City Union Bank - Healthy core performance - Centrum

CUB's Q2FY13 core performance (Rs1283mn, 26.4% YoY) came in line with our estimates driven by a healthy NII and fee income performance. Higher provisioning during the quarter contained the bottomline at Rs804mn (vs estimate of Rs853mn) as GNPA was up 21% QoQ. However, asset quality matrix still remains robust with %GNPA at 1.24% and restructured assets at 4.5% of loans. We continue to remain positive on the stock driven by its ability to deliver consistently robust return ratios. Maintain Buy with a revised target of Rs65.

- NIM expands 15bps QoQ: The reported NIM expanded by 15 bps QoQ to 3.3%, driven primarily by easing in cost of funds as blended yields were flat QoQ at 10.7%. The NIM expansion was in line with our expectations. The NIM expansion along with continued healthy credit growth (27% YoY) led to a robust 24% YoY growth in NII. The management has guided for stable NIMs for H2FY13, which we believe is achievable considering gradual easing in funding costs and pricing power enjoyed by the bank in key segments.

- Asset quality slips but remains comfortable: CUB's asset quality matrices deteriorated during Q2FY13 with GNPA jumping 21% QoQ though %GNPA still remains comfortable at 1.24%. Slippage rate inched up higher to 1.9% (from 1.5% in previous quarter). It should be noted that the slippages of Rs610mn includes a pharma company exposure of Rs320mn, which slipped due to temporary cashflow mismatch. The management expects recoveries from this account during H2FY13. Conservatively, we have factored in a 2% slippage rate and credit cost of 70bps for FY13.

- Strong credit growth: The advances book grew by a strong 27% YoY, though lower than the average +30% growth seen in the last four quarters. From segment perspective, corporate (46% YoY) and agriculture (41.4% YoY) continue to remain the primarily drives of incremental loan growth while SME segment loan growth has tapered down to 15% YoY. However, on a sequential basis the bank has allowed sizable large corporate loans to run off the book while adding agri and trade related credit to the book. We expect the FY13 loan book growth at 28% YoY.

- Deep discount rights issue (1:4): CUB has announced a rights issue in 1:4 ratio and priced the rights issue at a deeply discounted price of Rs20 (vs CMP of Rs60). While at deep discount, it is inline with the last rights issue done in 2009. The rights issue along with employee reservation shares implies a dilution of 31% in the current equity base. Given the deep discounted rights issue pricing, the book value is likely to get diluted by ~9% for FY14. The capital raising is likely to fetch Rs2580mn, which will further shore up capital adequacy (current CAR at 13.26% of which Tier I constitutes 12.54%).

- Remain positive on ability to deliver consistently robust return ratios: At current market price of Rs59, the stock trades at 1.5x FY2014E ABVPS. We continue to like the stock given the well displayed ability to deliver consistently high return ratios across operating environments. We maintain Buy with a revised target price of Rs65, an upside of 10% from current levels.

Source : Equity Bulls

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