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City Union Bank (CUB) is a South India based small sized bank. The
bank stands out from the rest due to its target SME customer profiling
and loan product mix resulting in higher NIM and best in class returns
matrix. While other banks build up scale through the wholesale
business first and enter retail subsequently, CUB’s growth, though
stemming in from retail, is in principle not for consumption as the bank
mainly lends to small businesses, traders, etc. It has been growing
steadily albeit relatively conservatively and aims to continue with this
strategy for the next four or five years in order to reach a larger scale
before embarking on an aggressive growth trajectory. We believe this
strategy works for the bank and estimate that a 26% CAGR in business
would lead to 30% CAGR in PAT with RoA and RoE being maintained at
1.7% and 22.7%, respectively, over FY10-13E.
Business loans, high short-term loan book to maintain NIM at 3.1%
CUB’s loan book is high interest yielding in nature as:
It has higher proportion of SME-trade loans segment (constitutes 54%
of its loan book). Short-term loans remain high (~58% in FY10)
Approx. 80% of its loan book is on a floating basis enabling frequent
repricing of its book, resulting in higher pricing power, which helps
maintain NIM
We expect advances to grow at a sturdy 28% CAGR over FY10-13E
resulting in NIM stabilising at 3.1% by FY13E.
Small ticket secured loans sustain healthy asset quality…
CUB has been successful in bringing its GNPA and NNPA down from peak
levels of 2% and 1.5% in Q1FY10 to 1.3% and 0.5%, respectively, in
Q1FY11 and maintaining them ever since. Its lending philosophy of
providing small ticket secured loans (~1:1 loan to collateral ratio) helps
control asset quality. We expect GNPA and NNPA to decline further to
1.1% and 0.4%, respectively, over FY10-13E.
Valuations
At the CMP of | 44, the stock is currently trading at 1.2x its FY13E ABV.
We believe CUB is capable of sustaining its high RoA and RoE of over
1.4% and 20%, respectively, while continuing its business strategy as a
niche banker to small businesses having a working capital loan oriented
business model. We have valued the stock at 1.4x FY13E ABV and arrive
at a target price of | 52, giving 18% upside. We are initiating coverage on
the stock with a BUY rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
City Union Bank (CUB) is a South India based small sized bank. The
bank stands out from the rest due to its target SME customer profiling
and loan product mix resulting in higher NIM and best in class returns
matrix. While other banks build up scale through the wholesale
business first and enter retail subsequently, CUB’s growth, though
stemming in from retail, is in principle not for consumption as the bank
mainly lends to small businesses, traders, etc. It has been growing
steadily albeit relatively conservatively and aims to continue with this
strategy for the next four or five years in order to reach a larger scale
before embarking on an aggressive growth trajectory. We believe this
strategy works for the bank and estimate that a 26% CAGR in business
would lead to 30% CAGR in PAT with RoA and RoE being maintained at
1.7% and 22.7%, respectively, over FY10-13E.
Business loans, high short-term loan book to maintain NIM at 3.1%
CUB’s loan book is high interest yielding in nature as:
It has higher proportion of SME-trade loans segment (constitutes 54%
of its loan book). Short-term loans remain high (~58% in FY10)
Approx. 80% of its loan book is on a floating basis enabling frequent
repricing of its book, resulting in higher pricing power, which helps
maintain NIM
We expect advances to grow at a sturdy 28% CAGR over FY10-13E
resulting in NIM stabilising at 3.1% by FY13E.
Small ticket secured loans sustain healthy asset quality…
CUB has been successful in bringing its GNPA and NNPA down from peak
levels of 2% and 1.5% in Q1FY10 to 1.3% and 0.5%, respectively, in
Q1FY11 and maintaining them ever since. Its lending philosophy of
providing small ticket secured loans (~1:1 loan to collateral ratio) helps
control asset quality. We expect GNPA and NNPA to decline further to
1.1% and 0.4%, respectively, over FY10-13E.
Valuations
At the CMP of | 44, the stock is currently trading at 1.2x its FY13E ABV.
We believe CUB is capable of sustaining its high RoA and RoE of over
1.4% and 20%, respectively, while continuing its business strategy as a
niche banker to small businesses having a working capital loan oriented
business model. We have valued the stock at 1.4x FY13E ABV and arrive
at a target price of | 52, giving 18% upside. We are initiating coverage on
the stock with a BUY rating.
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