Equity Research INDIA

June 26, 2019

BSE Sensex: 39592
City Union Bank HOLD
ICICI Securities Limited Downgrade from ADD
is the author and
distributor of this report
Best-in-class return ratios to sustain Rs216
We met Dr N Kamakodi, Managing Director and CEO, CUBK to get latest update on
business. Key takeaways are – a) loan growth to remain around 18/20% in FY20e,
Banking competition not likely to impact near term growth, b) changing industry dynamics
as on one hand NBFCs are slowing down AuM growth but many PSU banks are
Company update and coming out from PCA framework, is likely put pressure on NIM, c) slippage ratio to
reco change remain at 1.75%/2% during FY20e while NNPA likely to decline in 2HFY20e due to
higher recoveries, d) cost to income ratio likely to remain at ~42% and e) confident
Target price Rs210 of sustaining RoA at ~1.5% and RoE at 15%+. While we believe it is most likely to
sustain high return ratios, valuation also suggest the same, we also note its
higher exposure to Textile sector (~10%) and concentration in Tamil Nadu. Hence,
Shareholding pattern at current valuation we see limited upside, we downgrade to HOLD from ADD
Sep Dec Mar
'18 '18 '19 rating with unchanged TP at Rs210.
Promoters 0.0 0.0 0.0
Institutional  In-depth knowledge of home-town economics is an edge. CUBK’s edge lies in
investors 51.8 50.8 51.1 its in-depth knowledge of home-town economics which it gained by operating in
MFs and UTI 20.1 21.0 22.9
Insurance Cos. 0.0 0.0 0.0 Tamil Nadu for more than 100+ years. Importantly, CUBK’s market share in MSME
FIs and Banks 3.9 3.9 3.8 segment in its home state i.e. Tamil Nadu stands at 4% vs 2% in overall credit as at
FIIs 27.5 25.9 24.4
Others 49.2 49.2 48.9 Sep’18. SME/MSME specialized business model and superior client servicing is the
Source: CMIE key reason behind customer’s preference for CUBK over competition. Interestingly,
management has strategically started entering new states like Gujarat, Rajasthan,
Price chart AP and Telangana to reduce the concentration risk.
250  Lower recoveries impacted asset quality, delinquencies well-in-control. Over
225 past five years, due to real estate slow-down and regulatory delays (DRTs and
200 SARFAESI act) recoveries as % of o/p GNPA fell to ~30% in FY19 from 80% in
175
FY15. However, GNPA increased marginally by 100bps to 2.95% as at FY19 from
(Rs)

150
125 1.85% as at FY15 due to its ability to contain slippages at ~2.1% between FY16/19
100 vs 2.5% in FY15. It expects slippage ratio to remain between 1.75%/2% in FY20e.
75  Most-efficient player amongst regional banks. Management highlighted that over
50
the past decade, they have been able to contain C/I ratio ~40% due to its ability to
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19

retain customer given its expertise in tapping local customers and get repetitive
business from existing customers. Over past decade, it added relatively higher
branches between FY09-14 at 15% CAGR while between FY14-19 it moderated
branch addition to 9% CAGR. Similarly loan growth moderated to 15% CAGR
between FY14/19 from 23% between FY09/14. Going ahead, it is planning to add
~50 braches per year and expects C/I ratio to remain at current level of 42%.
 Outlook. CUBK remained on track in delivering consistent performance with RoA
remaining ~1.5% over past 18 quarters, reflecting management strength in
developing a business model that can sustain an adverse business cycle. However,
we believe current valuation largely captures the major positives and leaves limited
scope for further rerating in the near term.
Market Cap Rs159bn/US$2.3bn Year to Mar FY18 FY19 FY20E FY21E
Reuters/Bloomberg CTBK.BO/CUBK IN NII (Rs bn) 14.3 16.1 18.4 21.8
Shares Outstanding (mn) 734.5 Net Profit (Rs bn) 5.9 6.8 7.7 9.2
52-week Range (Rs) 217/162 EPS (Rs) 9.4 10.3 11.6 13.9
Free Float (%) 100.0 % Chg YoY 11.6 9.8 12.7 20.5
FII (%) 24.4 P/E (x) 21.3 19.4 17.2 14.3
Research Analyst:
Daily Volume (US$'000) 2,221 P/BV (x) 3.2 2.7 2.4 2.1
Renish Bhuva Absolute Return 3m (%) 7.8 Net NPA (%) 1.7 1.8 1.8 1.8
renish.bhuva@icicisecurities.com Absolute Return 12m (%) 28.7 BVPS (Rs/Sh) 63.0 73.0 84.0 97.0
+91 22 6637 7465
Sensex Return 3m (%) 4.0 RoA (%) 1.6 1.6 1.6 1.6
Sensex Return 12m (%) 12.9 RoE (%) 15.3 15.4 14.8 15.4

