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Spark Capital: City Union Bank 2QFY14 Result Review - Not extrapolating this quarter’s asset quality weakness: Maintain BUY




Spark Capital Advisors(India) Private Limited


12 Nov 2013





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City Union Bank 2QFY14 Result Review - Not extrapolating this quarter’s asset quality weakness: Maintain BUY City Union Bank’s (CUBK) 2QFY14 result was marked by annualised slippages of 3.8%, a departure from the 1-2% range the bank had recorded over the last 9 quarters. 2QFY14’s asset quality stress was led by one large account of Rs. 1.2bn in the steel sector, which the bank is hopeful of recovering as early as 3QFY14. Adjusted for the large delinquency, slippages were below 1%, while restructuring was a negligible Rs. 3.5mn; the restructured stock currently accounts for 1.4% of the loan book- the second lowest amongst regional peers. We view this quarter’s asset quality deterioration as a one-off event and expect slippages to revert to normal in 2HFY14; 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 focused (66%) loan book and a consistently low ALM mismatch in the <1 year bucket would translate into lesser NIM volatility going forward. Led by a 3% qoq decline in the gold loan portfolio, the loan book registered a sedate 2% sequential growth, for FY14 we estimate a 18% yoy growth in credit. Although gold loans account for 21% of the book, 60% of the book is agri linked where yields are ~11%, ensuring asset quality comfort. CUBK’s low dependence on treasury income led by a low proportion (6%) AFS book with a m.duration of <1yr stood the bank in good stead, resulting in only a Rs. 250mn MTM hit, which has been fully provided for. We expect sustainable core fee income streams as contribution from the 100 branches opened over the lat 18months kicks in, estimating overall other income at 1.2% of assets for FY14. Operating expenses increased 1% qoq; CUBK’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 43% over FY14-15E. CUBK ranks close to the top amongst regional banks in our 5x5 proprietary scoring matrix ranking matrix and we continue to 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 1.3x FY15E ABV.

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