BUY on City Union Bank - HDFC Securities

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

City Union Bank (Q1FY21 Results Review) Rs. Best amongst peers. BUY

CUBK's 1QFY21 earnings were ahead of our estimates on account of lower-than-expected operating expenditure and higher-than-expected treasury gains. Expectedly, sequential balance sheet growth was negligible. The sharp reduction in the proportion of the portfolio under moratorium to just ~12.5% was heartening, and the bank's performance on this front is significantly better than that of its peers, despite its high share of SME loans. We maintain a BUY with a target price of Rs 164 (2.1x FY22E ABV). Our assigned multiple reflects the bank's (1) strong PPOP profile and capital position, which are capable of absorbing shocks, and (2) consistent performance across most parameters. It remains our preferred pick amongst the mid-tier banks.

Asset quality and moratorium trends: GNPAs dipped 4.8% QoQ to Rs 13.46bn (3.9%), as there were negligible slippages. However, this was aided by the standstill classification benefit. The portfolio under moratorium registered a sharp fall and now stands at ~12.5%. It represents loans outstanding of borrowers who have not paid a single instalment. We find the progress on this front heartening; CUBK has performed much better than its peers have on this front. Nevertheless, we have conservatively kept our slippage estimates unchanged at ~4% in FY21E. CUBK saw a 6.1x/+30.6% YoY/QoQ rise in its restructured book; it now constitutes 1.12% of loans. The management guides for slippages of ~3.5% in FY21E, and expects to restructure 4.5-5% of loans (mostly from the moratorium book).

Provisioning: CUBK's non-tax provisions dipped 65.1% QoQ to Rs 1.57bn, but remained elevated nevertheless (+35.6%). Even as NPA provisions registered a sharp 65.3/83.9% fall to Rs 500mn, calc. PCR rose 253/186bps to 46.8%. The bank made COVID-related provisions of Rs 1bn, taking the total stock of such provisions to ~Rs 2bn (~60bps). We anticipate the bank to make LLPs of 1.72% over FY21-22E.

Loan growth: Credit growth was muted at 7.2/-0.1% YoY/QoQ. Here, the following trends stood out - (1) term loans grew 26.3/10.7% while working capital credit (58.9% of loans) dipped 2.4/6.2%. It can be attributed to the conversion of interest on working capital loans into FITLs; (2) credit to the CRE sector (8.2% of loans) grew 40.6/1.8%; and (3) non-agri jewel loans (2.4% of loans) grew 2.2x/15.1%. The bank disbursed Rs 12.2bn under the NCGTC scheme, and it expects to disburse Rs 16.3bn more. This will be a major contributor to incremental credit in the near term. We expect loan growth of ~9% over FY21-22E.

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.123.9 as compared to the previous close of Rs. 121.25. The total number of shares traded during the day was 90034 in over 2048 trades.

The stock hit an intraday high of Rs. 124.6 and intraday low of 121.35. The net turnover during the day was Rs. 11054457.

Source : Equity Bulls

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