Buy City Union Bank; target of Rs 200: JM Financial

JM Financial's research report on City Union Bank

CUBK reported a steady operating performance in 4QFY18 with net profit up 18% YoY at INR 1.52bn. Loan growth was healthy at 17% YoY, while margin declined slightly (although lower than management guidance) and was 11bps lower than the peak reached in 1QFY18. Going forward, management continues to guide for a contraction in margins in FY19E. Management expects that margin compression, along with lower treasury profits (from the high base of FY18), will keep PPoP growth muted in FY19E. On the flip side, asset quality remains in fine fettle for CUBK: GNPLs were steady at 3% (with PCR of 45%), and net stress on the loan book remains comfortable at 2.5% (Exhibit 5). We believe that a reduction in credit costs going forward will help CUBK maintain RoAs of 1.6% over FY18-20E even as margins come off, with PAT CAGR of 16% over this period. We have cut our earnings estimates by 2% / 1% in FY19E / FY20E, with no material change to fully adjusted book value.

Outlook

We value CUBK at 2.6x FY20E fully adjusted BVPS to arrive at our TP of INR 200/sh. Maintain BUY.