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Spark Capital: City Union Bank 1QFY14 result review - Robust numbers, comfort on asset quality continues: Maintain BUY




Spark Capital Advisors(India) Private Limited


31 Jul 2013





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City Union Bank 1QFY14 result review - Robust numbers, comfort on asset quality continues: Maintain BUY City Union Bank’s (CUB) 1QFY14 results were ahead of our estimates led by a 30% yoy rise in core fee income and a 36% rise in NII resulting in a 22% yoy rise in PAT. Asset quality was exceptional with slippages of 1% (annualized), while restructuring was a negligible Rs. 12mn during the quarter; the restructured stock currently accounts for 1.4% 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, 55% has been repaid while ~50% of the outstanding amount of Rs. 2.2bn has completed 1year of repayment post moratorium, thereby considerably reducing the risk of slippages going forward. We also note that a retail funding bias (95% of term deposits), a sole banker model with a high yield SME book, a working capital focussed (66%) loan book and a consistently low ALM mismatch in the <1 year bucket would translate into lesser NIM volatility going forward. Although gold loans accounted for 53% of FY13 incremental loan book growth, only ~4% of the book carries a LTV >85%, while 60% of the book is agri linked where yields are ~11%, ensuring asset quality comfort. Despite an affable rate environment, treasury income contributed to only 18% of 1QFY14 non-interest income led by a low proportion (12%) AFS book, indicating sustainability of core fee income streams as contribution from the 100 branches opened over the lat 18months kicks in. Business growth was in line with expectations with advances and deposits growing qoq by a sedate 1%. Operating expenses increased 5% qoq; CUB’s defined contribution pension scheme and independent settlement plans (non-IBA linked) mean costs are unlikely to spiral post the impending wage revision, accordingly we estimate a CIR of 42% for FY14E. We continue to like CUB for its ability to deliver consistently on the Growth-Asset quality-Profitability-Capital adequacy equation and reiterate a BUY valuing the stock at 1.6x FY14E ABV.

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