City Union Bank Initiating Coverage Reports And Research Reports

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.

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