Please refer to important disclosures at the end of this report

City Union Bank, June 26, 2019 ICICI Securities
Chart 1: Credit growth remained stable at 17% YoY over past four years

40%
35%
35%
31%
30%

Loan Growth (% YoY)

26%
25%
21%
20% 17% 17% 17%

15% 13%
12%
10%
6%
5%

0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, I-Sec research

Most-efficient player amongst regional banks

FY14 FY15 FY16 FY17 FY18 FY19
CUBK 45.2 42.8 40.1 40.9 38.5 41.7
FB 49.4 50.0 56.7 53.4 51.7 50.0
DCB 62.9 58.8 58.4 60.0 59.8 56.9
KVB 54.7 53.9 47.6 45.0 44.4 48.6
SIB 50.0 52.7 56.6 49.2 47.2 54.9
Source: Company, I-Sec research

Chart 2: Recovery as % of o/p GNPA fell to 29% due to real estate slowdown
and regulatory delays in getting approval to liquidate collaterals
140
117
120

100
80
74 72
80
(%)

56 58
60
38
40 29 30 29

20

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, I-Sec research

2
City Union Bank, June 26, 2019 ICICI Securities
Chart 3: Slippage ratio consistently moderating from FY14 onwards
3.5
2.9
3.0
2.5
2.5 2.2 2.1 2.2
2.1
2.0 1.7 1.6

(%)
1.5
1.3
1.5

1.0

0.5

0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, I-Sec research

Chart 4: Asset quality deteriorated but broadly remained stable over past three
years
3.5%

3.0%

2.5%

2.0%
(%)

1.5%

1.0%

0.5%

0.0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, I-Sec research

Chart 5: RoA broadly remained stable at ~1.5% while RoE moderated mainly
due to lower leverage
30.0 Cal RoE Cal RoA 1.8

1.7
25.0
1.7

20.0 1.6

1.6
(%)

(%)

15.0
1.5

10.0 1.5

1.4
5.0
1.4

0.0 1.3
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, I-Sec research

3
City Union Bank, June 26, 2019 ICICI Securities

Financial summary
Table 1: Profit and loss statement Table 3: Key ratios
(Rs mn, year ending March 31) (Year ending March 31)
FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E
Interest Income 34,024 37,672 43,649 51,787 Per Share Data
Interest Expense 19,721 21,557 25,220 29,955 Book value per share (INR) 63 73 84 97
Net Interest Income 14,303 16,115 18,429 21,833 Adj. BVPS (INR) 58 67 77 97
% NII Growth 19.3 12.7 14.4 18.5 Price/Book value 3.2 2.7 2.4 2.1
Treasury Income Price/ Adj. Book value 3.5 3.0 2.6 2.1
Non-interest income 5,321 5,144 5,658 6,337 EPS(INR) 9.4 10.3 11.6 13.9
Net Revenue 19,624 21,259 24,087 28,170 P/E Ratio 21.3 19.4 17.2 14.3
Employees Expenses 3,159 3,644 4,118 4,695 DPS 0.3 0.5 0.6 0.6
Other Op. Expenses 4,388 5,214 5,892 6,658
Operating Profit 12,078 12,400 14,076 16,817 Asset Quality
% OP Growth 21.5 2.7 13.5 19.5 Gross NPA (Rs mn) 8,566 9,771 10,675 12,328
Tax 1,980 2,420 2,704 3,258 Gross NPA (%) 3.03 2.95 2.77 2.66
Total Provisions 4,178 3,151 3,677 4,287 Net NPA (Rs mn) 4,748 5,915 6,481 7,558
Net Profit 5,920 6,829 7,695 9,272 Net NPA (%) 1.70 1.81 1.82 1.78
% PAT Growth 17.7 15.3 12.7 20.5 % coverage of NPA 44.6 39.5 39.3 38.7
Source: Company data, I-Sec research Delinquencies (%) 2.2 2.1 1.9 1.9

