City Union Bank - Q3FY14 Result Update - Growth moderates; asset quality set to improve - Centrum

Rating: Buy; Target Price: Rs63; CMP: Rs49; Upside: 29%

Growth moderates; asset quality set to improve

We retain Buy on CUBK with a target price of Rs63. We derive comfort from the bank addressing system-wide growth slowdown and asset quality concerns prudently, while retaining its return ratios largely intact. Stringent recovery process (9mFY14 recovery/ up-grades at 84% of FY13 GNPA) and guidance towards a similar trend make us believe that Q4FY14 could see sequential decline in the overall GNPA trend. The stock trades at 1x Dec'15E ABV of Rs48, which we believe is unreasonable, given the strong levers in place. Buy, CUBK remains one of our preferred picks.

- Q3FY14 - In line results: Q3FY14 NII / PAT at Rs1.97bn / 891mn were in line with our estimates. NIM at 3.6%, +11bps qoq was primarily on the back of a 12bps qoq decline in cost of deposits, a result of positive ALM gap in the 180-365days bucket and retail nature of the deposit profile. While the quarter saw some one-offs in operating expenses (+30% yoy, led by 42% yoy growth in other operating expenses), this was being adjusted against the provisioning line-item.

- NPA concerns limited; expect improvement in Q4: Slippages came in at Rs907mn (2.3% annualised). However, adjusted for one large account, slippage run-rate was tad higher at 1.3% levels. We remain enthused as recovery + up-grades for the quarter were at Rs591mn (90% annualised) and comprises 84% of opening GNPA for 9mFY14. Assuming a similar run-rate on slippages and higher recoveries (including from one steel related account), we expect a sequential decline in GNPA for Q4FY14E (see table aside). Healthy 71% provisioning on incremental net slippages provides comfort. Restructuring for the quarter stood at Rs440mn.

- Growth rate moderates; healthy capital position acts as a buffer: Loan growth at 9% yoy was lower than our estimates of 16% yoy. We believe the current phase of growth moderation is a prudent step as it prevents taking undue risk while retaining the capital position intact. The working capital linked nature of lending (largely secured) and favourable ALM will more than off-set the impact of growth moderation and see NIM sustain at 3.2% for FY14-16E. Capital position at tier-I CAR - 13% (total CAR at 13.6%), will enable leverage in the phase of upturn.

- Valuation and view and key risks: CUBK's Q3FY14 results continue to exhibit the core strengths of margin management, despite growth moderation and limited NPA concerns with ability to weather them. Healthy capital position, strong operating ratios and receding asset quality concerns put the bank into a favourable zone that warrants re-rating. Retain BUY with a target price of Rs63, (valued at 10% discount to the Gordon growth based PB multiple). Any further moderation in growth rates, longer than expected time for easing asset quality related issues, remain key risk to our call.

Source : Equity Bulls

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