Management also clarified that it would continue with its strategy of tapping the small-ticket self-employed segment.
City Union Bank (CUBK) has delivered yet another in-line full-year performance with FY19 RoA at 1.6%, highest in our small bank coverage universe. Notably, average RoA through the past decade works out to 1.6%. We see this as a testimony to the management’s ability to maintain leadership position in Tamil Nadu despite increasing competition and developing a business model that can sustain an adverse business cycle.
Q4FY19 result points at some softness on income and asset quality as reflected in a muted NII growth of 1% q-o-q and higher slippages at `2 billion.
However, on full-year basis, performance remained within guidance range. Management sounded confident about sustaining its long-term average RoA at 1.6% with RoE at 15% in FY20E. We maintain our ‘add’ rating on the stock with target price unchanged at `210.
Loan growth remained robust at 17% y-o-y , which is noteworthy given that CUBK passed on the incremental increase in cost of borrowing. It appears that the wholesale book (CREs, large industries, wholesale traders) was the key growth driver in Q4 FY19. However, the fact is that reclassification of certain accounts led to higher growth in mentioned segments and decline in MSME segment.
Management also clarified that it would continue with its strategy of tapping the small-ticket self-employed segment. It also highlighted that it would not accelerate growth just because of temporary opportunities due to lack of activities from NBFCs and weak PSBs.
Rather, the management highlighted that CUBK is more likely to grow 18-20% y-o-y each year over the next couple of years.
Margins remained sequentially flat at 4.4% as CUBK was able to pass on 10bps q-o-q increase in cost of deposit to customers as reflected in the 11bps improvement in asset yield during Q4 FY19. Considering the lack of margin levers and increasing competition, the management believes NIM is not sustainable at current levels and should moderate in the coming years.
Asset quality broadly remained stable with GNP ratio marginally higher at 2.95% in Q4 FY19 vs 2.91% in Q3 FY19. Slippages during FY19 remained in line with guidance with Q4 slippages slightly elevated.