Buy City Union Bank; target of Rs 240: HDFC Securities

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26 Aug, 2025 12:21

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HDFC Securities' research report on City Union Bank

GNPAs (2.95%) jumped ~10% QoQ as a result of a ~23% rise in slippages. Five large a/cs contributed to ~34% of slippages. Past trends and commentary suggest incremental stress may flow from exposures to educational institutions. Given that FY19 slippages were within the stated guidance of ~2%, the 4Q blip is not worrisome. At ~1.8% over FY19-21E, our slippage estimates are unchanged. High, Sticky Margins: NIM at ~4.4% has persistently held up. This is indicative of a lucrative lending franchise, as we have maintained. A large proportion of w/c (65%) and floating rate (95%) loans insulates NIM from CoF fluctuations. Yields and costs thus moved in tandem (+10bps QoQ). We, like CUB’s management, expect NIMs to dip a bit (to 4.1%) over FY19-21E. Put on Growth: Advances grew ~17/8% to ~Rs 333bn. Growth in the core MSME segment (31% of loans) was optically low at 7% YoY, due to sale of IBPCs (~Rs 7bn in 4Q). Large industry growth
revived to 18/10%. Trader loans grew 12/9% to constitute ~17% of the book. We expect loan growth to accelerate to 18% over FY19-21E as CUBK capitalises on the space vacated by capital strapped PSBs and cash strapped NBFCs.

Outlook

With consistent performance and healthy core parameters, CUBK deserves premium multiples. Barring the marginal blip in asset quality, 4QFY19 was mostly along expected lines. Maintain BUY with a TP of Rs 240 (3x Mar-21E ABV of Rs 80).

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