PL Stock Report: City Union Bank (CUBK IN) - Q1FY24 Result Update - Re-rating hinges on better growth/asset quality - Accumulate

City Union Bank (CUBK IN) - Gaurav Jani- Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs129 | TP: Rs160

Q1FY24 Result Update - Re-rating hinges on better growth/asset quality

Quick Pointers:

§ Core earnings beat due to lower tax rate; miss on loan growth/asset quality.

§ Loan growth to pick-up in H2FY24E; guided at 12-14%.

CUBK saw a weak quarter. Although, core PPoP was 6.7% ahead of PLe owing to better NIM, loan growth continues to disappoint while asset quality too saw a blip due to accounting change. Credit decline (3.9% QoQ) was higher than usual Q1 run-rate led by lower utilization and higher prepayments in agri/gold. However, bank expects credit growth to pick up in H2FY24 driven by better MSME investment cycle. While CUBK would like to grow by 12-14% in FY24, execution remains a key due to competitive intensity. Hence we are factoring a 10% loan growth for FY24. To propel credit offtake, bank has tied up with BCG to (1) scale up retail/digital lending and (2) streamline processes that should reduce TAT from 7-15 days to 1-2 days. Bank expects newer segments to contribute 15% to overall loans in 5 years. We maintain multiple at 1.4x on FY25E ABV and keep TP unchanged at Rs160. Retain ‘ACCUMULATE’.

§ Growth disappoints again although NIM beat; asset quality blip: NII was ahead at Rs5.23bn (PLe Rs5.06bn) due to better NIM as loan growth was lower. Credit growth was a miss at +3.1% YoY (PLe 4.0%) while deposit growth was in-line at 5.9% YoY. NIM was higher at 3.44% (PLe 3.31%) mainly due to better yield on IEA. Other income was a beat at Rs1.95bn (PLe Rs1.76bn) due higher fees, treasury and recovery. Opex was in-line at Rs3bn (PLe Rs2.97bn); employee cost was lower/other opex was higher. PPoP was Rs4.14bn while core PPoP was 6.7% ahead to PLe. GNPA/NNPA were a miss and rose by 54/14bps QoQ to 4.91%/2.51% due to higher slippages/lower recoveries. Hence provisions were more at Rs1.5bn (PLe Rs1.25bn). PAT was a beat at Rs2.3bn; core PAT was 5% ahead of PLe due to lower tax rate at 13%.

§ Growth guidance for FY24E maintained at 12-14%: Advances’ de-growth of -3.9% QoQ was sharper than usual Q1 run-rate as utilization levels were lower at 70-72% (earlier 75-80%) and pre-payments in agriculture and gold loans were higher due to interest subvention. Bank guided for 12-14% loan growth for FY24, that would be back-ended driven by improving investment cycle in MSME sector and introduction of newer products like co-lending, loan to NBFCs, retail products etc. for which bank is building capacities. In next 5 years, 15% of portfolio could be from newer segments. CUB has tied up with BCG as a consultant for digitization and process improvement which should reduce TAT from 7-15 days to 1-2 days in case of soft approvals. Underwriting practices would also be refined, freeing up processing capacities.

§ Asset quality blip due to regulatory change: Slippages at Rs3.8bn (Rs2.3bn from MSME) were higher due to accounting change which necessitated recoveries made between quarter end date and board meeting date, to be excluded from Q1’24 results. As a result, GNPA could have been lower by 70bps since recoveries of Rs0.98bn were not considered (would be included in Q2’24). Management expects slippages to normalise and for FY24 bank sees Rs8.5-10bn slippages and recoveries of Rs2.5-3bn. NNPA has been guided to reach back to pre-covid level of <2% by FY24 end. SMA pool has reduced to 2.45% which generally ranged between 6-7%.

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