Capital Adequacy Ratios

Table 2: Balance sheet RWA (Rs mn) 260,870 306,020 361,103 433,324
(Rs mn, year ending March 31) Tier I (%) 15.8 15.6 15.2 14.8
FY18 FY19 FY20E FY21E Tier II (%) 0.4 0.4 0.4 0.4
Capital 665 735 735 735 Total CAR (%) 16.2 16.0 15.7 15.2
Reserves and Surplus 40,968 47,673 55,001 63,906
Deposits 328,526 384,479 453,686 542,154 Business Ratios
Borrowings 17,359 4,809 1,912 5,755 Credit / Deposit(%) 84.8 85.0 85.0 85.3
Other Liabilities & Provisions 11,855 14,893 16,382 18,020 Investment / Deposit (%) 24.0 20.1 19.9 20.0
Total liabilities 399,372 452,589 527,716 630,570 CASA (%) 24.2 24.6 25.0 25.4
RoaA (%) 1.6 1.6 1.6 1.6
Cash & Balances with RBI 18,618 19,931 20,502 24,656 Core RoE (%) 15.3 15.2 14.8 15.4
Bal. with banks/ call money 7,746 9,702 11,354 13,655
Investment 78,791 77,122 90,259 108,546 Earnings Ratios
Loans and advances 278,528 326,733 385,545 462,655 Interest Inc. / Avg.assets (%) 9.0 8.8 8.9 8.9
Fixed Assets 2,231 2,500 2,625 2,757 Interest Exp./ Avg. assets (%) 5.2 5.1 5.1 5.2
Other Assets 13,458 16,600 17,430 18,302 NIM (%) 3.8 3.8 3.8 3.8
Total assets 399,372 452,589 527,716 630,570 Int. exp/ Int earned (%) 58.0 57.2 57.8 57.8
% TA Growth 13 13 17 19 Oth. Inc./ Tot. Inc. (%) 27.1 24.2 23.5 22.5
Source: Company data, I-Sec research Staff exp/Total opt. exp (%) 41.9 41.1 41.1 41.4
Cost/ Income Ratio (%) 38.5 41.7 41.6 40.3
Prov./ Operating Profit (%) 34.6 25.4 26.1 25.5
Loan loss prov./Avg. loans (bps) 161.7 104.1 103.3 101.1
Source: Company data, I-Sec research

Table 4: RoA tree

(%, year ending March 31)
FY18 FY19 FY20E FY21E
Interest income/Assets 9.0 8.8 8.9 8.9
Interest expenses/Assets 5.2 5.1 5.1 5.2
Net interest income/Assets 3.8 3.8 3.8 3.8
Other Inc. from operations/Assets 1.4 1.2 1.2 1.1
Total income/Assets 5.2 5.0 4.9 4.9
Total Exp./Assets 2.0 2.1 2.0 2.0
Operating profit/Assets 3.2 2.9 2.9 2.9
Tax/Assets 0.5 0.6 0.6 0.6
Loan loss provisions/Assets 1.1 0.7 0.8 0.7
Net profit/Assets 1.6 1.6 1.6 1.6
Leverage (x) 9.6 9.3 9.5 9.8
Return on Equity 15.1 15.0 14.9 15.6
Source: Company data, I-Sec research

4
 City Union Bank, June 26, 2019 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return;
SELL: < negative 15% return

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