April 20, 2025
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Research Report on City Union Bank by ICICI Securities
Analysis dated April 2025
Sector: Midsize Bank
Price on Analysis date: Rs. 177
Target Rs. 200
(40% Upside potential)
Target Period: 3 Months
Report
We recently interacted with senior management and select business heads of City Union Bank (CUBK). The bank reiterated its growth guidance of 12–14% YoY for FY25 and acceleration to 15–16% YoY for FY26. We are impressed by the new LOS/IT system and scalability/uniformity it brings to the business, underwriting and monitoring. The quality of leads has improved dramatically and causes of rejections are well understood by the business teams instilling institutional learning. CUBK aims to improve the share of ‘green’ cases, from currently 15–20% to 35–40% over the medium term, leading to better efficiency and productivity. The initial results have been encouraging with a rise in throughput and miniscule .
Maintain BUY with unchanged TP
CUBK does not see any material headwinds in its gold loan business due to the recent guidelines. Our PAT estimates are revised up by 2/1% for FY25/FY26. Retain BUY; INR 200 TP unchanged, valuing the stock at ~1.45x FY26E ABV, in-line with RoAs. Key risk: Slower-than-expected growth.
New LOS to drive sharp rise in efficiency/scale
CUBK has successfully implemented a Loan Origination System (LOS), powered by Newgen, with the help of one of the top consulting companies. Initially, the bank tested retail (home loan/LAP) and MSME (up to INR 30mn) products on LOS. As of now, all retail and MSME loans have been added. The LOS is a ‘Low Code No Code’ platform with robust workflow capabilities. It has interfacing capabilities with external APIs and requires little customisation viz. UIDAI, GST, VKYC, NSDL, bureaus, ITR, UDIN, MCA, CERSAI etc.
We are more confident on 15% YoY growth estimates for FY26
Implementation of the new LOS has boosted scale, efficiency and risk architecture. Earlier, credit processing involved substantial manual intervention in verification and assessment. Under the new LOS, the entire workflow has been digitised with adequate monitoring at appropriate intervals. This has freed up a lot of capacity at branch/underwriting, which shall be channelled towards more volumes. Quality of leads has also improved dramatically, as they need to pass through minimum hurdle.
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