City Union Bank Ltd. share price target

CUBK's performance over FY20 so far, has been softer than anticipated on key fronts- asset quality and growth (excusable, given systemic trends). However, when we consider CUBK's track record and inherent strengths (strong credit filters, overall prudence and customer franchise) our outlook on CUBK's prospects remains unchanged. CUBKs 3QFY20 operating performance was slightly below estimates with slower business traction and a rise in slippages. NIM improvement and higher recoveries were the silver lining. Net Earnings were in line, assisted by lower tax provisions. Maintain BUY (TP Rs 262, 3x Dec-21E ABV).

City Union Bank (CUBK) reported a tepid Q2 with slowdown in loan growth and compressed NIM due conscious focus on credit quality and pricing pressures. Lower CD ratio of 82% also led to NIM contraction. Deposits grew 17% YoY and CASA ratio (24.7%) improved sequentially.

Sector: Banks /Small-Cap | Earnings Update 2QFY19 Background: City Union Bank (CUB) among the smaller-sized banks in the private sector space operates a network of 650 branches. With about 2/3rds of its branches located in Tamil Nadu the bank's business is largely skewed towards the Southern India. Majority of its business comes from branches located in South India. CUB has a significant chunk...

With (macro-induced) lower loan growth and higher slippage assumptions, we continue to like CUBK's conservative underwriting approach and inherent strengths (strong regional understanding, customer franchise, etc.). Aided by the recent tax cut, CUBK should continue to deliver best-in-class RoAAs (~1.60% over FY20-22E). CUBK is our preferred bet amongst regional banks. CUBKs 2QFY20 operating performance was a tad below estimates. However, higher treasury gains and lower tax led to a PAT beat. Elevated slippages (~2.45%) and slower growth (~12% YoY) disappointed slightly. Maintain BUY with a TP of Rs 255 (3x Sep-21E ABV).

Loan growth slowed to 14% YoY (vs +17% in last 4 quarters). Slippages were elevated due to one large educational institution (~Rs700mn) but in-line with guidance. Strong treasury gains and improved recoveries from written off accounts led to better than expected other income.

Sector: Banks /Small-Cap | Earnings Update 1QFY20 Background: City Union Bank (CUB) among the smaller-sized banks in the private sector space operates a network of 616 branches. With about 2/3rds of its branches located in Tamil Nadu the bank's business is largely skewed towards the Southern India. Majority of its business comes from branches located in South India. CUB has a significant chunk of its branches in urban and semi-urban areas. With no identifiable promoters CUB is run by a team of professionals. A slew of FII's hold a 24.4% equity stake....

City Union Bank Ltd (CUB), the oldest private sector bank in India, is a mid-sized commercial bank headquartered at Tamil Nadu, having a network of 650 branches and 1,711 ATMs spread across the country and have a loan book size of ~Rs32,000cr. Net Interest Income (NII) grew by 11% and PAT grew by 15% YoY in Q4FY19, with 14% YoY growth in loans and advances. Marginal reduction in Net Interest Margin (NIM) on a YoY as well as sequential basis, and currently stands at 4.11%....

In spite of the sequential rise in GNPAs and deceleration in growth, our constructive stance remains (and estimates largely) unchanged. We build slightly slower growth and higher slippages on a/c of deterioration in macros. We like CUBK for its strong regional focus, customer franchise and calibrated credit filters. These are contributors to a steady RoAA (~1.6% over FY20-21E) In line operating performance led by seasonal deceleration in growth (+14% YoY) and dip in NIMs (-29bps QoQ). Lower recoveries drove GNPAs. Treasury gains and MTM reversals negated higher LLPs. Maintain BUY with a TP of Rs 246 (3x Jun-21E ABV of Rs 82)

Outlook on MSME exposure remains bit cautious Bank's asset quality witnessed deterioration, as absolute GNPA surged 10% QoQ to | 1076 crore. Fresh slippages continue to remain elevated at | 200 crore led by one account within educational sector leading to 39 bps QoQ...

Despite margin contraction/higher provisions, CUB reported in-line profit at Rs1.86bn, up 15% yoy, aided by higher treasury income. Asset quality was a key irritant with headline GNPA ratio rising 39bps qoq to 3.3% due to elevated slippages and subdued credit growth. The bank has seen a sustained rise in NPAs since the past three quarters given rising book and some moderation in other business segments. NIM slipped 29bps qoq/13bps yoy to 4.1% from peak levels on higher cost of funds and some interest reversals on NPAs. CUB remains our preferred pick in the small-cap private banking space, given its superior return ratios (RoA/RoE of 1.6%/15-16%), higher Tier I ratio (~15%) and top-management...