City Union Bank -Asset quality stabilises, lower provision aids PAT :: ICICI Securities, report

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Asset quality stabilises, lower provision aids PAT • NII was largely in-line at | 210 crore, up 6.2% YoY (I-direct estimate: | 213 crore). Margins stayed healthy at 3.48% • Credit growth remained sluggish at 7% YoY to | 16967 crore (up 1.3% QoQ). Deposit growth was at 10% YoY to | 23203 crore • Slippages stood at | 66 crore, the lowest level in the last several quarters. Absolute GNPA rose just | 23 crore to | 361 crore (2.1% GNPA ratio) while absolute NNPA was flat QoQ at ~| 220 crore (1.3% NNPA ratio). Fresh RA in Q3FY15 was merely | 6.8 crore with outstanding RA at | 257 crore (1.5% of the credit) • Other income saw strong traction of 66% YoY to | 98 crore (I-direct estimate at | 94 crore) led by a robust increase in trading income to | 40 crore vs. | 13 crore last year & | 25 crore in Q2FY15. PAT grew above estimate & was up 15% YoY to | 102.7 crore Strong regional bank; expect growth to moderate from past trends City Union Bank is the oldest bank in the “old private sector bank” category with 100+ years of existence with continuous profitability & dividend pay out. It is largely a south India oriented bank with a network of 445 branches of which 394 are located in South India and 303 in Tamil Nadu alone. CUB’s business traction at 29% CAGR over FY06-13 has been higher than industry except in FY14 wherein business growth fell to 7.2% to | 38114 crore (credit at | 16097 crore & deposits at | 22017 crore). Due to the strained economic scenario, the bank focussed on quality rather than growth. We have lowered our credit, deposit CAGR to 14.3%, 14.7% vs. 18% over FY14-16E to | 21039 crore, | 28974 crore, respectively. NIM above 3%+ for over decade; expect healthy levels to sustain ahead One of the commendable features of CUB is that it has been able to maintain NIMs of 3%+ for over a decade across economic cycles despite low CASA base (18% of total deposits). This is owing to the structure of its loan book, which is focused on the SME/MSME segment (~45% of loans) that is high yielding and wherein re-pricing is possible. Further, ~80% of the book is on a floating basis, which reduces interest rate risk. We expect margins to stay at healthy levels of ~3.4% over FY14-16E. Conservative strategy helps asset quality in current slowdown CUB’s lending philosophy of giving small ticket secured loans helps control asset quality. Around 1:1 loan to collateral ratio was maintained. Unsecured loans are only 2% of loans. The bank did not go overboard on growth in the peak years of 2007-08 and maintained its 25-30% credit growth. It improved its NNPA from 7-8% in the FY00 crisis to greater than 1.0% in FY10 & maintained it despite banking system NPAs surging in both FY12 and FY13. RA is one of the lowest in industry at 1.5% (| 256 crore) but recent one year asset quality pains led GNPA, NNPA estimates to be revised to 2.1%, 1.3% for FY15 and 2.0%, 1%, respectively, by FY16E. Operational performance holding up well vs. peers; recommend BUY We expect PAT traction to improve at 21.5% CAGR to | 512 crore in FY14-16E as we factor in an improvement in margins & asset quality. Further, it is comfortable on capital adequacy front with tier I ratio at 15%, sufficient for growth estimated ahead. We believe CUB is capable of sustaining its RoA and RoE above 1.6% and 17%, respectively. CUB has historically traded a slight premium to other regional banks owing better return ratios. We roll over to FY17E ABV and value the bank at 1.8x to arrive at revised TP of | 110 (| 100 earlier). We have a BUY rating on CUB.

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