Buy City Union Bank - Target Price Rs. 65 - Dolat Capital

- We like CUB's model of network expansion with focus on core semi metro areas where they can garner sufficient client base.

- The model to sustain 28% CAGR credit growth is well balanced, in our opinion, to manage risks and we expect CUB to continue to maintain its superior asset quality record.

- The bank is able to price its risks and earn higher than industry loan yields as it focuses on business and retail loans. We expect CUB's loan yields to remain higher than industry average and support the NIM. Softening of deposit rates should aid in NIM expabsion from 2H FY14 onwards in our opinion.

- Improvement in branch and employee productivity should boost the overall operating ratios for the bank over the long term. The bank has never faced any staff unrest in the past and their proactive employee policies should aid in keeping the employee turnover low even in face of increased competition.

- We believe that the bank should not only do well in the medium term by improving its NIM and maintaining its asset quality, even over a longer horizon, the bank should be able to deliver above average returns.

- We expect the bank's loan book to grow at CAGR of 28% during the next two years driven primarily by retail and SME segments. We expect net profit to grow at CAGR of 25% over the next two years.

- Despite the 31% equity dilution, ROEs would remain high at 20%+, a feat which only handful of other banks can match. We have a Buy rating on the stock with target price of Rs. 65 based on PBR of 1.7x on our FY14E BVPS forecasts.

Source : Equity Bulls

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