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City Union Bank’s (CUB) prudent loan growth, best-in-class
productivity and superior asset quality are likely, in our view, to drive
profitability and sustain an RoA of 1.7% over FY12-14. We initiate
coverage on the stock with a Buy rating and a price target of `68.
Prudent growth with strong customer focus. With over 86% of its
branches in south India, ~47% in rural and semi-urban India, and its
century-old experience in the industry, CUB has forged strong customer
relationships. As a result, its NIM (3.4% in Dec ’11) is traditionally higher
than that of peers, despite a highly-secured loan book (98% of loans) and a
relatively low-cost deposit share (16.8% in Dec ’11). Management has
targeted balanced and steady business growth across credit cycles, while
preserving credit quality and profitability. We estimate 30% CAGR in loan
book over FY12-14, led by a customer-centric strategy and likely addition
of 200 branches.
Best-in-class productivity. Operating costs have grown at a slower
pace than CUB’s balance sheet in the last five years, enabling it to enjoy an
industry-low cost-to-asset of 1.8%. The employees’ union has maintained
cordial relations with senior management, with no instances of labour
unrest since inception. We expect the strong productivity to help sustain
profitability and maintain a high RoA of 1.7% over FY12-14.
Superior credit quality. Gross NPA (1.2% of loans) and net NPA (0.5%
of loans) are some of the lowest in the sector, as a result of its robust credit
appraisal, a highly collateralized loan book and a deep understanding of
customers’ cash-flows. NPA coverage is a healthy 76.2%, while tier-1
capital of 11.5% suffices for prudent loan growth.
Valuation. At our Jun’13 price target, the stock would trade at a PBV
of 1.8x FY13e and 1.5x FY14e. Our price target is based on the twostage
DDM (CoE: 13.1%; beta: 0.6; Rf: 8%). Risk: Slower-thanexpected
economic growth could impact loan growth and credit quality
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
City Union Bank’s (CUB) prudent loan growth, best-in-class
productivity and superior asset quality are likely, in our view, to drive
profitability and sustain an RoA of 1.7% over FY12-14. We initiate
coverage on the stock with a Buy rating and a price target of `68.
Prudent growth with strong customer focus. With over 86% of its
branches in south India, ~47% in rural and semi-urban India, and its
century-old experience in the industry, CUB has forged strong customer
relationships. As a result, its NIM (3.4% in Dec ’11) is traditionally higher
than that of peers, despite a highly-secured loan book (98% of loans) and a
relatively low-cost deposit share (16.8% in Dec ’11). Management has
targeted balanced and steady business growth across credit cycles, while
preserving credit quality and profitability. We estimate 30% CAGR in loan
book over FY12-14, led by a customer-centric strategy and likely addition
of 200 branches.
Best-in-class productivity. Operating costs have grown at a slower
pace than CUB’s balance sheet in the last five years, enabling it to enjoy an
industry-low cost-to-asset of 1.8%. The employees’ union has maintained
cordial relations with senior management, with no instances of labour
unrest since inception. We expect the strong productivity to help sustain
profitability and maintain a high RoA of 1.7% over FY12-14.
Superior credit quality. Gross NPA (1.2% of loans) and net NPA (0.5%
of loans) are some of the lowest in the sector, as a result of its robust credit
appraisal, a highly collateralized loan book and a deep understanding of
customers’ cash-flows. NPA coverage is a healthy 76.2%, while tier-1
capital of 11.5% suffices for prudent loan growth.
Valuation. At our Jun’13 price target, the stock would trade at a PBV
of 1.8x FY13e and 1.5x FY14e. Our price target is based on the twostage
DDM (CoE: 13.1%; beta: 0.6; Rf: 8%). Risk: Slower-thanexpected
economic growth could impact loan growth and credit quality
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