CITY UNION BANK - Initiating Coverage - CMP Rs.49, Rating Changed to Accumulate, Target Rs.58 - Sushil Finance

CITY UNION BANK LTD. - CMP Rs.49, Rating Changed to Accumulate, Target Rs.58

STRENGTH: Impressive Business Growth, Consistent NIM's, Better Asset-Liability Management, Minimal Corporate Book, Stable Asset Quality & Return Profile WEAKNESS:Regional Concentration (~71% business from TN), Lower CASA OPPORTUNITIES:Growing Business Prospects Outside TN THREAT: Interest Rate Volatility, Prolonged Economic Slowdown may led to Higher Slippages.

Loan book to grow at healthy pace over FY13-15E

Strong regional positioning, higher focus on SME's & retail coupled with consistent branch expansion has led to strong advances growth (5-year CAGR – 27%) over the last couple of years. Predominant focus on SME/MSME's (sole banker to ~80-85% of SME's) with Tamil Nadu having one of the highest share of SME segment offers huge opportunity for the healthy advances growth in this segment. Also aggressive branch expansion (~2x FY08-13) over the last couple of years with major focus on rural & semi-urban areas (~57%) is likely to fuel loan growth going ahead. However, considering the slowdown in economy & increasing management focus towards asset quality, we expect advances to grow at a CAGR of ~16% over FY13-15E.

Margins to remain stable on back of better ALM & improving efficiencies

Despite lower CASA (~17%), the bank has maintained healthy NIM's of ~3.2-3.5% over the last 5-6 years mainly on account of favorable asset-liability franchise, higher share of retail term deposits coupled with lower dependence on bulk deposits. Greater emphasis on high yielding W/Cap loans (~65% of advances) & better advances mix (~80% floating) not only mitigates interest rate risk but also offers better margins. We expect margins to remain stable over FY13-15E (Mgmt Guidance ~3.2-3.7%). Moreover, with new branches getting profitable (~70% added in last 3 years) & considering the healthy cost to core income ratio of ~45%, we expect PPP to grow at a CAGR of ~12% over FY13-15E.

Healthy asset quality coupled with Robust return ratios instills further confidence

Prudent risk management, diversified credit portfolio, relatively smaller ticket size along with low slippages has enabled the bank to maintain stable asset quality over the last couple of years with GNPA & NNPA not exceeding ~1.8% (Q3FY14 - 1.7%) & ~1.1% (Q3FY14 - 0.9%) resp. since FY08. However, on conservative basis, we have assumed higher GNPA & NNPA for FY15E at 1.8% & 0.9% resp. Fairly low exposure to large corporate & greater focus on SME/Retail segment with small ticket size (98% security backed) has resulted in lower slippages (FY08-13 Avg.~1.4%). Also the restructured book is amongst the lowest in the industry at ~1.9% of the total gross advances. Strong credit growth, stable NIM's & healthy asset quality has led to better return ratios with sustainable ROE & ROA's at ~20%+ & ~1.5% over the last many years.

OUTLOOK & VALUATION

CUB has emerged as one of the leading regional bank having strong presence in South. Strong track record of healthy advances growth, stable margins coupled with healthy asset quality over the last many years makes it a prefer choice over many PSU & other regional banks. Despite current slowdown, we expect advances & deposits to grow at a CAGR of ~16% & 14% resp. over FY13-15E. Strong liability franchise having comparatively higher duration along with focus on high yielding SME segment to keep margins stable over the next few years. Minimal exposure to stress sectors & lower restructured book is likely to keep asset quality intact. Hence considering the above investment arguments & strong growth prospects, we recommend 'Accumulate' on the stock with a price target of Rs.58 based on forward P/ABV of 1.4x (5 year avg).

Source : Equity Bulls

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