Maintain ‘add’ on City Union Bank with a target price of R105 per share. We value the bank at 1.8x book and 12x EPS (September 2016) for RoEs in the range of 16-17% levels and >15% earnings growth in the medium term.
We like the stock despite the strong outperformance in recent quarters. As a mid-tier bank, we think that the bank has adequate space to report strong earnings growth over the long term. We are comfortable with the management and their conservative approach to growth. The bank is well capitalised with tier-1 ratio at 16% and comfortable balance sheet leverage. At these levels, we see City Union Bank more as a play on earnings growth over the long-term and less as a play on multiple expansion. The inability or low focus to build a liability portfolio will act as a main hindrance.
Feedback from our recent meeting suggest: 1) the management is cautious though the bank is well prepared for growth. Share of gold loans could decline further. 2) There is greater focus in building retail term deposit as compared to CASA given the strength of the bank and cost benefits. 3) After having seen a few quarters of high slippages, the management appears to be a bit more confident on the impairment cycle today. 4) Focusing on improving RoEs back to 18-20% levels.
Kotak Institutional Equities
