Buy City Union Bank - Eastern Financiers

City Union Bank (CUB) is a private sector bank with a legacy of over 100 years. Based out of Kumbakonam, Tamil Nadu, it has a network of 303 branches. The bank stands out from the rest due to its target SME customer profiling & loan product mix resulting in higher NIM and best in class returns matrix. While other banks build up scale through the wholesale business first and enter retail subsequently, CUB mainly lends to small businesses, traders, etc.

Highlights

- City Union Bank has been steadily expanding its business over the years. In the last five years, the bank has registered a business growth of 28% CAGR. While the deposits have grown at a CAGR of 28%, the Advances have grown at a CAGR of 30% over the last five years. In Q1FY13, the total advances by the bank stood at Rs.12773 Cr, up 33% on YoY basis and the total deposits taken by the bank stood at Rs.17062 Cr, up 25% on YoY basis.

- CUB targets a pan-India presence by expanding its branch network to 500 from the present 303 branches in the next three years.

- The bank has an interesting loan product mix as 65% of its advances are high interest yielding short-term loans fulfilling working capital requirements. This helps in generating a faster loan book churn as the average maturity of working capital loans is 1.75-3 years. Approximately 80% of its loan book is on a floating basis, which allows frequent loan book re-pricing during rising interest rate scenario. This reduces interest rate risk, thus protecting its NIM.

- The investment portfolio of City Union Bank is very well balanced with the AFS portfolio forming only a very small portion of the overall investment portfolio (7% of the Total investment portfolio in Q1FY13). This insulates CUB from suffering high M2M losses.

- CUB has fared very well in terms of maintaining its Asset quality over the years. The Gross NPA% has decreased from 1.81 in FY08 to 1.01 in FY12. The net NPA% for the same period have declined from 0.98 to 0.44. In Q1FY13, the Gross NPA% and Net NPA% srood at 1.07% and 0.50% respectively.

- The bank has sequentially expanded its Return on Net worth from 19.90 in FY09 to 24.91 in FY12. Its asset Utilization has also been excellent over the years and improved sequentially from 1.50 in FY09 to 1.71 in FY12. In Q1FY13, the RoA & RoE stood at 1.57% and 23.09 respectively.

- In Q1FY13, the bank has registered a NII of Rs. 137.94 Cr, up 15% YoY and net profit of Rs.73.89 Cr, up 27% YoY.

- CUB could be a possible take-over candidate once the Banking Laws (Amendment) Bill is passed.

- At CMP of Rs.50.90, the stock trades at 1.10X FY14E BV & 5.20x FY14E EPS. We recommend a "BUY" on the stock with a price target of Rs 69.00, assuming a P/B of 1.50XFY14E Book-Value & P/E of 7x FY14E earnings, an upside of 36%, over a period of 12 months.

Source : Equity Bulls

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