City Union Bank (CUBK) posted an encouraging second quarter with strong delivery across key metrics on the back of improving growth momentum, improving net interest margins (NIMs) and continued asset quality improvement. However, credit costs looked optically higher on rising coverage.
The Tamil Nadu-based bank posted a marginal increase in profit after tax (PAT) of 2 per cent at Rs 285 crore in the quarter ended September 30, 2024 against Rs 281 crore in the year-ago quarter. Profit before tax (PBT) grew 8.33 per cent YoY to Rs 358.17 crore in the quarter ended September 30, 2024.
The company reported better-than-expected growth outcomes as gross advances grew 4.5 per cent. This is with better NIM growth fed into improved NII growth.
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On Tuesday, the stock surged over 11 per cent to settle at Rs 168.5 close to its 52-week high of Rs 176.82 on the NSE. However, the stock has remained an underperformer on the stock markets for a long time due to slower loan growth and lower net interest income compared to other banks. In addition, lower loan and deposit growth, compared to other banks, also contributed to the underperformance of the stock. In the last five years, the stock has fell nearly 20 per cent compared to a 110 per cent rise in benchmark NSE Nifty 50 index.
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However, the bank’s growth appears to have finally picked up and management remains optimistic of the growth momentum continuing.
Operational Improvements Fuel Growth
NII rose 8 per cent to Rs 582.50 crore in September quarter as compared to Rs 538.40 crore in corresponding quarter of previous financial year. NIM stood at 3.67 per cent as against 3.74 per cent in the year-ago quarter.
According to the Elara Capital report, the bank’s growth trajectory is becoming more predictable as it is overcoming transitionary challenges reasonably well. It has not yet received the benefit of a new retail portfolio (likely to see gradual benefit from Q4FY25), which will further add to the growth trajectory – delivery on this is a key variable.
Unlike its peers, CUBK’s NIMs improved 13 bps QoQ from 3.54 per cent in Q1 FY24 as it was able to reprice certain portfolios, which was a missing link during last year due to RBI rate hikes.
Asset Quality Shows Improvement
City Union Bank’s asset quality improved sharply driven by lower slippages and higher recoveries. The gross non-performing assets (GNPA) were at Rs 1,725.50 crore as of September 30, 2024, down 15.19 per cent as compared to Rs 2,034.63 crore as of September 30, 2023. The GNPA ratio stood at 3.54 per cent compared to 4.66 per cent in the year-ago period.
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The net NPA ratio stood at 1.62 per cent as of September 30, 2024 compared to 2.34 per cent as of September 30, 2023.
“With a lower stress build-up and an improving business environment, near-term net slippages are expected to be negative,” Anand Rathi Research said in its report.
The bank made a provision of Rs 252 crore in the reported quarter compared to Rs 293 crore posted in the year-ago period. The provision coverage ratio (PCR) as of September 30, 2024 is at 75 per cent (including T/W) and 55 per cent (excluding T/W).
Total advances surged by 12 per cent to Rs 48,722 crore in the reported quarter compared to Rs 43,688 crore in the same quarter last year. The credit deposit ratio stood at 84 per cent. The sluggish business environment in Tamil Nadu led to slower credit growth. However, with economic activity picking up in Tamil Nadu, credit growth is expected to improve.
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According to Anand Rathi, with credit growth likely to rise and a modest slippage run rate, medium-term credit costs are expected to be favourable. A pick-up in credit growth, margins over 3.5 per cent and favourable credit costs would lead to strong profitability in the medium term.
Positive Outlook From Management
In addition, the bank management has indicated that the growth visibility has improved after the implementation of new initiatives and tech overhaul. Currently, the pick-up in growth has been in the traditional segments of MSME and Gold loans, led by strong demand. The management expects the bank’s credit growth rate to converge with the systemic growth rate in FY25E and the pace to accelerate from FY26E onwards.
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City Union Bank will extend the MSME processes to the retail secured loans – LAP, Micro-LAP and Housing as it looks to scale the book to constitute 7-8 per cent of the portfolio over the next 3-4 years.
Moreover, the bank’s process to strengthen its executive and field team to kick-start its retail growth journey is underway. The management has also indicated that the bank will not look to pursue growth in the unsecured segment.
“With CUBK expecting further benefit on this, there is still a scope for a positive surprise. CUBK has invested heavily, which may keep costs elevated, near term, but this was quintessential and may define future capability, which is the right move as per our assessment,” Elara Capital said.
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“With growth visibility improving, we expect CUB to resume its growth journey and deliver a 14 per cent CAGR growth over FY24-27E,” Axis Securities said in a report.
The brokerage firm added that City Union Bank appears to have re-started its growth journey with demand-led growth visible in the core segments. As the revamped processes yield results and the bank begins pursuing growth in the non-core retail segment, we expect growth to improve further. Steady NIMs, improving Opex ratios and stable credit costs are likely to enable CUB to deliver RoA/RoE of 1.6/13-14 per cent over FY25-27E.
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