Buy City Union Bank; target of Rs 59: LKP

“City Union Bank (CUB) FY11 operating income grew by 37% yoy led by NII growth of 51%; ahead of our estimate by16%; due to lower interest expended of 8.4%. Higher than expected operating costs and provisioning by 8.4% and 45% respectively v/s our estimates partly offset the difference in PAT (growth of 41% yoy FY11) which was ahead by13%. Q4FY11 PAT increased by 48%/ (11%) yoy/qoq to Rs 514 mn, led by 36%/14% NII growth. Interest earned increased 38%/11% yoy/qoq while the bank benefitted through the roll off of high cost liabilities and interest expended increased by 40%/9% yoy/qoq.”

“NIMs for the full year were 3.6% v/s 3.2% yoy. The bank maintained spreads during the quarter as it balanced CoDs of 7.2% v/s 6.9% qoq with yields on advances of 12.7% v/s 12.2% qoq. The management expects interest rate environment to remain firm; however, also factors in flexibility to pass on 50-75 bps interest rate hikes. Loan book grew 28%/9% and deposit by 26%/8% yoy/ qoq. CD ratio increased to 72% v/s 67%/71% yoy/qoq. The low CD ratio maintained in previous quarters enabled CUB to protect margins in Q4FY11. Although the benefit of CD ratio will not be there in the next 2-3 quarters, Rs 3,000-4,000 mn high cost deposits maturing in Q2FY11 and repricing of loan book will aid in maintaining margins in the prescribed range of 3.1-3.8% in FY12.”

“CASA grew 12% yoy and share remained 20% v/s 22%/19% YoY/QoQ. The management has guided CASA share of ~20% going forward. Non-interest income grew by 40%/24% YoY/QoQ. Fee income grew in line with loan book and treasury income lagged during the quarter. The asset quality of bank remains manageable with slippage at 1.2%. Gross npas increased 20%/3% YoY/ QoQ to 1.2% v/s 1.4%/1.3% yoy/qoq. Net Npas increased 22%/8% YoY/ QoQ to 0.5% v/s 0.6%/0.5% yoy/qoq. PCR increased to 77% v/s 70%/71% yoy/qoq. Restructured assets were 3% of loan book (Rs 3 bn) and the Rs 108 mn were added during FY11. The management has guided for a benign environment of restructured assets (Only Rs 232 mn principal repayment is yet to start) based on repayments of restructured assets and no direct exposure to dyeing and common affluent plants in Tirupur.”

“Management has guided for FY12 loan growth of 27-30% factoring in firm interest rates and margin pressures in underlying industries (such as textiles). We have revised our FY12 estimates adjusting for strong asset and NII growth in FY11. We expect NII to grow 26% CAGR on the back of loan growth of 26% CAGR FY11-13E and a 73% CD ratio. NIMs are likely to benefit from re-pricing of the working capital book and re-pricing of high cost deposits. The management has indicated capital raising plans in FY12 and will seek to renew the shareholder approval to raise Rs 2-3 bn. We have not factored in capital raising in our estimates. We rollover to FY13E and revise downwards our price target to Rs 59 (Rs 65 FY12 earlier) – lower P/ABV multiple of 1.5x. Reiterate BUY,” says LKP Research Report.

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