City Union Bank - Valuation captures positives - Karvy

In Q2FY13, City Union Bank's (CUB) profits grew 3.7% YoY (up 9% QoQ) to Rs804 mn, below estimate owing to higher NPA provisions. NII grew 24% Yoy (up 8% QoQ) to Rs1.5 bn driven by robust loan growth. Operating profit grew 26.4% YoY (12.4% QoQ) to Rs1.3 bn marginally higher than our estimate. NIM improved 15bps to 3.3% owing to improving yields on advances, while asset quality showed slight deterioration.

- Loan Growth continues momentum: Advances grew at 27% YoY (up 5% QoQ), primarily driven by credit to agri and large industries. Deposits grew 20% YoY (up 4% QoQ). Consequently, C-D ratio increased 100bps sequentially to 75.4%. CASA deposits increased 21% YoY (up 7% QoQ) and CASA ratio improved 54bps QoQ to 18.1%.

- Asset quality deteriorates marginally: CUB's gross NPA reflected slight deterioration as bank reported slippage worth Rs600 mn (delinquency ratio of 60bps) pertaining to a pharma company. It also restructured loans worth Rs231 mn, taking the cumulative value of the restructured book to Rs3.1 bn (2.3% of gross loan book). Its gross NPA increased 17bps sequentially to 1.24% and net NPA increased 10bps to 0.6%. Its provision coverage ratio decreased 500bps to 71%.

- NIM shows improvement: NIMs increased 15bps sequentially to 3.3% owing to improvement in yield on advances by 15bps QoQ to 13.6%. Cost of deposits remained flat QoQ to 8.5%. The management has guided 3.3% NIM for FY13 and expects cost of deposits to decline going forward.

Outlook & Valuation

The Bank continues to show momentum in growth along with improvement in NIM. Overall, the bank's asset quality remains sound. At the CMP, the stock is trading at 9.2x and 7.1x FY13E and FY14E earnings respectively, while the ABV is trading at 1.9x and 1.6x FY13E and FY14E ABV respectively. We have maintained our earnings estimates for FY13 and FY14. Given the recent run up in the stock price, the current valuations factors in most of the positives, we therefore downgrade the stock's rating from BUY to HOLD and maintain our price target of Rs65 valuing the stock at 1.7x FY14E ABV.

Source : Equity Bulls

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