City Union Bank – Steady performance on asset quality metrics

Sector Outlook – Positive

In Q3FY24, the bank’s Net Interest Income (NII) decreased to Rs. 516 crores, down 4.2% QoQ and 7.2% YoY. Pre-provision operating profit (PPOP) also declined to Rs. 364 crores, down 5.8% QoQ and 26.8% YoY. 

Provisions decreased to Rs. 46 crores from Rs. 56 crores in Q2FY24 and Rs. 225 crores in Q3FY23. 

The bank’s net profit rose to Rs. 253 crores, down 9.8% QoQ and 16.2% YoY. The Net Interest Margin (NIM) decreased to 3.50% in Q3FY24. Gross Non-Performing Assets (NPA) decreased to 4.47%, and Net NPA decreased to 2.19% in Q3FY24. 

Gross Deposits grew to Rs. 52,726 crores, and Gross Advances stood at Rs. 44,017 crores in Q3FY24. The Current and Savings Account (CASA) ratio slipped to 29.0%, and the cost-to-income ratio rose to 48.64% in Q3FY24.

Concall Highlights

• City Union Bank targets 12-15% business growth in FY24, mainly towards year-end.
• Recoveries exceed slippages, expected to continue; slippages to return to pre-COVID levels.
• Increasing recoveries in NPAs reduce gross NPA, net NPA, and provision requirements, boosting potential PAT growth.
• Plans to open around 800 branches by FY24 end, with 20 branches opened this fiscal year.
• Reversed Rs. 25 crores from FITL interest income on loans during COVID restructuring, impacting NIM.
• Asset quality significantly improved, with SMA 2 numbers below 2 post cleanup.
• Digital lending efforts reduce customer turnaround time to as low as one day.
• Focus on achieving a RoE growth rate of 16-17% in the next 4-8 quarters, supported by comfortable CAR levels.
• Loan growth expected to gradually improve in FY25, led by gold loans, automated lending, and controlled slippages.
• Deposit growth to align with advances growth; not currently aggressive on deposits.
• Partnership with BCG for digitization reduces TAT from 7-15 days to 2 days; improved underwriting practices.

Valuation and Outlook

In Q3FY24, City Union Bank (CUB) reported mixed results. While its core pre-provision operating profit (PPOP) declined due to lower net interest margins (NIMs), the bank’s asset quality improved due to controlled slippages and strong recoveries. The NIM decrease was primarily due to a one-time interest reversal of Rs. 25 crores related to a funded interest term loan (FITL). Despite weak loan growth, management expects credit flow to improve in the future, driven by reducing the Kisan Credit Card (KCC) book and digital lending initiatives. 

CUB aims to accelerate growth, but its nine-month performance suggests that FY24 growth may end up in high single digits, below industry averages. The bank plans for retail and unsecured segments to contribute 15% to loans in five years, but competitive intensity poses execution challenges. 

Asset quality improvement is expected to be gradual, and business growth may lag in the short term.