City Union Bank - Q4FY22 Result Update - Asset quality on the mend - BUY

Mr. Gaurav Jani - Research Analyst at Prabhudas Lilladher.

Quick Pointers:

- GNPA/NNPA decline led by better recoveries; OTR/ECLGS performing well.

- PAT beat led by lower opex and higher AUCA recoveries; NIM weaker.

City Union Bank (CUBK) saw a good quarter as asset quality was best ever in recent times. GNPA/NNPA declined sharply QoQ (~50bps each) on the back of stronger NPA recoveries while the OTR and ECLGS pools are performing well. Combined expsoure to ECLGS and OTR at ~Rs49bn is stable QoQ although SMA-1/2 within ECLGS and non-paying OTR pool have reduced as superior repayment ability of customers have sustained. PAT at Rs2.1bn was ahead led by lower opex and higher AUCA recoveries. Credit for FY23 may grow by 10-15% with incremental flow being towards non-gold. NIM was weaker owing to higher liquidity although we do see NIM levers in place. With an expected RoE of 13% in FY24E, CUBK is attractively valued although we lower multiple from 1.8x to 1.7x as we trim FY23/24 earnings by average 5% led by lower margins. Retain BUY but revise TP from Rs180 to Rs170.

Lower opex and higher AUCA recoveries drove PAT beat: NII was in-line at Rs5.01bn even as loan growth was a tad better at 11.6%. NIM was a miss at 3.8% (PLe3.9%) due to lower yields owing to increased liquidity. Other income was a tad better at Rs2.0bn (PLe Rs1.9bn) with AUCA recoveries being higher at Rs739mn (last quarter Rs469mn). Fees at Rs788mn was largely in-line. Opex was lower at Rs2.6bn (PLe Rs3.1bn) due to both employee and other opex. Driven by lower opex and better other income PPoP surprised positively at Rs4.4bn (PLe Rs3.8bn). Provisions were higher at Rs1.7bn (PLe Rs1.4bn) which includes NPA provisions of Rs1.15bn. GNPA/NNPA improved QoQ by ~50bps each to 4.7%/3.0% owing to higher recoveries while PCR improved QoQ from 35% to 38%. PAT was ahead at Rs2.1bn (PLe Rs1.9bn).

Asset quality showed all-round improvement: Slippages were in-line at Rs2.2bn and declined QoQ while GNPA/NNPA reduced as recoveries were higher and improved to Rs2.1bn (PLe Rs1.85bn). However, provisions were more as CUBK provided additional Rs450mn on Spicejet (YTD provision Rs850mn); its total exposure is Rs1bn. Funded exposure related to ECLGS was ~Rs144bn of which the SMA-1/2 further reduced QoQ from 2.9% to 1.5%. Restructured pool at Rs22bn or 5.3% of loans was stable QoQ with a PCR of 10%. Of this pool, 60% (Rs13bn) has become due (30% last quarter). Of the remaining 40% that is not due, ~33% (Rs7.3bn) has started paying EMI in advance. Hence effectively ~7% (Rs1.5bn) of the OTR pool has not paid a single EMI (last quarter 11%). SMA-2 pool contracted QoQ from 2% to 1.4%.

Loan growth guidance for FY23 unchanged: Credit growth target of 10-15% for FY23 was maintained although non-gold might drive the incremental flow which could support margins. Higher liquidity was a drag on margins however, there are levers in place for NIM enhancement viz. (1) CUBK generally has a positive ALM mismatch in <1yr maturity bucket which is beneficial in a rising interest rate environment (2) 70% of the portfolio is EBLR linked which is higher to peers and 3) incremental credit flow towards higher yielding assets. We expect NIM to improve from 3.7% in FY22 to 3.8% in FY23.

Shares of City Union Bank Limited was last trading in BSE at Rs. 130.45 as compared to the previous close of Rs. 134.10. The total number of shares traded during the day was 32787 in over 990 trades.

The stock hit an intraday high of Rs. 136.05 and intraday low of 129.90. The net turnover during the day was Rs. 4364144.00.