City Union Bank - 3QFY13 results expectation - Ambit

(CUBK IN, mcap US$595mn, BUY, TP Rs63, 2% upside)

Analyst: Krishnan ASV, vkrishnan@ambitcapital.com, Tel: +91 22 3043 3205

City Union Bank (CUBK) is slated to announce its 3QFY13 earnings today. We expect operating profit to increase by 23% YoY to Rs1.3bn and net profit to increase by 23% YoY to Rs885mn. We expect QoQ margins to contract by ~10bps, but we envisage net interest income to increase by 22% YoY to Rs1.5bn on the back of strong loan growth. Beyond the headline numbers, the key trends to watch out for would be:

1. Asset quality: For a bank that has been known for its consistent asset quality, gross NPA ratio increased by 21bps to 1.24% during 1HFY13; also, loan loss coverage dipped by 483bps QoQ to 51.4% as of September 2012. Given its exposure to SMEs (across the turnover spectrum), delinquencies from the cyclical sectors are a key monitorable.

2. Opex: The cost-to-income ratio was at 41.5% for 1HFY13 (vs 38% for 1HFY12) as against the management's guidance of 39-40%. The bank recently offered a generous rights issue component to its employees (one-fifth of the Rs2.5bn rights issue size), which is broadly likely to offset wage inflation pressure.

Valuation and recommendation: CUBK, with its track record of consistent profitability, above-average loan book growth, superior efficiency ratios and high return ratios, remains a blue chip amongst smaller private sector banks. We continue to view CUBK as a medium-term multi-bagger amongst smaller banks. We opine that CUBK's current business model (likely to remain stable until FY15E) will continue to consistently generate RoAs of ~1.5%. The stock is trading at 1.4x our FY14E ABVPS estimates of Rs45. Our numbers are subject to an upward bias as we adjust for the rights issue proceeds (the rights issue closed on 31 December 2012).

Source : Equity Bulls

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