Buy This Small Cap Banking Stock, Shares Can Surge 25%, Gave 48.63% In 3 Months

The brokerage firm IDBI Capital in its recent report has given a buy call to the stock of City Union Bank (CUB). The brokerage has an estimated target price of Rs 230 apiece for the stock of the company. Considering this, the stock is likely to surge 25% in 12 months. City Union Bank is a private sector small-cap bank having a market capitalization of Rs 13,641.64 crore.

It is one of the oldest private sector banks with a legacy of over 115 years. The bank's main focus is to lend MSME's, Retail/ wholesale trade with a granular asset portfolio including providing short-term and long term loans to the agriculture sector. The Bank currently has 660 Branches with 90% of branch presence in South India out of which 78% branches are in Tamil Nadu. Currently the bank has employee strength of 5,757 and strong CAR of 15.41%.

Stock Outlook

The Current Market Price (CMP) of CUB is Rs 184.45 apiece on NSE. The 52-week low level is Rs 109 apiece recorded on 7 March 2022 and the 52-week high level is Rs 191.95 apiece recorded on 26 August 2022, respectively. 

Returns over the past 5 years

The shares surged 1.54% in the past 1 week and 4.89% in the past 1 month.  In the past 3 month the shares surged 48.63%. Over the past 1 year, the share price surged 23.21%. It has given 13.42% negative return in the past 3 years and 22.93% in the past 5 years. 

Asset quality to improve; Restructured assets to be watched

CUB's asset quality has got impacted due to Covid-19 with GNPA at 5.6% Q1FY22 as against 3% FY19 (pre Covid-19). GNPA declined to 4.7% by end of FY22 backed by higher recoveries/upgrades (including write offs) as against fresh slippages. Restructured assets could surprise negatively impacting the asset quality going forward as moratorium comes to end for these borrowers. Thus, we have done the scenario analysis with respect to slippages from restructured assets in FY23 & FY24, with peak restructured assets at 5.3%(FY22). 

Credit growth to improve towards pre-Covid levels; TN major contributor of loan book

Empirical data suggests that the bank shares a positive correlation (Ex. FY20) with both the GDP growth of Tamil Nadu (0.81) as well as that of the credit growth in Tamil Nadu (0.36). Overall, we expect credit growth to improve from FY23 onwards to pre-Covid levels. Bank reported loan growth at 16% CAGR (FY15-19); we estimate 15% CAGR (FY22-24E) credit growth.

Asset quality to improve; Restructured assets could play spoil sport?

City Union Bank's asset quality got impacted due to Covid-19 with GNPA at 5.6% Q1FY22 as against 3% FY19 (pre Covid-19). With minimal impact of third wave, recovery in economic growth along with key focus on collection efficiency, asset quality improved. GNPA declined to 4.7% by end of FY22 backed by higher recoveries/upgrades (including write offs) as against fresh slippages. Management guided for upgrades/recoveries will be higher than fresh additions going forward which should result further decline in GNPA. Pre Covid, slippage ratio have been in the range of 2.1 - 2.2% (FY16-19) which increased to 3.2-3.3% (FY20-22). Management guided for slippage ratio to come down towards pre Covid levels (2%-2.2%) by FY23.

Restructured assets - Scenario analysis

However, Restructured assets could surprise negatively impacting the asset quality going forward as moratorium comes to end for these borrowers. Thus, we have done the scenario analysis with respect to slippages from restructured assets in FY23 & FY24. Best case scenario - 15% slippages in next 2 years (FY23- 24), Base case scenario - 30% slippages and worst case scenario - 40% slippages. Management guided for 20- 25% of restructured assets could turn bad in next 2-3 years with respect to experience of 2008 crisis, at that time 20% of restructured assets slipped into NPA. Also, data suggests from FY14 to FY21 cumulatively fresh restructuring stood at Rs.21bn and out of which Rs.6.3bn were written off which suggests approx. 70% recovery. Thus, we undertook 30% as base case in our estimates. In base case scenario, RoA should reach to pre-Covid levels of 1.5% by FY24 which should support re-rating of the valuation towards pre-Covid levels (traded at an average of 2.2X P/BV between FY15-19; pre Covid).

RoA to reach pre-Covid level, Buy for Target Price Of Rs 230

CUB, among the old private banks, has reported consistent performance in RoA at ~1.5% over the FY15-19 (pre-Covid period). This is backed by 16% loan CAGR (FY15-19) and stable GNPA at 2% to 3%. Covid pandemic has impacted the asset quality which resulted in RoA to the lowest levels of ~1% in FY20. We expect RoA to improve towards ~1.5%, backed by 15% loan CAGR (FY22-24) and decline in credit cost at 1.2% FY23 vs. 2.2% in FY21. Stock trades at attractive valuation i.e. P/ABV of 1.7x FY24E. We initiate coverage on CUB with target price of Rs 230, valuing it at 2.2x P/ABV FY24 which is stock's average valuation of FY15-20. Key positives are stable asset quality; credit growth in high teen's and key to watch is trajectory of restructured assets.

Disclaimer

The stock has been picked from the brokerage report of IDBI Capital. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.