City Union Bank - Collection improving; return to normalcy to be prolonged - ICICI Securities

City Union Bank's (CUBK) Q1FY21 earnings revived to Rs1.5bn supported by strong net revenues, cost flexibility and sequentially lower provision. Net interest income grew 4% QoQ driven by 7bps QoQ margin expansion. Asset resilience reflects in sharp reduction in the moratorium portfolio to 12.5% as at Jun'20 from ~52% in Mar'20. About 70% customers paid all dues and ~88% paid at least one EMI/interest as at Jun'20. While we repose faith in CUBK's SME financing niche, coupled with its robust retail liability franchise to manage the crisis effectively, non-paying customer base at 12% (belonging to vulnerable segments like tourism, hotel, CRE, LRD, retail textile, etc.) poses risk of near-term volatility in asset quality and earnings. Maintain HOLD with a revised target price of Rs120 (earlier: Rs130).

- Slippage guidance unchanged at 3.25%-3.5% for FY21E. We do not read too much into Q1FY21 asset improvement given that lower slippages at Rs34mn is due to the ongoing moratorium; GNPL fell to 3.9% and NNPL to 2.1% due to accelerated provisions. Further, CUBK continued to build contingency buffer by additionally providing Rs1bn in Q1FY21, taking the cumulative buffer to ~Rs2.25bn (65bps of loans). Collection efficiency improved sharply with ~88% of customers paying at least 1-month due and ~70% of customers clearing all past dues. However, since customer behaviour and collection trend is panning out as per earlier assessment, our FY21E slippage ratio remains unchanged at 3.25-3.5%. Further, CUBK expects the standard restructured book to remain at 4-5% (currently ~1.1%). However, it will be very selective and restructure only borrowers with satisfactory pre-Covid credit behaviour and some visibility on cashflow getting back to normalcy.

- Focus on balance sheet protection, not expansion; SME lending under CGTMSE and gold loans to remain key growth drivers. Management sounded conservative and not very convinced about accelerating growth despite room for market share gain. It clearly stated that near-term focus would be on effective balance sheet management and that it is not exploring any new credit opportunity. Bulk of incremental lending would be towards gold loan and lending under CGTMSE schemes.

- Strong retail liability franchise likely to support NIM in FY21. While management expects lower 'other income' in FY21 due to lower ATM fees, lower processing fees, etc., we believe its strong retail liability franchise will support NII progression in FY21E. Its strong retail liability franchise reflects in <7% contribution from top-20 depositors and only ~11% of total deposits above Rs20mn ticket size. Margin expanded 7bps QoQ driven by 18bps QoQ improvement in cost of deposit and only 6bps QoQ fall in asset yield.

- Valuation. CUBK's premium valuation (2.0x FY20 P/BV) over peer banks was largely due to its decade-long consistency in returns and asset quality. We believe the current valuation fairly captures the improved collections, but a multiple rerating would only be gradual and prolonged due to: 1) lack of visible triggers for early return to historical profitability, and 2) asset quality risk (~12% of customers are still inactive, i.e. not paying any dues). Maintain HOLD with a revised target price of Rs120 (earlier: Rs130).

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.121.25 as compared to the previous close of Rs. 116.8. The total number of shares traded during the day was 244969 in over 2352 trades.

The stock hit an intraday high of Rs. 124.35 and intraday low of 120.6. The net turnover during the day was Rs. 29903218.

Source : Equity Bulls

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