CITY UNION BANK, Divergence absorbed; but structural challenges remain
Call & Research Report by HDFC Securities
Sector: Bank – Private
CMP Rs. 160, Target Rs. 230 (44% upside potential)
Target Period: 12 Months
Despite stable loan growth and higher recoveries from written-off accounts, City Union Bank’s (CUBK) Q3FY23 earnings missed estimates due to massive interest reversals and higher credit costs (2.2% annualised). Slippages were elevated (~4.4%), largely from the RBI-identified divergent pool (INR2.6bn), driving up GNPA to 4.6%. Management revised its loan growth guidance a tad lower than earlier expectations of 15-18% on account of a delayed rebound in the MSME investment cycle. The lag in the pace of deposit mobilisation is likely to be an overhang on loan growth, translating into a higher equity mix on the balance sheet, keeping RoEs in check. We tweak our FY23 numbers to factor in the impact of reported divergence and a relatively conservative growth stance in the medium term; maintain BUY, with a TP of INR230 (2.1x Sep-24 ABVPS).
● One-off NPA reversals impact earnings: Despite healthy loan growth (+14% YoY), NII moderated to ~13% YoY due to heavy interest reversals impacting margins (down 21bps QoQ). Loan growth was led by the gold segment (+31% YoY) and large corporates. However, deferred pick-up in the capex cycle has led to the management revising its credit growth guidance to sub-15% for FY23.
● Asset quality yet to stabilize: Slippages, even excluding the impairment recognition on account of divergence, were elevated at ~2.6%, partly offset by higher recoveries/ write-offs, resulting in GNPA/NNPA of 4.6%/2.7%. While the management guided for healthy repayment trends on the back of a highly-secured portfolio (99% of loans); the bank shored up its provisions (PCR target of 50% from current ~44%). The total stress pool (NNPA + restructured + SR + SMA-2) remained sticky at ~8%.
● Structural challenges to check RoE reflation: Despite surplus liquidity, the management’s conservative approach to loan growth (loan-to-deposit ratio at 86%) reflects structural issues around the bank’s pace of deposit mobilisation and productivity metrics, resulting in an opex-heavy P&L and equity-heavy balance sheet, translating into modest sub-15% RoEs.
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