After a rough Q3, City Union Bank’s path remains uncertain
2 min read . Updated: 16 Feb 2023, 10:21 AM IST
Premium- City Union Bank’s management expects the slippages to stay elevated in the coming quarters and has revised its full-year FY23 slippage guidance to 2.5-2.8% versus 2.25-2.5% earlier.
Shares of City Union Bank (CUB) fell by almost 16% on Monday. This follows concerns about the bank’s asset quality after it reported a sequential rise in its non-performing assets (NPA) during the December quarter (Q3FY23). Q3 results were announced on Saturday. So far, the stock has recovered only some of its losses.
The management expects the slippages to stay elevated in the coming quarters. CUB’s management has revised its full-year FY23 slippage guidance to 2.5-2.8% versus 2.25-2.5% earlier. Slippages are fresh additions to NPAs. Analysts estimate Q3 slippages at about 4%.
Krishnan ASV analyst at HDFC Securities said, “The slippages were higher in Q3, accentuated by the RBI-identified one-off divergence, absorbed by the bank, resulting in higher provisions. With a 99% secured portfolio, we believe the bank's lending DNA is intact, which should help sustain the likelihood of high organic recoveries from the current pool of slippages." The bank saw its Gross NPA (GNPA) increase 4.62% in Q3 versus 4.36% in Q2. The management also guided that it may require to make additional provisions based on expected credit loss (ECL) model, if implemented by the RBI.
Note that CUB has a higher exposure to the MSME segment which constitutes more than 50% of its gross advances. This segment is usually considered risky. The asset quality of the bank had been within the guided range over the years despite risky exposure, said a report by ICICI Securities dated 12 February.
To be sure, slow loan growth, and the lack of deposit mobilisation are a key overhang on the stock, that could exert pressure on net interest margin (NIMs), going ahead. At a time when banks are clocking loan growth of 18-19%, CUB’s 12% growth y-o-y is far from inspiring. It was also below the management’s growth guidance of 15-18%. According to the management, a delay in MSME investment cycle has led to a slower loan growth.
According to Krishnan, “Deceleration in loan growth is likely to be a common theme for most mid-sized banks including CUB, going forward. Given the sharp spike in deposit pricing and relatively lower branch productivity, mid-sized banks may choose to calibrate their loan growth aspirations."
CUB’s deposit growth in Q3 stood at 7% y-o-y. While deposit mobilisation is key to sustaining net interest margins, slower deposit mobilisation would not affect loan growth for next few quarters due to excess liquidity. The management stated that the bank holds surplus liquidity of nearly Rs3,000 crore that can be used to fund growth.
Meanwhile, prior to Monday’s fall in the stock price, some analysts pointed out that CUB’s valuations were expensive. But even after the fall in the shares, it is not as if the outlook is hunky dory. As ICICI Securities’ analysts pointed out, “Considering the lack of visibility on meaningful improvement in credit growth, we downgrade the stock to ADD (from Buy) with a revised target price of Rs180 (earlier Rs225)." The broking firm has cut its valuation multiple to 1.8x (earlier 2.25x) price-to-book value on Sep’23 book value per share. CUB’s shares are now trading at Rs137.85 apiece.