City Union Bank - Collection trend encouraging; profitability returning to normalcy would be prolonged - ICICI Securities

City Union Bank's (CUBK) Q2FY21 improvement in collections to 90% with non-paying customer pool falling to 4% (~12.4% in June'20), potential restructuring of 4-5%, and providing Rs1.1bn for Covid-related uncertainties (total buffer at Rs3.3bn or 89bs of loans) sums up its asset quality stance. Core performance improved further during Q2FY21 with A) NII posting strong 9% QoQ growth driven by 14bps QoQ margin expansion despite it reversing interest component of Rs0.25bn on current SMA pool, B) PPoP growth at 8% supported by 43% QoQ growth in fee income and C) RoA touching 1.23% despite it creating additional provisions. While we repose faith in CUBK's SME financing niche, coupled with its robust retail liability franchise to manage the crisis effectively, RoA reaching pre-Covid level in near term is less likely given pressure on NIMs, other income and uncertainty over credit growth. Further, its exposure of 8-10% towards most vulnerable segments like tourism, hotel, CRE, etc. also poses risk of near-term volatility in asset quality. Maintain HOLD with a revised target price of Rs150 (earlier: Rs140), valuing at 2.0x FY22e BVPS.

- Guidance on asset quality and profitability unchanged. We do not read too much into Q2FY21 asset improvement given nil slippages due to the Supreme Court's interim order; GNPL fell to 3.4% and NNPL to 1.8%. Further, CUBK continued to build contingency buffer by additionally providing Rs1bn in Q2FY21, taking the cumulative buffer to ~Rs3.3bn (89bps of loans). Surprisingly, despite collections improving to 90% and non-paying customer pool fling to 4% from 12% in June'20, it refrained from lowering slippage guidance (~3.25-.5% in FY21e) disclosed earlier during June'20. Further, CUBK expects the standard restructured book to remain at 5-6% (including current book of 1.35%). 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 ECLGS and gold loans remained key growth driver during H1FY21. Management sounded conservative and not convinced about accelerating growth despite business activities improving better-than-expected expectations. It clearly stated that near-term focus will be on effective balance sheet management and that it is not exploring any new credit opportunity.

- Margins expanded 11bps QoQ to 4.33% but likely to converge towards normalised level of 3.8-4.2% gradually. Margins, from past couple of quarters, have been surprising positively with ~40bps expansion during H1FY21 largely driven by reduction in cost of deposit and optimisation of CD ratio (currently at 84%). However, management expects NIM to settle lower between normalised levels of 3.8-4.2% as it sees pressure on asset yields.

- Valuation. CUBK's premium valuation (1.9x FY21 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 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 (~8% exposure to stressed sector). Maintain HOLD with a revised target price of Rs150 (earlier: Rs140).

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.152.45 as compared to the previous close of Rs. 148.05. The total number of shares traded during the day was 66823 in over 1645 trades.

The stock hit an intraday high of Rs. 154.5 and intraday low of 148.25. The net turnover during the day was Rs. 10137689.

Source : Equity Bulls

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