City Union Bank - Healthy business growth, robust NIM, strong fees; Buy - Anand Rathi

Despite strong net interest income and healthy fees, City Union Bank's 2QFY13 profits were constrained by higher provisions. We raise our target from Rs.68 to Rs.71, as we value the bank at 1.8x FY14e BV (1.8x 1QFY14e earlier). We maintain Buy, as prudent loan growth, stable productivity and robust asset quality could drive profitability and sustain RoA of 1.6% over FY13-15.

- Healthy credit growth, better CASA, steady NIM. At 26.8% yoy, advances grew faster than deposits at 20.1% yoy, thereby increasing the credit-deposit 398bps yoy to 75.4%. While NIM rose 15bps qoq (down 8bps yoy) to 3.3%, CASA share rose 54bps qoq (17bps yoy) to 18.1%, with saving deposits up 21.6% yoy. We estimate NIM of 3.1% and 3.2% in FY13 and FY14, respectively, supported by rising credit-to-deposits and sustainable CASA share of 20%.

- Strong fee income, stable productivity. Fee income grew 70% yoy and improved 8bps yoy to 1.41% of assets. Cost-to-assets rose 3bps yoy to 1.9% as the number of branches rose 9.5% yoy to 311. Investment in distribution is likely to persist, albeit in low-cost semi-urban/rural areas, since the bank aims to reach 500 branches by FY15. We expect the bank's branches to see better operating leverage with cost-to-assets estimated at 1.7% over FY13-14.

- High proportion of secured loans, capital-raising plans. Gross NPAs grew 21.1% qoq, with fresh slippages of Rs.606m (1.8% of loans). NPA coverage (excl. technical write-offs) fell 220bps qoq to 51.4%. Yet a high proportion of secured loans (97%) and a strong track record of asset quality are reassuring. Likely capital raising in 2HFY13 via a Rs.2.5bn rights issue would improve the bank's capital adequacy (tier-1 of 12.5%).

- Valuation. At our Mar'14 target, the stock would trade at PBV of 2.2x FY13e and 1.8x FY14e. Our TP is based on the two-stage DDM (CoE: 15.6%; beta: 0.8; Rf: 8%). Risk. Higher-than-estimated increase in NPA.

Source : Equity Bulls

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