Maintain BUY on City Union Bank - Moat around low LGDs likely to stand out - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

City Union Bank's (CUBK) 4QFY21 earnings were below our estimates on account of lower non-interest income, higher opex and high provisions. However, the bank ended FY21 with slippages at 3.1% and restructured book at 5%, within management guidance, an improvement from our expectations at the end of Q3FY21. The management expects the asset quality impact of the second wave of the pandemic to play out by H1FY22 and expects ROA to normalise to steady-state levels (~1.5%) by FY23. We revise our FY22/FY23 earnings downwards by 4%/2% to factor in higher costs and moderation in loan growth. Although the bank may witness a spike in MSME slippages in light of income shocks to self-owned businesses, we are confident in CUBK's ability to contain loss-given-defaults (LGDs) in this portfolio. Maintain BUY with a revised target price of INR194 (earlier target price at INR198).

Subdued P&L performance; gold loans drive asset growth: CUBK reported subdued NII/PPOP growth of 2%/-15% YoY due to high interest reversals (INR1.3bn), lower other income (-19% YoY) and higher opex. Loan growth was steady at 7% YoY, driven largely by gold loans (97% YoY, 18% QoQ) and ECLGS disbursals, categories characterised by low capital consumption.

Asset quality within management guidance; watchful in H1FY22: CUBK's FY21 slippages (3.2%) and restructured book (~5%) clocked in within management guidance and better than our expectations. While the stressed pool (NNPA + restructured + SR + SMA2) at ~10.4% appears on the higher side, we are confident in CUBK's ability to contain eventual losses (LGDs) in its core MSME portfolio. We expect the asset quality impact from the second wave of the pandemic to play out during H1FY22 and expect overall slippages to be lower compared to FY21.

Provisions remain elevated; expect to normalise by FY23: CUBK's non-tax provisions during Q4FY21 (INR2.4bn) were higher than our estimates. With the PCR at 43% (excluding technical write-offs) and surplus COVID buffer at 0.4% of loans, we expect gradual normalisation of credit costs during FY22. We factor in average LLPs of 1.4% during FY22-FY23E.

Shares of CITY UNION BANK LTD. was last trading in BSE at Rs.172.25 as compared to the previous close of Rs. 173.9. The total number of shares traded during the day was 312145 in over 4090 trades.

The stock hit an intraday high of Rs. 177.8 and intraday low of 169.15. The net turnover during the day was Rs. 54186436.

Source : Equity Bulls

Keywords