City Union Bank - Moderation in growth, near term triggers limited • :: ICICI Securities, pdf link

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Moderation in growth, near term triggers limited
• NII has grown strongly at 8.6% YoY and 10.2% QoQ to | 206 crore in
line with our estimate of | 203 crore. Other income of | 90 crore, up
46% YoY was higher-than-expected mainly led by strong trading
profit of | 25 crore. Higher AFS book at 20% of SLR vs. 10% earlier
was the highlight
• Credit growth was sluggish at 5.7% YoY to | 16758 crore (up 3.8%
QoQ). Similarly, deposit growth was mediocre at 10% YoY to
| 23151 crore. Both were below our estimates
• Though slippages remained high at | 83 crore, GNPA rose just | 30
crore to | 338 crore (2% GNPA) while NNPA increased from | 204
crore to | 218 crore QoQ (1.3% NNPA)
• Profit grew as estimated up 11% YoY to | 93.7 crore (I-direct
estimate: | 94.2 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 425 branches of which 376 are located in South India and 291 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 18.5%, 17.6%
vs. 20% over FY14-16E to | 22589 crore, | 30429 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 less 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% (| 250 crore) but
recent one year asset quality pains led GNPA, NNPA estimates to be
revised to 2%, 1.2% for FY15 and 1.8%, 0.9%, respectively, by FY16E.
Valuations at reasonable levels; recommend HOLD
We expect PAT traction to improve at 20.6% CAGR to | 507 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 14%,
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 at 1.5x one year forward ABV, a slight premium to
other regional banks. Currently, the stock is trading at 1.6x FY16E P/ABV.
We maintain our TP of | 80 and HOLD rating valuing it at 1.6x FY16E ABV.

LINK
http://content.icicidirect.com/mailimages/IDirect_CoalIndia_Q2FY15.pdf