Buy City Union Bank Ltd for the Target Rs 250 by Prabhudas Liladhar Ltd
Loan CAGR over FY27-29E could be between 16-20%
CUB saw a good quarter with core PAT beating PLe by 3.7% led by better NII/fees; other income included ARC sale of INR1.07bn which provided cushion against higher opex and allowed to create contingent provision of INR0.5bn. Bank reiterated guidance of growing loans 2-3% above industry; we are factoring loan CAGR of 17% over FY26- 28E. Portfolio mix was guided to be: gold at 31-32% (currently 30%), MSME at 55-60% and secured retail 10%. One-time ECL impact has been lowered from 60-65bps to 40- 45bps due to improved portfolio quality. We keep multiple at 1.7x on Sep’28 ABV and maintain TP at INR250. Retain ‘BUY’
Higher TWO recovery cushions higher opex/contingent provisions:
NII was a 3% beat at INR8.7bn (PLe INR8.5bn). NIM (calc.) was ahead at 3.85% (PLe 3.76%); reported NIM was up 9bps QoQ to 3.87%. Loan/deposit growth was 330/100bps more at 26.6%/20.7% YoY. Other income was higher at INR3.5bn (PLe INR2.6bn) due to rise in TWO recovery and fees. Opex at INR5.6bn was 9.2% above PLe led by increase in staff cost and other opex. Core PPoP at INR6.2bn was 11.4% above PLe; PPoP was INR6.6bn. GNPA was lower at 1.4% (PLe 1.6%) due to lower slippage at INR1.75bn, better recovery at INR1.80bn and higher write-off. Provisions were INR1.2bn (PLe INR0.9bn) which included contingent provisions of INR500mn. Core PAT was 3.7% above PLe at INR3.9bn; PAT was INR4.2bn.
Loan growth momentum continues:
Management reiterated guidance of loans growing 2-3% above industry, led by MSME, gold and secured retail. With LDR at 85-86%, deposit growth is to stay aligned with credit growth. Gold loans stood at INR217bn (~30% of credit), with bank aiming to cap the share at 31-32%. Gold portfolio is concentrated in South India (~96%), with the remaining 4% from other regions. Bank does not see any challenges in the gold loans; while revised framework permits LTV of 85%/80%/75% for consumption loans of up to INR0.25mn, INR0.25-0.5mn and >INR0.5mn, bank generally maintains an initial LTV of 60-65%.
NII surprises again; cost of funds to be watched:
Reported NIM improved by 9bps QoQ to 3.87% supported by a 4bps QoQ fall in cost of funds to 4.74% and higher investment yield, while cost of deposits was flat at 5.56%. Deposit cost is expected to rise by 10bps in Q3FY27, offset by asset-side repricing (EBLR and gold). NIM guidance for FY27 was raised to 3.85-3.95% (3.65-3.75% guided in Q1FY27), supported by EBLR repricing and by better liability side costing.
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SEBI Registration number is INH000000933
