A sturdy franchise
City Union Bank (CUB) emerges as one of the most robust regional
bank franchises in our analysis of regional banks. Its strong income
generation (NII and fee income to assets of 4.6% vs peer average of
4.2%), controlled cost base and healthy asset quality more than offset
the weakness on the liabilities side. Hence, superior RoAs of 1.5-1.6%
are the best among regional banks and are closer to the new private
sector banks. In the near term, we expect the bank to maintain its
margins in the current tight liquidity environment, given that the
duration of the loan book is lower than the duration of its borrowings.
CUB would deliver net profit CAGR of 20% in FY13-15. The stock is
trading at 1.0x FY14 BV, which is an attractive entry point. We retain
our BUY stance.
Competitive position: MODERATE Changes to this position: STABLE
A robust franchise: City Union Bank emerges as one of the most robust
regional bank franchises in our analysis. Its strong income generation (NII and
fee income to assets of 4.6% vs peer average of 4.2%), controlled cost base
and healthy asset quality more than offset the weakness on the liabilities side.
This has helped CUB to deliver largely stable and high RoAs of 1.6% over the
last eight years along with average asset growth of 27%.
Strong growth to continue: CUB has delivered better loan growth vs its
peers (FY06-13 CAGR of 29%), owing to the relatively better lending
opportunities in its home state, Tamil Nadu (discussed on page 28). We expect
CUB to maintain its loan growth momentum, with a CAGR of 22% in FY13-15,
owing to its continued focus on its core SME franchise and relative insulation
to large corporate loans.
In a better position to manage RoAs: We expect CUB to maintain its RoAs
at 1.45% over the next two years, as: (i) the duration of the loan book at 1.5
years is significantly lower than the 2-3-year duration of its deposits, which
would help the bank to maintain its margins in an environment of tight
liquidity; (ii) income growth keeps pace with cost growth, leading to a stable
cost/income ratio of 42-43% over the next two years; and (iii) credit costs
would peak at 94bps in FY14 (vs 81bps in FY13). Note that CUB’s credit costs
have been relatively high (FY08-13 average of 81bps) due to CUB’s market
positioning as a SME lender (reflected in high yields), but its asset quality
trends have been among the least volatile (65-85bps in the last three years).
Valuation and stance: We cut our FY14 estimates by 14% due to lower NIM
and higher credit cost estimates. We maintain our BUY stance, as at 0.9x oneyear forward BV, the valuations are reasonable for a strongly profitable
franchise. Our target price of `66/share implies 1.45x FY14 P/B and 7.5x
FY14 P/E. Higher-than-expected deterioration of asset quality is the key risk to
our BUY stance.
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City Union Bank (CUB) emerges as one of the most robust regional
bank franchises in our analysis of regional banks. Its strong income
generation (NII and fee income to assets of 4.6% vs peer average of
4.2%), controlled cost base and healthy asset quality more than offset
the weakness on the liabilities side. Hence, superior RoAs of 1.5-1.6%
are the best among regional banks and are closer to the new private
sector banks. In the near term, we expect the bank to maintain its
margins in the current tight liquidity environment, given that the
duration of the loan book is lower than the duration of its borrowings.
CUB would deliver net profit CAGR of 20% in FY13-15. The stock is
trading at 1.0x FY14 BV, which is an attractive entry point. We retain
our BUY stance.
Competitive position: MODERATE Changes to this position: STABLE
A robust franchise: City Union Bank emerges as one of the most robust
regional bank franchises in our analysis. Its strong income generation (NII and
fee income to assets of 4.6% vs peer average of 4.2%), controlled cost base
and healthy asset quality more than offset the weakness on the liabilities side.
This has helped CUB to deliver largely stable and high RoAs of 1.6% over the
last eight years along with average asset growth of 27%.
Strong growth to continue: CUB has delivered better loan growth vs its
peers (FY06-13 CAGR of 29%), owing to the relatively better lending
opportunities in its home state, Tamil Nadu (discussed on page 28). We expect
CUB to maintain its loan growth momentum, with a CAGR of 22% in FY13-15,
owing to its continued focus on its core SME franchise and relative insulation
to large corporate loans.
In a better position to manage RoAs: We expect CUB to maintain its RoAs
at 1.45% over the next two years, as: (i) the duration of the loan book at 1.5
years is significantly lower than the 2-3-year duration of its deposits, which
would help the bank to maintain its margins in an environment of tight
liquidity; (ii) income growth keeps pace with cost growth, leading to a stable
cost/income ratio of 42-43% over the next two years; and (iii) credit costs
would peak at 94bps in FY14 (vs 81bps in FY13). Note that CUB’s credit costs
have been relatively high (FY08-13 average of 81bps) due to CUB’s market
positioning as a SME lender (reflected in high yields), but its asset quality
trends have been among the least volatile (65-85bps in the last three years).
Valuation and stance: We cut our FY14 estimates by 14% due to lower NIM
and higher credit cost estimates. We maintain our BUY stance, as at 0.9x oneyear forward BV, the valuations are reasonable for a strongly profitable
franchise. Our target price of `66/share implies 1.45x FY14 P/B and 7.5x
FY14 P/E. Higher-than-expected deterioration of asset quality is the key risk to
our BUY stance.
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