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Small is beautiful
City Union Bank (CUB), the oldest Indian private sector bank,
is a play on consistent performance on the back of a fine
balance between growth, profitability and quality. Armed
with a low-duration loan book and long-duration deposit
base, CUB has maintained strong profitability across
operating environs. All in all, a small but quality franchisee
available at attractive valuations.
Fine balance of growth, quality & profitability: CUB has
maintained a very fine balance between the three conflicting
objectives: balance sheet growth, asset quality and
profitability. This ability to maintain balance (despite regional
focus) is quite commendable and reflects well on the strong
management team and focussed business approach. In line,
CUB has churned out consistent RoA (~1.5%) & RoE (~20%)
for more than a decade – encompassing varied operating
environments.
Focussed business approach: CUB, a regional banking
player in Southern India, has carved out a niche for itself by
catering to working capital requirements of SMEs with clear
preference towards secured credit. The focussed approach
along with deep understanding of local market dynamics has
been crucial to its consistent performance. CUB has
maintained its NIM between 3-4% for over a decade (FY2000-
M9FY11), despite a historically weaker CASA (~22%) relative
to larger peers.
Well positioned for interest rate upcycle: The bank is well
positioned to minimise the pressure on NIM owing to steep
hikes in policy rates with 1) ~72% of its deposit in 1-3yr
bracket, which would help counter NIM pressure in a high
short term rates environment. 2) Working capital loans form
~56% of total advances which offer the benefit of a rising
interest scenario.
Sound asset quality position: Asset quality remains healthy
(%GNPA of 1.3%) with limited restructured assets (3.5% of the
loan book). Slippages in restructured assets have been
marginal (2.6% of the total) with risk of additional slippages
lower as almost all restructured accounts are out of
moratorium.
Healthy operating matrices: The bank maintains a healthy
operational efficiency – with one of the lowest cost-income
ratios and high per employee productivity. With operational
restructuring underway, CUB should be able to further
improve efficiency of its retail franchisee (wider product suite
and process re-engineering).
Quality franchisee @ attractive valuations: At current
market price, the stock trades at 1.5x FY12E BVPS and 6.7x
FY12E EPS. In the light of CUB’s key strengths, the current
valuations offer a good entry point for long term investors.
We initiate coverage with Buy rating and a target price of
Rs55 (22% upside), based on 1.6x FY13E ABVPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Small is beautiful
City Union Bank (CUB), the oldest Indian private sector bank,
is a play on consistent performance on the back of a fine
balance between growth, profitability and quality. Armed
with a low-duration loan book and long-duration deposit
base, CUB has maintained strong profitability across
operating environs. All in all, a small but quality franchisee
available at attractive valuations.
Fine balance of growth, quality & profitability: CUB has
maintained a very fine balance between the three conflicting
objectives: balance sheet growth, asset quality and
profitability. This ability to maintain balance (despite regional
focus) is quite commendable and reflects well on the strong
management team and focussed business approach. In line,
CUB has churned out consistent RoA (~1.5%) & RoE (~20%)
for more than a decade – encompassing varied operating
environments.
Focussed business approach: CUB, a regional banking
player in Southern India, has carved out a niche for itself by
catering to working capital requirements of SMEs with clear
preference towards secured credit. The focussed approach
along with deep understanding of local market dynamics has
been crucial to its consistent performance. CUB has
maintained its NIM between 3-4% for over a decade (FY2000-
M9FY11), despite a historically weaker CASA (~22%) relative
to larger peers.
Well positioned for interest rate upcycle: The bank is well
positioned to minimise the pressure on NIM owing to steep
hikes in policy rates with 1) ~72% of its deposit in 1-3yr
bracket, which would help counter NIM pressure in a high
short term rates environment. 2) Working capital loans form
~56% of total advances which offer the benefit of a rising
interest scenario.
Sound asset quality position: Asset quality remains healthy
(%GNPA of 1.3%) with limited restructured assets (3.5% of the
loan book). Slippages in restructured assets have been
marginal (2.6% of the total) with risk of additional slippages
lower as almost all restructured accounts are out of
moratorium.
Healthy operating matrices: The bank maintains a healthy
operational efficiency – with one of the lowest cost-income
ratios and high per employee productivity. With operational
restructuring underway, CUB should be able to further
improve efficiency of its retail franchisee (wider product suite
and process re-engineering).
Quality franchisee @ attractive valuations: At current
market price, the stock trades at 1.5x FY12E BVPS and 6.7x
FY12E EPS. In the light of CUB’s key strengths, the current
valuations offer a good entry point for long term investors.
We initiate coverage with Buy rating and a target price of
Rs55 (22% upside), based on 1.6x FY13E ABVPS.
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