Maintain HOLD on City Union Bank - Positives Priced-in - Karvy

City Union Bank (CUB) is currently trading at 35% premium to its five year average valuation, while the stock has outperformed the Bankex by 19% over last one year reflecting better than the industry growth, healthy NIM and strong asset quality. The Bank has one of the best return ratios amongst its peers.

Business Growth - Outperformance to Continue: City Union Bank's business growth has surpassed the industry by a significant margin, while we expect such outperformance to continue, going ahead. The Bank does majority of its lending to MSMEs, wholesale and retail traders, which is its niche segment. The Bank's overall lending book mainly constitutes of highyielding working capital loans (60%) and rest of term loans (40%).

NIMs - Continue to Remain Healthy: City Union Bank has been able to maintain its NIMs in excess of 3.2% in H1FY13. Though the Bank expects marginal reduction in yield on advance, it would get offset by reduction in cost of deposits. We expect the Bank to continue to maintain its NIM ~ 3.2% in H2FY13.

Asset Quality - to Remain under Control: City Union Bank's asset quality continued to show resilience in a deteriorating economic environment. However, we believe that it would be difficult for the Bank to report further improvement in its asset quality. Thus, considering marginally higher slippage ratio, we expect the Bank's NPA ratio would increase marginally in FY13. Meanwhile, the Bank has maintained its restructured loan book at 3.2% which is lesser than peers.

Outlook & Valuation

At CMP, the stock trades at 7.4x & 5.9x FY14E & FY15E earnings, and at 1.6x & 1.3x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its mean valuation implying 1.45x P/ABV FY15E, we reiterate our "HOLD" recommendation on City Union Bank with unrevised target price of Rs. 65 per share.

Source : Equity Bulls

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