City Union Bank Ltd. - Q4FY14 Update, CMP Rs.71, Rating Changed to HOLD with revised Target of Rs.72 - Sushil Finance

City Union Bank Ltd. (CUB) has delivered subdued set of numbers for the quarter ended March'14 with higher focus on asset quality. We attended the conference call of the company and following are the key highlights of the results.

Key Highlights of Q4FY14 & FY14 results

- Flattish advances growth QoQ along with lower margins (3.34% v/s 3.62% QoQ) led to ~6% de-growth in NII which stood at Rs.1847 mn in Q4FY14. Core Fee Income grew by 10% YoY & 16% QoQ to Rs.527 mn. Ongoing branch expansion led to sharp rise in operating expenses (higher 26% YoY & 3% QoQ) which resulted in PAT de-growth of ~6% QoQ to Rs.833 mn. C/I stood flat sequentially at 48%.

- In FY14, NII grew by 22% YoY mainly on back of better NIMs which stood at 3.50% (FY13 - 3.35%). Lower advances growth led to lower fee income growth of 13%. Higher operating expenses & higher provisioning resulted in lower net profit growth of 8% to Rs.3471 mn.

- Advances & Deposits grew at a very slow pace of 6% & 8% YoY as a result of conscious management decision to focus on profitable growth instead of aggressive credit growth. CASA improved marginally to 17.8% v/s 16.8% YoY.

- Asset quality deteriorated slightly with GNPA & NNPA slipping to 1.8% (Q3 1.7%) & 1.2% (Q3 0.9%) resp. on account of higher slippages which stood at Rs.1.8 bn in Q4 (~1.1%) due to 1 major account from Iron & Steel segment (~Rs.1 bn) slipping into NPA this quarter. Slippages for FY14 stood at Rs.4.6 bn (~2.8%). Restructured book stood at 1.7% while PCR declined to 62% which management expects to improve back to 70% by FY15.

- Higher focus on recovery (rate ~75-80%) has enabled bank to recover ~40% of the fresh slippages in FY14. Almost entire book is backed by collateral & hence management don't foresee any major risk of huge losses from NPA's.

- Management Guidance: 1) Advances to grow at ~12-15% in FY15 with more focus on profitability 2) NIM's to remain in the range of ~3.2-3.5% over the next 3-4 quarters 3) C/I likely to be ~42-43% by FY16 4) Branch expansion to continue with FY15 target of ~500 branches 5) Asset quality likely to remain slightly under pressure with likely slippages of ~Rs.3 bn in FY15 6) Sale to ARC likely to be in the range of Rs.1.5-2.0 bn in FY15 7) Looking to raise ~Rs.2 bn via preferential allotment in this fiscal 8) Tax Rate likely to be 22-25%.

OUTLOOK & VALUATION

Moderating growth along with increasing asset quality concerns offers limited room for upside in near term considering the sharp run-up in the stock. Accelerated advances growth on back of faster than expected economic revival coupled with higher up-gradations & recoveries provides upside risk to our assumptions. Considering the strong track record, management bandwidth coupled with huge growth potential, we remain positive on the stock over the long run & hence recommend 'Hold' with a revised price target of Rs.72.

Source : Equity Bulls

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