When Daljeet Kohli recommended a buy of City Union Bank, a mid-cap bank with a market capitalisation of Rs. 6,250, on 30.03.2016, I wasn’t impressed at all and I did not pay any attention. I was spooked by the colossal NPAs being reported by PSU Banks and the de-rating of the entire banking sector.
The stock was then quoting at Rs. 90 and Daljeet promised a target price of Rs. 105, which was an upside of 16%.
To my utter surprise, City Union Bank reported blockbuster Q4FY16 results and has effortlessly breached Daljeet target’s price in less than two months.
This means that the stock has given an annualized return of 96%, which is hefty by any standards.
Daljeet has now raised the target price to Rs. 118. His logic is as follows:
“City Union Bank (CUB) reported better than expected results on all fronts with pick up in loan book to 17% yoy. As a result, Net Interest income at Rs 2.65 bn was ahead of expectation and grew by 29% yoy. NIMs (rep) improved by 14 bps yoy to 4% led by decline in cost of funds.
Despite muted non interest income (up 2% yoy), Operating profit grew 25% yoy and came in at Rs 2.2 bn which was ahead of expectation. Provisioning expense grew 22% yoy and Net profit grew 13% yoy to Rs 1.1 bn (vs exp of Rs 1.05 bn). Asset quality continues to remain strong with Gross NPA of 2.4% and Net NPA of 1.5% (increase of 4 bps qoq which is lowest increase amongst all banks reported Q4FY16 results till date). Fresh slippages were stable on qoq at Rs 1.3 bn(which includes slippages of Rs 690 mn from restructured book) and restructured book has come down to 1% which is lowest and best in industry. Our rationales for highlighting CUB as top pick has played well which are – granular loan book, pick up in loan growth (though better than expected), improving ROEs / ROAs by FY18E and stable asset quality. Further management indicated that employee expense is likely to go up in FY17 on back of wage revision and we had already factored in this in our Initiating coverage.
Hence our earnings estimates largely remain unchanged both for FY17E and FY18E. CUB remains better than peers on all fronts and hence deserves higher valuation. Hence we upgrade our target multiple to 2x FY18E and raise target to Rs 118. Maintain BUY.”
Other experts have also joined the chorus in recommending CUB as a pick.
Dipen Sheth of HDFC Sec recommended a buy on the basis that “there is a complete turnaround happening and the cost structures are in place in City Union Bank. They have grown at less than traditional growth rate of 20-25 percent for the last two or three years. They have added costs, they have added branches. There is going to be crazy operating leverage when that plays out and you will say they are available for 1.5 times your adjusted book value number for FY18.”
He added that CUB “is probably India’s best run small or regional bank on current form”.
HDFC Securities has predicted a target price of Rs. 120 for the stock.
Motilal Oswal have recommended a buy on the basis that “Strong track record of healthy advances growth, stable margins, coupled with healthy asset quality over the last many years makes CUB our preferred choice over many PSU & old generation private banks. CAR of 15.6% would enable growth without any dilution over the next three years.”
Motilal Oswal’s target price is Rs. 123.
ICICI Securities is also gung ho about City Union Bank. Their target price is Rs. 118.
Federal Bank is another mid-cap Bank that you can consider. We saw earlier that three stalwarts, Rakesh Jhunjhunwala, MA Yusuffali and Akash Prakash of Amansa Capital have corned large chunks of Federal Bank’s stock in the fond hope that they will be rewarded with mega bucks. The stalwarts usually get what they hope for!
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City Union Bank is looking better at current levels as the stock is trailing at PE of 15x which is reasonable at current levels. Interest income growth is marginally poised in FY15-16 but expecting some better run in FY17. Earning are never mind in one way drive, growing significantly YoY. As far valuation is concerned, City Union Bank can find some space in the portfolio. Federal Bank is in a exponential growth phase as far as interest income is concerned. The bank is trailing at PE of 10.69x which is looking better with long run vision. Street is expecting the bank to grow with 15-16% growth rate in coming couple of years. HDFC securities is again a good option for short run as well where returns are expected in coming couple of quarters.
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