Maintain BUY on City Union Bank - A disappointing quarter - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

City Union Bank (Q4FY20): A disappointing quarter. Maintain BUY
(TP Rs 164, CMP Rs 137, MCap Rs 101bn)

CUBK reported a net loss of Rs 953mn on a/c of a jump in provisions (Rs 4.5bn), which in turn were driven by elevated NPL and COVID-19 related provisions. Asset quality deteriorated with the sharp rise in slippages. Despite the disappointing performance this quarter and premium valuations relative to peers we maintain our BUY with a TP of Rs 164 (2.1x FY22E ABV). (1) A strong PPOP profile, (2) consistent performance across most parameters, (3) management pedigree (scope for continuity of the existing MD&CEO till 2026, subject to RBI approval) and (4) a strong capital base underpin our stance.

Asset quality: CUBK's performance on this front disappointed, as slippages jumped to Rs 4.8bn (5.62% ann.). They were mostly granular, with 3 a/cs (metals and beverages) contributing to ~30% of total slippages. The management accredited the rise in slippages to collection efforts being hampered by COVID-19. Consequently, recoveries and upgrades too, were muted. High w/offs curtailed GNPA growth. The management indicated that potentially stressed sectors (hotels, LRD, CRE etc.) a/c for ~10% of its portfolio and that it expects ~20% of this to slip. It thus guided for slippages of 3.25-3.5% over FY21E. We conservatively build slippages of 4%+.

Funding and liquidity: While overall deposit growth was slow at 6/3%, we don't find this particularly worrisome. CASA deposits grew by 5/10%, led by ~12% growth in SA. Further, the mgt indicated that ~90% of the bank's deposits are less than Rs 20mn in size. The 21.8% QoQ rise in borrowings was on a/c of borrowing under TLTRO and SIDBI refinance. On the liquidity front, CUBK is well placed, with an LCR of 200% (up to 260% by May-20) and excess SLR investments of ~Rs 15bn. CRAR rose by 121/135bps on a/c of (1) capitalisation of full year audited profits, and (2) tepid loan growth. With a CRAR of 16.8%, of which Tier 1 is 15.8%, CUBK is fairly well capitalised (best amongst peers). While it too did not find the need to raise capital, the mgt said it would do so only under extraordinary circumstances.

COVID-19 related management commentary: (1) The mgt indicated that 48% of borrowers under moratorium paid 2 instalments, and that ~38% paid all 3 instalments. (2) As part of its slippage guidance, the mgt envisages additional restructuring of Rs 3-4bn in FY21E. (3) ~Rs 93bn worth of loans are eligible under the NCGTC scheme, indicating potential incremental credit of ~Rs 18bn (borrowers representing ~Rs 12bn of credit have opted for the scheme), of which Rs 8.5bn has been sanctioned till date. (4) Reduced SA rates from Apr-20 to 3.5/3.75% for balances below Rs 0.1mn/ between Rs 0.1-1.0mn.

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.136.95 as compared to the previous close of Rs. 132.9. The total number of shares traded during the day was 17864 in over 570 trades.

The stock hit an intraday high of Rs. 137.5 and intraday low of 133. The net turnover during the day was Rs. 2431399.

Source : Equity Bulls

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