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Spark Capital: City Union Bank - Small is Beautiful




Spark Capital Advisors(India) Private Limited


07 Oct 2013





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City Union Bank - Small is Beautiful We have liked City Union Bank for its efficiently managed, plain vanilla borrowing-lending focused model, with predominant focus on lending to agriculture, trading, SME and mid-sized businesses in South India especially in the state of Tamil Nadu. The bank continues to score high on most of the profitability, capital and asset quality related parameters in our 5x5 scoring matrix, currently topping the regional banking space. Retail funded liabilities (95% of term deposits), pricing power led by 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 augur well for margins in today’s environment. We like the bank 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. Measured and consistent overall growth in terms of asset base and profits, at 25% CAGR over the past five years, close to the highest among relevant peers, which we expect to continue over FY14-16E. Sound risk adjusted profitability profile, with one of the highest Risk-adjusted Yields in the banking sector demonstrated for years, apart from sound Return on RWAs. Healthy ALM with a negative (-23%) mismatch in the <1 year bucket – the only bank other than HDFCB to run a negative mismatch translating into comfortable liquidity. Further, the bank’s low AFS book ~10% and focus on core fee income limit volatile treasury income streams and associated provisioning. Healthy asset quality with a well distributed customer base, low slippage, negligible and further falling assets with >100% risk weights and RWAs at a low 59% of total assets. Moreover, outstanding restructured loans are amongst the lowest in the banking industry at 1.4% of the loan book, 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 Robust profitability and capital efficiencies with >3.2% sustainable NIMs given a healthy liability profile, reliance on retail term deposit customers, low dependence on bulk/ wholesale deposits have resulted in RoAs in excess of 1.5% and ~ 20% sustainable RoEs.

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