Dolat Capital Market's research report on City Union Bank
CUBK reported an in-line operating performance with NII growth at 14% YoY. NIM increased QoQ by 4 bps to 4.16% despite the impact of interest reversals on pro forma NPAs as benefit on CoF more than offset lower yields. High treasury gains aided operating profits and PAT. However, unlike most peers, asset quality metrics failed to surprise on the positive. Pro forma NPAs increased to ~6% as of Dec-20 against 4.1% for Mar-20, with pro forma net NPA at 3.37%. Also, the NNPA calculation factors in the entire standard COVID provision buffer of Rs4.65bn. Pro forma slippages were at 4.4% (annualized) for 9MFY21 against 3.4% for last fiscal, and remains higher compared with peers. The bank has so far restructured Rs8.1bn or 2.2% of loans. Management maintained its restructuring guidance of 5-6% of advances. Slippages/restructurings mostly pertains to accounts that were under stress even pre-COVID. The bank’s historically healthy recoveries are being impacted by the delay in NPA recognition owing to the SC embargo. Consequently, credit costs could remain elevated owing to weak recoveries. The bank maintained its caution on lending, with a large share of sequential loan growth at 3% coming from ECLGS disbursements and gold loans. Total ECLGS disbursements were at 5.5% of loans and at least 15% of these are also being restructuring. Healthy core operating metrics, high ultimate recoveries historically with LGD at <20%, and low slippages from the restructured pool in the last asset quality cycle at 20% (industry at ~80%), continue to provide comfort on the bank despite weaker asset quality trend vs peers.
Outlook
Factoring in higher treasury gains for FY21E which have been largely offset by higher provision coverage assumptions, we maintain our ACCUMULATE rating with TP of Rs200, valuing the bank at 2.5x Dec-22 P/ABV.
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