This Small-Cap Banking Stock Rated Accumulate With Rs 209 Target Price, Surged 26.7% In 3 Months

In Geojit's recent report on City Union Bank Ltd. (CUB), the brokerage has given Accumulate rating to the stock of the bank with a target price of Rs 209. Considering the accumulate rating with the given target price, the stock is likely to surge by 17%.

City Union Bank, the oldest private sector bank in India, is a mid-sized commercial bank headquartered in Tamil Nadu, having a network of 727 branches spread across the country and a loan book size of Rs.40,934cr.

Bank's total Business grew by 11% YoY with advances growing at 12% supported by strong growth in Gold Loan while deposits grew by 9% YoY.

Stock Outlook

On NSE, the Current Market Price (CMP) of City Union Bank Ltd is Rs 180.10 apiece. The 52-week low of the stock is Rs 109 apiece recorded on 7 March 2022, and the 52-week high is Rs 191.95 apiece recorded on 26 October 2022. It is a small cap banking stock having a target price of Rs 13,319.92 crore.

Returns over the 5 Years

In the past 1 week, the stock has fallen 4.2%, whereas, surged 10.32% in the last 1 month. In the past 3 months, the stock jumped 26.7%. Over the past 1 year, the stock has given nearly 14.9%. Over the last 3 years, it has given a negative return of 11.3%. In the past 5 years, the stock has given a positive return of 23.47%.

Advances growth led by Gold portfolio

In Q1FY23, banks total business grew by 11% YoY with deposits growing at 9% YoY and 2% sequentially while advances grew 12% YoY while it marginally degrew on a sequential basis. High yield working capital loan constitutes 62% of the advances while term loan contributes 37%. The growth in advances were driven by gold loan which grew by 37% YoY and constitutes 23% of gross advances. Total Gold loan outstanding as on Q1FY23 stands at Rs.9,494.4cr against Rs.6,906.0cr an year ago and Rs.9,003.3cr during previous quarter. On the deposit front, CASA grew by 25% YoY as savings deposit grew by 20% YoY and demand deposit by 39%. CASA ratio of the bank stood at 31.5% compared to 32.6% during the previous quarter. Sequential decline in CASA mix was due to 1.5% decline in savings deposit. Management expect advances to growth at 15- 18% during FY23. Capital Adequacy Ratio of the bank stands comfortable at 20.5% compared to 20.9% in Q4FY22.

Net Interest Income grew by 17.3% YoY and 4.8% QoQ

Net Interest Income (NII) for the quarter grew by 17.3% YoY and 4.8% QoQ as interest income witnessed a growth of 10.2% YoY and 4.7% QoQ and interest expense grew by 4.5% YoY and 4.6% QoQ. Net Interest Margin showed a sequential decline of 6bps to 3.95%. Cost of deposit declined by 11bps sequentially and 52bps YoY to 4.43% while yield on advances declined 22bps sequentially and 36bps YoY to 9.04%. Decline in yield despite rate hike was partly due to lag effect and because of increasing mix of gold loan which has lower yield compared to the average yield of the bank. 65% of the advances of the bank are EBLR linked while 25% are MCLR linked while only 10% of the advances are fixed in nature. Pressure of increasing bond yield was seen in treasury income as it declined 80% YoY to 20.9cr. Pre-provision profit of the bank grew by 16.7% YoY and 1.7% sequentially. Bank reported PAT of Rs.225.0cr registering a growth of 30.0% YoY and 7.7% QoQ. Bank's PCR stood at a comfortable 64% in line with Q4FY22.

Marginal improvement in asset quality

GNPA/NNPA for the quarter improved marginally to 4.65%/2.84% against 4.70%/2.89% during Q4FY22. Annualised slippage ratio stood at 2.6% compared to 3.1% in FY22. Total restructured book as a percentage of gross advances stood at 5.0% amounting to Rs.2033.7cr during the quarter. We anticipate gradual recovery in asset quality with GNPA at 4.0% by end of FY23.

Outlook and valuation

Bank has shown a decent performance during the quarter. Management has increased their FY23 loan growth guidance to 15-18%. We expect ROE/ROA to improve to 13.7%/1.6% by FY24. With improved growth outlook, we upgrade our valuation to 2.1x FY24E Adj BVPS and recommend Accumulate rating with a target price of Rs.209.

Disclaimer

The stock has been picked from the brokerage report of Geojit. 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.