Hold City Union Bank; target of Rs 145: Sharekhan

Sharekhan's research report on City Union Bank

City Union Bank (CUB) reported a strong beat in earnings with PAT at Rs. 281 crore (versus estimate of Rs. 205 crore) mainly led by lower credit cost (53 bps annualised vs 143 bps q-o-q and 100 bps y-o-y) however, core PPoP declined by 20% y-o-y / 6% q-o-q. PPoP was 5% below our estimates. This was the first quarter since COVID-19 times where the bank saw asset quality trends normalise. Net slippages were negative to the tune of Rs. 13 crore led by substantial reduction in slippages (2.1% annualized vs 3.7% q-o-q) along with higher recoveries from NPAs. Credit growth (up 1% q-o-q) continued to remain muted and bank maintained its guidance for back-ended credit growth in FY2024E. The bank also cited that it is not in a hurry to accelerate growth pedals until asset quality trends are back to pre -COVID levels.

Outlook

We maintain a Hold rating on CUB with an unchanged PT of Rs. 145. We would watch out for sustainable improvement in asset quality going forward as stressed assets are still higher (~5% of advances) when compared to peers along with sub-optimal coverage (~55%) and also near term growth outlook is muted. The stock trades at 1.3x/1.1x its FY2024E/FY2025 ABV.