City Union Bank Ltd. share price target

Sector: Banks /Small-Cap | Earnings Update 4QFY19 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....

Net Interest Margin (NIM) remained almost stable on a sequential basis, where as increased by 4bps on a YoY basis to 4.40%. The banks deposits have grown by 17% YoY, with 22% increase in CASA deposits (CA 15%, SA 25%) and the CASA mix at 25.22%. A marginal slippage in gross/net NPA by 4bps/7bps and currently stands at 2.95%/1.81% and PCR almost stable at around 63%. We expect NII/PAT to grow at a CAGR of 14%/16% over FY19-21E on the back of 17% CAGR growth in loans and advances....

City Union Bank (CUB) reported stable set of numbers in Q4FY19 supported by loan growth of 17% YoY. Profit for the quarter grew by 15% to Rs 175 cr vs Rs 152 cr in corresponding quarter of previous fiscal year. Credit growth of the bank remained steady at 17%, leading to 14% jump in NII at Rs 421 cr and stable NIM at 4.4%. Underlying asset quality of the bank remains under control with GNPAs at 2.95% while NNPAs stood at 1.81%. Management has given steady outlook going forward and guided for 18-20% advances growth. We remain positive on CUB's growth outlook and believe it will give sustainable...

Stable return ratios to sustain premium valuation... The bank's conservative approach kept asset quality largely stable though slippages were a bit higher at | 204 crore, leading to a ~4 bps QoQ increase in GNPA ratio to 2.95%. The management reiterated slippage will remain...

Strong regional focus and customer franchise in core segments (MSME/traders) have enabled CUBK to consistently outperform its regional peers (KVB and FB). While critics may be wary of its regional concentration, we believe there is enough headroom to grow in TN (3.6% marketshare). Waning competition will only help. A low frills operating model (that earns employee loyalty via ESOPs) and calibrated credit filters contribute to steady RoAA. CUBK looks relatively small, but is rock solid. With consistent performance and healthy core parameters, CUBK deserves premium multiples. Barring the marginal blip in asset quality, 4QFY19 was mostly along expected lines. Maintain BUY with a TP of Rs 240 (3x Mar-21E ABV of Rs 80)

Net interest income grew by 15% and PAT grew by 15% YoY in Q3FY19 mainly led by consistent 17% YoY growth in loan book. Net Interest Margin (NIM) remained stable at 4.41% on a YoY basis and improved sequentially by 9 bps against 4.32% in Q2FY19 due to sequential increase in yield of funds and cost of funds. Deposit grew by 13% YoY in Q3FY19 in which CASA grew by 21% YoY. Asset quality improved with GNPA at 2.91% against 3.30% in Q3FY18, with NNPA and PCR stable at 1.74% and 65% respectively....

NII witnessed a continued pick-up in growth trajectory at 14.5% YoY to | 418 crore, in line with our estimate, led by healthy credit offtake Other income was at | 120 crore; down 1.5% YoY, lower than our estimate, attributable to a subdued treasury performance. Accordingly, operating profit was muted at | 307 crore, up 3.5% YoY Provisions were at | 79 crore, down 8.1% YoY & 16% QoQ. Lowerthan-expected tax outgo at | 50 crore, led earnings growth at 15.1% YoY to | 178.1 crore, broadly in line with our estimate Slippage remained higher at ~| 165 crore, led by one large...

We assign a target multiple of 3xDec-20E ABV to arrive at a TP of Rs 236. Maintain BUY. Yet again, CUBK performed consistently, across parameters. Loan growth was steady and broad based at 17%, fees grew ~16%, NIMs improved ~10bps sequentially, CASA (24%) and the PCR (65%) remained stable.