Maintain BUY on City Union Bank - Ahead of estimates, despite conservative provisioning - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

CUBK's earnings were significantly ahead of estimates, despite higher-than-expected provisions, led by better-than-expected operating performance. Like most banks, CUBK saw a surge in collection efficiency, despite a high proportion of SME loans. Further, the bank continued to provide for the impact of COVID-19 prudently. CUBK remains our preferred pick amongst the mid-tier banks, given its healthy capital position, strong PPOP profile, and conservative management. Maintain BUY with a target price of Rs 199.

Asset quality and collections: Aided by nil slippages (SC order) and slightly higher write-offs, GNPAs dipped 9.3% QoQ to Rs 12.2bn (3.4%). Total SMA now stood at ~Rs 4bn (vs. Rs 6.3bn in July). Collection efficiency improved rapidly, reaching ~91% and 4.1% of borrowers had not paid a single instalment since March. These trends are encouraging. Despite this, the mgt expects slippages of 3-3.5% in FY21E and ~5% to be restructured.

Non-tax provisions remained elevated at ~Rs 1.8bn (~2% ann.) as CUBK continued to provide for the potential impact of COVID-19 (~Rs 1.2bn in 2Q, total provisions at ~Rs 3.2bn, ~89bps of loans, highest amongst peers). Despite the sharp fall in NPA provisions (-67.3/-36% YoY/QoQ), and slightly higher write-offs, calc. PCR rose 324/149bps to 48.3%. We continue to factor in elevated LLPs of 1.6% over FY21-23E.

Loan growth slowed slightly to 6.5% YoY. MSME (+11/11.5%, propelled by disbursals under the MSME credit guarantee scheme- ~Rs 17bn) and gold loans (+57.8/31.6%, on a small base, now 12.8% of loans) were major growth drivers. The management guides for high single-digit growth in FY21E. We build in loan growth of 11.2% over FY21-23E.

NIMs rebounded, expanding 21/14bps to 4.12%; led by a 71/35bps reduction in the CoD, driving core spreads and a 328/137bps decline in the CD ratio, as deposit growth remained muted. Further, CUBK reversed interest income amounting to Rs 250mn on its SMA exposures, adjusted for which, the NIM stands at 4.33%. We build in NIMs of 3.8% over FY21-23E.

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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