HDFC Securities Places Buy Call On This Small Cap Banking Stock, Sees 37% Potential Upside

Leading brokerage firm HDFC Securities in its recent report on City Union Bank (CUBK) has placed a "buy" call for a target price of Rs 265 per share. Given the target price, the brokerage anticipates an increase of 37% in share price from its current level.

CUBK is a small-cap banking company having a market cap of Rs 14,325.75 crore. It is one of the leading scheduled commercial banks in the private sector with a major presence in urban semi-urban as well as rural centres in South India. The Bank's segments include Treasury, Corporate and Wholesale Banking, Retail Banking and Other Banking Operations.

Stock Outlook & Returns

The share price of City Union Bank currently trading at Rs 194.30 apiece on the NSE. 2.24% up from its previous close of Rs 190.05 per share. Its 52-week high level was recorded at Rs 199.25 in November 2022, and the 52-week low was recorded at Rs 109 in March 2022, respectively.

The stock in the past 1 week has surged 4.14%, whereas, in the past 1 month it gave 8.21% positive returns. It gave 20.27% positive returns in 3 months. Over the past 1 year, it gave 11.16% positive returns. However, in 3 years, it has given 8.48% negative returns. In the 5 years, it gave a positive return of 29.76%

Non-gold segments contribute to growth

NII grew ~19% YoY on the back of stable loan growth (+13% YoY) and better NIMs at ~4.1%. Loan growth was led by gold (+28% YoY), large corporate and MSME segments. Management continued to guide for a 15-18% loan growth on the back of rising confidence in the broader demand environment. Also, CUBK is gradually broadening its product portfolio further into credit cards and auto loans over the medium term, which should add incremental growth levers.

Strong recoveries in sight to support asset quality

Despite higher slippages at ~2.7%, GNPA/NNPA improved sequentially to 4.4%/2.7% (Q1FY23: 4.7%/ 2.9%), led by healthy recoveries and upgrades. Better repayment trends (87% of the restructured book started payments) and a highly-secured portfolio (99% of the loan book) offer comfort on FY23 credit costs (140bps).

RoA overshoot in sight; the right time to reinvest in the franchise

With credit costs mean-reverting to 4% and a stable margin outlook, CUBK appears on track to overshoot 1.5% RoA for FY23 (Q2FY23: 1.7%). Given that CUBK is currently overshooting its potential RoA, we argue that CUBK would be better off reinvesting these super-normal gains to further fortify its core positioning in the flagship MSME businesses and revive its distribution network (branches).

Super-normal times; ripe timing for franchise build-out, buy for Rs 265 target price

Despite a lower other income, City Union Bank's (CUBK) Q2FY23 earnings beat our estimates on the back of lower-than-expected credit costs (1.1% annualised). Slippages continued to stay elevated (~2.7%), partly offset by recoveries and upgrades, driving GNPA to 4.4% (Q1FY23: 4.7%). However, the total stress pool (NNPA + restructured + SR + SMA-2) remained sticky at ~9.8%. Management continued to guide for 15-18% loan growth and continued healthy momentum in recoveries, which should likely translate into lower credit costs during FY23. "On the back of a benign credit cycle and the prevailing pricing environment, CUBK is on track to achieve its targeted 1.5% RoA for FY23 - however, we flag CUBK's deposit-side strategy as a monitorable. We tweak our FY23 loan growth forecasts higher and maintain BUY, with a TP of INR265 (2.4x Sep-24 ABVPS)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. 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.