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Quality of core revenue improving each quarter

Quick Pointers:

* Core earnings higher due to beat on NII/fees and provisions.

* Loan growth, NIM and net slippage momentum guided to sustain.

CUB saw yet another stellar quarter with beat on all fronts. Core PPoP was 6.7% beat led by superior loan growth, better margins and higher fees. Asset quality continues to remain benign as slippages have been controlled while recoveries have surpassed slippages since the past 9 quarters. Growth has been strong without compromising on margin, due to benefit of lower reprising of deposits. Due to asset quality tailwinds, credit growth could surprise positively. Bank expects NIM benefit to continue in H2FY26 led by further repricing of Rs180bn of deposits. Since asset quality risks have abated and PCR has touched 63%, provisions may be created only towards ECL transition; management does not expect a significant impact. Due to better growth and margins, we upgrade core PAT for FY26/27E by avg. 4.5%. We increase multiple on Sep’27 ABV to 1.6x from 1.5x and raise TP to Rs265 from Rs245. Retain ‘BUY’..

* Strong quarter with beat on all fronts: NII was Rs6.7bn (PLe Rs6.5bn); NIM (calc.) was ahead at 3.57% (PLe 3.50%) reported NIM rose by 5bps QoQ to 3.59% due to fall in deposit cost. Credit growth was a beat at 18.7% YoY (PLe 16.6%); deposit accretion was in-line at 21% YoY. CASA improved to 28.1% (27.3% in Q1’26); LDR inched up by 90bps QoQ to 81.6%. Other income was higher at Rs2.6bn (PLe Rs2.4bn) due to better fees, TWO recovery & IT refund. Opex at Rs4.6bn was 3% higher led by staff cost. Core PPoP at Rs4.5bn was 6.7% above PLe; PPoP was Rs4.7bn. Asset quality was better; GNPA was lesser 2.4% (PLe 2.6%) as gross slippages at Rs1.6bn (PLe Rs2bn) and recoveries Rs2.5bn (PLe Rs2.2bn) were better. Provisions were lower at Rs0.6bn (PLe Rs0.8bn). Core PAT was 14.6% above PLe at Rs3.1bn; PAT was Rs3.3bn.

* Loan growth surprised positively: Credit accretion was strong at 6.9% QoQ mainly driven by MSME and gold (both agri/non-agri). Overall loan growth momentum is likely to sustain driven by (1) gold, which offers favorable riskreward and (2) retail secured lending that would support overall accretion; its share in advances is guided to reach 4.0-5.0% by FY26 end and 8-9% by FY27 end. Retail sourcing is 90% branch driven and 10% through third party while MSME sourcing is through organic and inorganic routes. In terms of tariff, bank does not foresee any significant challenges as US exposure stood at Rs1.54bn which is only 0.27% of loan book. Focus is on CASA since there is a dedicated team coupled with branch focus.

* NIM outlook positive; more asset quality tailwinds: Adjusting for interest on NPA recovery, NIMs rose by 5bps QoQ led by i) repricing of Rs90bn deposits in Q2’26 and ii) migration to fixed rate gold loans. Bank expects this improving margin trend to continue since additional 30-35% of deposits (~Rs180bn) are expected to re-price lower in H2FY26. CUB has been seeing negative net slippages since the past 9 quarters and mgmt. expects this trend to continue in H2FY26. ECL impact may not be material on profitability.

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