMs contraction lower than expectations at 6bps QoQ with a 7bps drop in CoD partially offsetting the impact of higher decline in yields (-12bps QoQ). NIMs stood at 3.54% vs 3.54/3.6% YoY/QoQ. Non-interest income grew by 27/-3% YoY/QoQ. The bank reported a treasury gain of Rs 64 Cr. Opex growth was controlled (+15/2% YoY/QoQ). C-I Ratio was stable at 48.1% vs 48.2% QoQ. PPOP grew by 21/2% YoY/QoQ. Credit costs declined to 52bps vs 60bps QoQ. PAT grew by 16/6% YoY/QoQ.

* Asset quality NNPA continued to improve with GNPA/NNPA at 2.99/1.2% vs 3.09/1.25% QoQ, led by lower slippages during the quarter (slippage ratio of 1.5% vs 2% QoQ)

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