City Union Bank Research Report By Edelweiss

City Union Bank (CUB) is one the fastest growing small-sized bank with a rare status of being one of the most consistent bank in terms of growth and operating metrics; the bank has delivered steady (and superior) return ratios and controlled its delinquencies over the past decade. CUB has strategically grown its book by focusing on high-yielding yet secure products. This has resulted in CUB having a superior NIM profile and one of the lowest unsecured books in the industry. CUB has significant edge over peers in terms of operating cost, NIM, return ratios and asset quality. Over the last 10 years, the bank – with advances of INR 35,437cr and branch network of 700 – has maintained RoA/RoE upwards of 1.5%/16%, aided by superior Pre-Provisioning Operating Profit (PPoP). We estimate advances/revenue/PAT CAGR of 13%/11%/26% over FY20-23E. We initiate coverage with a ‘BUY’ rating on expected improvement in return ratios and an uptick in credit growth.

Excellent understanding of credit cycle, which is reflected in its metrics

CUB has excellent understanding of macroeconomics and the credit cycle, which is reflected in its (a) credit growth cycle, (b) superior asset quality, and (c) credit costs, which have remained under control throughout the cycle. In terms of credit growth, CUB reported 29% CAGR over FY05-13 and 12% CAGR over FY13-20. Given the improving macroeconomic scenario, we believe CUB would grow its credit book much faster than the industry average on account of (a) its healthy capital adequacy, (b) ample liquidity on its books, and (c) moderate Balance Sheet stress. Over FY20-23E, we estimate CUB to post 13% CAGR in credit growth.

Heavy regional presence; operating metrics in line with large private banks

Despite being smaller sized and having concentrated presence in South India, CUB has all the features of a large private bank – its performance metrics are robust in terms of NIM, cost-income ratio, credit cost, PPoP-Assets and return ratios. In terms of overall digitization, product offerings, and infrastructure, CUB is at par with new-age private banks. Also, while regional peer banks have expanded heavily outside the southern region (to lower regional risk), CUB has remained focused on adding majority of its new branches in South India, where it has business edge and deep customer understanding. We believe incessant initiatives by the bank such as increasing share of high yielding assets, boost in credit-deposit ratio, active HR & wage policies, enhancing transaction through digital channel and lower unsecured loans would further strengthen the above metrics in the medium-to-long term.

Healthy recovery and proven credit underwriting to keep asset quality under check

CUB had maintained superior asset quality over FY10-19, but the same deteriorated in FY20 due to elongated stress in the SME and corporate segments. GNPA hovered between 1.5-3% and slippage ratio remained within the 2% range during FY10-19. The latter increased to 3.4% in FY20, resulting in higher GNPA of 4.1% in FY20. We project slippage ratio of 2.8% over FY21-23E and GNPA of 5.0%/4.2%/3.3% for FY21E/FY22E/FY23E.

Initiate coverage with BUY rating and target price of INR245/share

At CMP, the stock is trading at 1.7x FY23E ABV. We expect an improvement in RoA/RoE to 1.5%/12.5% by FY23E from 1.0%/9.3% in FY20. We recommend a ‘BUY’ rating with target price of INR245/share (2.5x FY23E ABV), an upside of 43%.