Hold City Union Bank; target of Rs 132: Emkay Global Financial

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Emkay Global Financial's report on City Union Bank

CUB reported disappointing results, with a historic loss of Rs0.95bn mainly on higher NPA recognition, which resulted in higher specific provisions (Rs3.1bn) and contingent Covid-19 provisions (Rs1.2bn). RoA for FY20 stood low at 1% vs. typical the run rate of 1.5-1.6%. Headline GNPA ratio jumped 59bps QoQ to 4.1% due to accelerated impairment from the SMA 2 pool (Rs3.9bn) due to the lockdown. The SMA 2 pool decreased to Rs1.2bn (0.4% of loans) vs. Rs20.3bn (~6%) due to NPA recognition and upgrades/recoveries. The moratorium rate in value is higher at ~52% due to higher share of SME loans. CUB expects slippages at 3.25-3.5%, which may come down if restructuring is allowed. However, we prefer to remain conservative and build higher slippages at 4%/LLP at 2.5% (after factoring in contingent Covid-19 provisions), leading to nearly flat RoA at 1% in FY21E, gradually improving to 1.5% by FY23E as asset quality pain recedes.

Outlook

We cut our rating on CUB to Hold from Buy and turn EW in EAP, with a revised TP of Rs132 (based on 1.7x FY22 ABV vs. earlier Rs205 based on 2.3x) factoring in moderation in its otherwise superior RoAs and near-term asset quality overhang.

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