City Union Bank - Stress pool within guidance range, but profitability returning to normalcy would be prolonged - ICICI Securities

City Union Bank's (CUBK) Q3FY21 earnings were characterised by collection remaining flat between Sep-Dec'20 (adjusted for past-dues), incremental stress pool was well within guidance range, and there is no change in guidance despite economic recovery at a faster pace. Core performance improved further during Q3FY21 with A) NII posting strong 15% QoQ growth, despite it derecognising interest income of Rs0.3bn towards potential stress, B) steady improvement in NIMs to 4.16% from 3.91% in Q4FY20 driven by improving deposit profile reflects consistent reduction in cost of deposit and CASA ratio improving to all-time high of 27.5% and C) further strengthening of balance sheet by building Rs1.25bn towards covid-buffer taking cumulative pool to Rs4.65bn. 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 the expected high credit cost, pressure on other income and uncertainty over credit growth. Maintain HOLD.

- Guidance on asset quality and profitability unchanged. Taking cognisance of flat collections between Sep-Dec'20 and stressed asset formation in Q3FY21 remaining in-line with earlier expectations with no positive surprise, management refrained from revising asset quality guidance lower. It expects slippage ratio to remain at 3-3.5% (9MFY21E pro forma slippage ratio stands at 3.2%) and total restructuring to settle at 5-6% vs 2.2% currently as guided earlier. Further, CUBK continued to build contingency buffer by additionally providing Rs1.25bn in Q3FY21 taking the cumulative buffer to ~Rs4.65bn against pro-forma slippage of ~Rs11.5bn. It expects credit cost to normalise by Q3FY22E and hence, expects RoA to reach pre-covid level of 1.5% by 2HFY23e.

- SME lending under ECLGS and gold loans remained key growth driver. While credit growth sowed initial sign of recovery by growing 3% QoQ, management sounded conservative and not convinced about accelerating growth despite business activities improving better-than-expected expectations. Gold loans (up 22% QoQ) and disbursements under ECLGS (~Rs19bn or 5% of loans) have been key growth drivers during 9MFY21. 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 to 4.16% but likely to converge towards normalised level of 3.8-4.2% gradually. Margins, in past couple of quarters, have been surprising positively with ~25bps expansion during 9MFY21 largely driven by reduction in cost of deposit and optimisation of CD ratio (currently at 83%). However, we expect NIM to settle lower between normalised levels of 3.8-4.2% given the likely pressure on asset yields.

- Valuation & outlook. CUBK's premium valuation (2x FY22 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 until Sep'20, and a multiple rerating from current level will only be gradual and prolonged due to: 1) Lack of visible triggers for early return to historical profitability, and 2) collections at 89%. Maintain HOLD with a target price of Rs190. Better-than-expected recovery in PAR portfolio remains key upside risk while stress unfolding higher is key downside risk.

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.182.45 as compared to the previous close of Rs. 181.5. The total number of shares traded during the day was 69624 in over 914 trades.

The stock hit an intraday high of Rs. 183.85 and intraday low of 178.25. The net turnover during the day was Rs. 12640963.

Source : Equity Bulls

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