Buy City Union Bank Ltd For Target Rs 350 By Emkay Global Financial Services Ltd
City Union Bank’s (CUBK) credit growth further accelerated to ~26.5% YoY and 8% QoQ in Q4, which, coupled with steady loan yields, helped the bank deliver a multi-quarter high margin of 3.9%. This, in turn, drove healthy core-operating profit growth of 33% YoY. Provisions were slightly higher than expected, as the bank continued to write-off assets and built a standard asset provision buffer. Despite this, CUBK delivered a strong PAT of Rs3.6bn and RoA of 1.6%. Going ahead, the bank expects to sustain high growth, led by MSME and secured retail loans, including gold, while margins are expected to be largely stable. We raise our earnings estimates by 4-6% for FY27-28E and expect the bank to report a strong RoA of ~1.5-1.6% and RoE of 14-15% over FY27-29E. This, coupled with a strong capital buffer and improving retail orientation, should help the bank to sustain a premium valuation, in our view. On management succession, Kamakodi has stepped down as MD & CEO, passing on responsibilities to Vijay Anandh to ensure a smooth transition. The board has sought his willingness to continue in a non-executive role, with any future decision contingent on regulatory comfort and approval. We retain BUY and TP of Rs350, valuing the bank at 1.9x FY28E ABV.
Strong business momentum to sustain in FY27 as well
CUBK’s credit growth accelerated to ~26.5% YoY and 8.2% QoQ, led by strong momentum in secured retail (+50.8% YoY), MSME (+15.4% YoY) and agri (+23.4% YoY), while the corporate book also grew 7.2% YoY. Within retail, gold loans remained a key driver, growing 61.6% YoY and 16.8% QoQ, and are conservatively managed with capped lending values based on past stress experience, ensuring adequate protection even under moderate gold price corrections and compliance with RBI LTV norms. NIM was stable at 3.9%, supported by improved LDR and loan yields. CUBK expects advances growth to be 2–3% above the industry in FY27 (with an upward bias), while NIMs are expected to be stable within a narrow 5–10bps range in FY27.
Asset quality continues to improve
Asset quality continued to improve with contained slippages of Rs1.9bn (1.5% of loans), supported by better recoveries and write-offs, leading to a 26bps QoQ improvement in GNPA ratio to 1.9% and NNPA to 0.7%. Specific PCR improved to 64.7% and is expected to increase further, while SMA trends also improved, with total SMA declining to 2.5% and SMA-2 to 0.72% in Q4FY26 from 3.7% and 0.95% in Q3, respectively. The management noted no visible impact from the US-Iran geopolitical situation so far, though the portfolio continues to be closely monitored
We retain BUY
We raise our earnings estimates by 4-6% for FY27-28E and expect the bank to report a strong RoA of ~1.5-1.6% and RoE of 14-15%. This, coupled with a strong capital buffer and improving retail orientation, should help sustain premium valuation. Hence, we retain BUY and TP of Rs350, valuing the bank at 1.9x FY28E ABV. Key risks: Macro deterioration hurting asset quality, higher ECL hit, and KMP attrition in its retail banking team.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
