After private sector lender City Union Bank reported strong Q3 results, HDFC Securities has reiterated its bullishness on the shares of the company. City Union Bank reported a 22.2% rise in its third quarter net profits for the period ending 31 December 2017 to Rs 154.79 crore on the back of strong growth in net interest income. “CUBK’s robust 3Q result reaffirms our belief in its growth story. Uptick in advances (+20% YoY) coupled with surprisingly stable NIMs (~4.4%) led to robust core earnings (+19% YoY),” HDFC Securities noted in its report.
The Gross non performing assets (NPA) stood at 3.30% as on 31 December 2017 while net NPA at 1.74%. “Though GNPAs spiked (+10% QoQ), the deterioration is only optical slippages moderated sequentially (2.03% annual vs 2.38% annual) PCR improved to 65% (+200 bps QoQ) despite the dip in provisioning (133 bps vs 209 bps in 2Q),” said HDFC Securities.
Notably, HDFC Securities has increased the target price on the shares to Rs 206. The shares closed higher by more than 3.5% on BSE today at Rs 162.10. The firm’s target price implies an upside of more than 27% from the current market prices.
HDFC Securities says that City Union Bank will be a key beneficiary of various MSME initiatives rolled out by the government, given its sector expertise and flourishing franchise. Further, HDFC Securities says that gaining share from floundering PSBs could further propel growth. “No reportable divergence, an insignificant watchlist and shrinking SMA-II reduces the probability of future jolts. Faster growth and a tight leash on costs will lead to oplev benefits hereon. Maintain BUY with a TP of 206,” the firm said in its report.
HDFC Securities also noted that slippages may be on the lower aide for the bank going forward. “We suspect that our slippage assumption of 1.75% over FY18-20E is aggressive, and expect better asset quality performance given near nil restructured book, sharp fall in SMA II and no major watchlist,” the firm said.