This Banking Stock Has A 42% Upside Potential

Edelweiss Professional Investor Research has a "buy" rating on the shares of City Union Bank, which maybe a good year end-end pick. According to the broking firm, this is one of the fastest growing small-sized bank with a rare status of being one of the most consistent bank in terms of growth and operating metrics; the bank has delivered steady (and superior) return ratios and controlled its delinquencies over the past decade.

"CUB has strategically grown its book by focusing on high-yielding yet secure products. This has resulted in CUB having a superior NIM profile and one of the lowest unsecured books in the industry. CUB has significant edge over peers in terms of operating cost, NIM, return ratios and asset quality.

Over the last 10 years, the bank - with advances of Rs 35,437crores and branch network of 700 - has maintained RoA/RoE upwards of 1.5%/16%, aided by superior Pre-Provisioning Operating Profit (PPoP). We estimate advances/revenue/PAT CAGR of 13%/11%/26% over FY20-23E," the brokerage firm has stated.

"Given the improving macroeconomic scenario, we believe CUB would grow its credit book much faster than the industry average on account of (a) its healthy capital adequacy, (b) ample liquidity on its books, and (c) moderate Balance Sheet stress. Over FY20-23E, we estimate CUB to post 13% CAGR in credit growth," Edelweiss Professional Investor Research.

Healthy recovery and proven credit underwriting to keep asset quality under check

According to the research report, City Union Bank had maintained superior asset quality over FY10-19, but the same deteriorated in FY20 due to elongated stress in the SME and corporate segments.

"Gross Non Performing Assets hovered between 1.5-3% and slippage ratio remained within the 2% range during FY10-19. The latter increased to 3.4% in FY20, resulting in higher GNPA of 4.1% in FY20. We project slippage ratio of 2.8% over FY21-23E and GNPA of 5.0%/4.2%/3.3% for FY21E/FY22E/FY23E.

We initiate coverage with BUY rating and target price of Rs 245/share. At current market price, the stock is trading at 1.7x FY23E ABV. We expect an improvement in RoA/RoE to 1.5%/12.5% by FY23E from 1.0%/9.3% in FY20. We recommend a 'BUY' rating with target price of Rs 245/share (2.5x FY23E ABV), an upside of 43%," the broking firm has stated.