City Union Bank investors spooked by asset quality hit in Q3

While net profit grew 11 percent YoY to Rs 217.8 crore and net interest income showed a healthy growth of 13 percent, the lender’s performance didn’t live up to its past trend as well as that of its peers in the banking industry

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26 Aug, 2025 12:21

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Tamil Nadu-based City Union Bank Ltd’s (CUBK) December quarter performance was found wanting, and investors have spoken with their feet. The private sector lender’s shares tumbled more than 15 percent on February 13, in response to the numbers.

The lender released its December quarter numbers on Saturday.

The bank’s headline numbers were not disappointing. Net profit grew 11 percent year-on-year (YoY) to Rs 217.8 crore and net interest income showed a healthy growth of 13 percent. That said, the lender’s performance didn’t live up to its past trend, as well as that of its peers in the banking industry. Both the numbers were lower than those estimated by several analysts. Analysts at Emkay Global Financial Services Ltd have cut their FY23 earnings estimate for the bank by 8 percent factoring in the lower growth.

Those at Elara Capital summed up the bank’s performance better. “While CUBK has historically been very strong (most profitable regional bank), the past two years have been tough, challenging the obvious notions, with recovery being slower than most peers. We believe, challenges for CUBK will persist and slow recovery/volatility are concerning,” they wrote in a note. The brokerage is one of the four that have a Sell rating on the stock.

“We have trimmed our FY22-25 credit CAGR from 15 percent to 12.4 percent,” wrote those at Prabhudas Lilladher in a note. Indeed, most other lenders have reported a loan growth of more than 15 percent, while the overall industry loan growth is in excess of 16 percent. In light of this, CUBK’s loan growth should be concerning to investors. Further, the management has been circumspect on the outlook. In their interaction with analysts, the bank’s management has indicated that achieving 15 percent loan growth for the current year would be hard due to delay in investment cycle. The private sector bank’s loan growth has been tepid mainly due to deceleration in the corporate loan book.

But this is not the primary reason for the stock’s dive on Monday. Analysts are more concerned about the bank’s asset quality, and therefore, future provisioning needs.

Asset quality scare

For the December quarter, the bank reported higher slippages and a sequential increase in bad loan stockpile. As a percentage of the loan book, gross bad loans rose to 4.62 percent for the December quarter, up from 4.36 percent in the September quarter. Moreover, CUBK reported a divergence in recognition of bad loans for FY22, which was flagged by the banking regulator. Towards this, the bank had to make additional provisions. This took the total provisions for the December quarter to Rs 279.5 crore, a 61 percent rise YoY. The bank intends to increase its provision coverage ratio from the current 67 percent, which means incremental provisions in the coming quarters will remain elevated.

Slippages added up to Rs 439 crore for the quarter, while recoveries and upgrades were Rs 173 crore. In essence, the pile of loans that stopped paying the bank an interest rose, while those that improved were lower. “The divergence in NPLs (albeit small) with the RBI has hit CUBK's goodwill over the years. Asset quality differentiation has been the key to higher premium, which is missing in this cycle, in our view,” warned analysts at Elara Capital in a note. The brokerage has a Reduce rating on the stock, as three other brokerage firms too.

Of the 27 brokerages that cover the stock as per Bloomberg, 20 still have a Buy rating. The bank’s valuations are still reasonable, according to them. The stock trades at 1.5 times its estimated book value for FY24, points out Elara.