We believe CUBK’s balance of deep customer relationships, employee motivation and rock steady astute top management will propel the bank to greater heights.
Our recent interaction with the City Union Bank (CUBK) reaffirms our consistently bullish view. CUBK has repeatedly quashed apprehensions around growth (23% loan CAGR over FY06-17) and delivered stable asset quality across cycles. Its relatively weaker liability franchise is more than compensated by a flourishing asset profile. We believe CUBK’s balance of deep customer relationships, employee motivation and rock steady astute top management will propel the bank to greater heights.
With PSB competition receding, CUBK has an increasingly empty playing field to comfortably beat our growth assumptions (19% CAGR over FY18-20E), derive incremental oplev and deliver superior return ratios. Hence we are upgrading our target multiple to 3.0x (from 2.75x). Our revised TP is Rs 231 (3x FY20E ABV of Rs 77). Despite various micro and macro headwinds, CUBK has displayed resilience and grown comfortably. Though 63% of the advances are in TN and 52% are in the MSME segment, there is ample room for CUBK to expand market share (3.57% as on 2QFY18) of total advances in TN. Capital starved PSBs withdrawing from the market and deep customer relationships will provide a unique growth opportunity, that we expect CUBK to pounce on. We conservatively factor only 19% CAGR over FY18-20E.
Though we have been expecting a compression owing to a higher share of floating rate loans (90%) and increasing competition, NIMs have been surprisingly resilient (4%+ for past 7 qtrs) largely due to falling COF. With no major COF reduction in sight, we believe NIMs will remain under pressure. We have factored in a dip of 25bps over FY18-20E. CUBK’s conservative approach has served well as net impaired assets stand at a mere 1.8% (vs. 3% for FB, 3.3% for SIB and 5.5% for KVB).
By: HDFC Securities