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Spark Capital: Q3FY13 Result Reviews of CUBK




Spark Capital Advisors(India) Private Limited


13 Feb 2013





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City Union Bank - Comfort on asset quality continues: Maintain BUY City Union Bank’s (CUB) 3QFY13 results were ahead of our estimates, with a 25% yoy rise in core fee income and a 33% rise in NII offsetting a 43% yoy spike in operating expenses. Adjusted for a large slippage of Rs. 180mn, slippages (1.4% annualized) were within the usual quarterly run rate of Rs. 300mn while there was no restructuring done during the quarter; the restructured stock currently accounts for 2% of the loan book- the second lowest amongst regional peers. Our comfort on asset quality is also an outcome of repayments in the restructured book – of the cumulative Rs. 6bn restructured since FY08, 51% has been repaid while 64% of the outstanding amount of Rs. 3bn, has completed 1year of repayment post moratorium, thereby considerably reducing the risk of slippages going forward. We continue to like CUB for its ability to deliver consistently on the Growth-Asser quality-Profitability-Capital adequacy equation and reiterate a BUY valuing the stock at 1.9x FY14E ABV. Margins expanded 12bps qoq aided by a 29bps decline in the CoF which offset a 12bps reduction in the YoA. Treasury income contributed to only 17% of non-interest income, indicating sustainability of core fee income streams. Business growth was strong with advances and deposits growing qoq by 8.0% and 7.7% respectively while CASA deposits were flat. Operating expenses increased 15% qoq led by ex-gratia payment of Rs. 100mn ; CUB’s defined contribution pension and independent settlement plans (non-IBA linked) mean costs are unlikely to spiral post the impending wage revision, accordingly we estimate a CIR of 41% for FY14E.

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