By HDFC Securities
For the past few quarters now, City Union Bank (CUB) has been in a position to maintain NIM in the range of 4-4.5%, which is comparable to few of the well-established banks of the country. This is really commendable considering CASA ratio at just 22-24% levels. The major reason behind this high NIM level is the cushion provided by the dips in CoF and rise in the CD (credit-deposit) ratio. Also, company has focused on the high yield SME/trader segment, which has helped it up its interest income. In the last quarter also, the company has achieved 4.41% (+10bps q-o-q) margin.
The improvement was led by slower rise in CoF (8 bps) due to higher SA growth and re-pricing of TD in Q2 and a faster (19 bps) rise in yield on assets. Management also attributed higher growth in avg. loans as one of the drivers for NIM improvement. CUB’s focus on the MSME and trader segments, commendable customer loyalty, 65% of the book consisting of high yielding W/C loans, higher proportion of floating rate book (95%) will insulate NIMs from a rise in CoF.
Despite conservative management guidance, we have maintained our NIM assumptions at 4% over FY19-21E. CUB is our preferred regional (and amongst mid-tier) bank as a result of its (1) conservative management, (2) superior NIMs due to its unparalleled lending franchise, (3) well capitalised B/S , (4) steady operating efficiency, (4) lower stressed assets with a near nil watch list and (5) huge MSME lending opportunities and (6) superior return ratios across cycles. We have estimated around 16% CAGR in NII, 17% CAGR in earning and 20% CAGR in loan book between FY18-21E.
We recommend CUB a ‘Buy’ at CMP `197 and ‘Add’ on dips to `188 for the price target of `236 over the next 4 to 5 quarters.
Currently, it trades at 2.8x FY20E and 2.4x FY21E adjusted book value (ABV). Given the consistent growth and controlled asset quality, we believe the bank will demand higher valuation compared to its peers.
We estimate its RoAE and RoAA to improve to 15.6% and 1.54%, respectively, in FY21E.