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Notwithstanding the anemic credit growth at 2% YoY/3% QoQ, CUBK reported a strong 27% PAT beat at Rs2.8bn/1.7% RoA, mainly owing to lower LLP, and partly offset by lower other income and higher opex. Margin improved after a long break – up by 7bps QoQ to 3.74% due to better loan/investment yields. Asset quality too improved sharply, with GNPA/NNPA ratio down by 25bps/17bps QoQ to 4.7%/2.3%, respectively. Going forward, Bank expects the growth trajectory to gradually improve, and plans to incrementally focus on retail (organically and via co-lending). Bank has highlighted that the recent RBI annual inspection has been completed, and that it does not require reporting any divergence, which we believe is a huge relief. Additionally, Bank expects recovery trends to improve, which should help it to reduce NNPA to around 1.5-2%.

Factoring-in the strong 2Q beat, including better asset-quality outcome, we revise FY24E/25E earnings upward by 8%/4%, respectively, and expect RoA/RoE of 1.4- 1.5%/12% over FY24-26E. We retain HOLD on CUBK, with revised TP of Rs152/share, rolling forward on 1.2x Sep-25E ABV. We believe a meaningful rerating is conditioned to deliver on growth and sustained asset quality.

City Union Bank: Financial Snapshot (Standalone)

Growth drags, but NIM improves a tad QoQ

CUBK continued to report sub-par credit growth at 2% YoY/3% QoQ, mainly due to contraction in the agri loan portfolio and slower growth in the SME/Corporate portfolio. That said, CUBK remains hopeful of steady improvement in credit growth of over 10% in FY24 on account of acceleration in gold, VF and housing loans (via co-lending outside TN). Deposit growth too remains moderate, at 6% YoY/2% QoQ, with CASA slipping a bit to 30%. However, increase in CoF was relatively lower, at 3bps QoQ to 4.6% which, coupled with slight improvement in loan/investment yields, led to a 7bps QoQ improvement in NIM to 3.74%. Going forward, the bank expects NIM to stay rangebound.

Headline asset quality improves QoQ, but need for shoring-up PCR

After a long time, fresh slippages moderated meaningfully to Rs2.3bn/2.1% of loans which, coupled with higher upgrades, led to a 25bps QoQ reduction in the GNPA ratio to 4.7%. As a result, the GNPA ratio increased to 4.9% in Q1FY24 (up by 54bps QoQ). Bank has highlighted that the recent RBI annual inspection has been completed and that it does not require to report any divergence, which we believe is a big relief. Also, Bank expects recovery trends to improve, which should help it to reduce NNPA to around 1.5-2% from 2.3% in 2Q. However, the specific PCR remains sub-par vs peers at 51%, which we believe the bank needs to shore-up, along with building some contingent buffers.

Outlook and Valuation

CUBK has long struggled on the growth front and, better late than never, has now hired BCG to revamp its credit machinery. Factoring-in the strong 2Q beat including better asset-quality outcome, we revise earnings for FY24E/25E upward by 8%/4%, respectively, and expect RoA/RoE at 1.4-1.5%/12% over FY24-26E. We retain HOLD on the stock, with revised TP of Rs152/share, rolling forward on 1.2x Sep-25E ABV. We believe a meaningful re-rating is conditioned to deliver on growth and sustained asset quality. Key risks: Slower growth, faster CASA cannibalization, higher ECL impact, and MD succession.

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