City Union Bank - On Right Track; Result Update Q3FY15 :: Edelweiss

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City Union Bank’s (CUB) Q3FY15 PAT at INR 103 cr was ahead of our estimate. Key highlights for the quarter were: 1) NII growth remained muted (up 6% YoY) mainly due to slower advances growth (up 7% YoY) 2) NIMs remained stable QoQ at 3.5% 3) Asset quality holding steady with slippages at 1.6%, lowest in last 6 quarters. GNPL/NNPL ratios remained stable at 2.1%/1.3%, respectively 3) cost-income ratio increased by 300bps QoQ to 45% mainly due to higher employee expenses during the quarter. Given the highly capitalized Tier-1 position of 15.2%, stressed assets of ~2.8% and relatively strong RoAs of 1.5% vis-à-vis peers, the stock trades at attractive valuations at 1.6x FY17 adjusted book.

Business growth muted; NIMs stable

CUB’s Q3FY15 advances growth was muted with growth at 7% YoY (INR 16,968 cr). In the bank’s largest portfolio - MSME - growth was healthy at 27% YoY while the Agri loan book grew by 22% YoY. Retail segment witnessed de-growth of 9% YoY, led by a fall in the bank’s gold loan portfolio. Deposits grew by 10% YoY to INR 23,203 cr, led by 10% YoY growth in term deposits. The CASA ratio decreased by 160bps QoQ to 16.9% led by 20% decline in current deposits QoQ. NIMs remained stable QoQ at 3.5%, led by stable spreads (cost of funds down 11bps QoQ at 7% and yield on funds down 10bps QoQ at 10.2%). The credit-to-deposit (CD) ratio remained stable at 62% QoQ. Going forward, we expect NIMs to remain in the range of 3.2% to 3.4% for FY16-17E.

Asset quality stable, outlook improving

CUB reported better Q3FY15 show on asset quality, largely owing to lower slippages at 1.6% (lowest in last 6 quarters) with no major fresh restructuring. The headline asset quality remained stable on QoQ basis, with GNPA at 2.1% and NNPA at 1.3%. Going forward, the management believes that there is no major pipeline of NPAs and therefore the asset quality should stabilize. The provision coverage ratio remained comfortable at 62%. During the quarter, restructured assets increased by INR 7 cr to 1.5% QoQ. With stressed assets of 2.8% (NNPAs and standard asset restructuring) and PCR at 62%, we believe CUB is well positioned to tackle asset quality issues vis-à-vis its peers.

LINK
https://www.edelweiss.in/research/City-Union-Bank--On-Right-Track;-Result-Update-Q3FY15/10005492.html