This Small Cap Banking Stock Reported Strong Overall Q1, Brokerage Suggests Buy For 19% Gains

Stock Outlook & Returns

The Current Market Price (CMP) of the stock on NSE is Rs 176.70 apiece. It recorded the 52-week low at Rs 109 apiece on recorded on 7 March 2022, and the 52-week high at Rs 191.95 apiece was recorded on 26 October 2022. 

In the past 1 week has gained 7.04% and 20.12% in the last 1 month, respectively. In the past 3 months, the stocks have jumped 43.15%. Over the past 1 year, the stocks have given nearly 13.65%. Over the last 3 years, the shares gave a negative return of 11.02%. In the past 5 years, the stock has gained 22.03%.

The ROE of the stock is 11.54%. TTM EPS is Rs 10.28. TTM PE ratio 17.03. The P/B ratio is 1.97. The dividend yield is 0.57% and the face value is Rs 1, respectively. It is a small cap banking stock having a target price of Rs 12,942 crore.

 

Credit growth muted during the quarter, but guidance is encouraging

Advances grew 12% YoY and 1% QoQ to Rs 40,934cr. In Q4FY22, management guided for credit growth in the low to mid-teens for FY23. However, this has now been increased to 15-18% despite a slow start to the financial year. Share of gold loans in overall advances continued to increase, now at ~23% of gross advances (vs. 19% in Q1FY22). After declining in Q1FY22, the bank's MSME book has since performed well, particularly in the past two quarters. Growth for this segment came in at 26% YoY and 9% QoQ. MSME is the bank's target segment, and we expect it to be a key growth driver in FY23 and beyond, particularly on improving pricing scenario. We also believe this will result in an improvement in City Union Bank's yield. City Union Bank's deposits grew by 9% YoY and 2% QoQ, driven by a massive 25% jump in CASA deposits. This led to a 390bps YoY hike in the CASA ratio to ~31.6% and resulted in significant CoF moderation over the period

Stressed book, though high in quantum, is being effectively managed

City Union Bank reported slippages of Rs 270cr or ~2.7% of overall advances. Against these, the bank had recoveries and upgrades of Rs 160cr and took write-offs to the tune of Rs 140cr. As a result, GNPA and NNPA declined 5bps and 6bps QoQ to 4.65% and 2.89%, respectively. PCR (calculated) improved by 62bps QoQ to ~37.9%. The restructured book stood at Rs 2,034cr or 5.0% of gross advances (improvement from 5.4% in Q4FY22). ~42% of the restructured book is still in moratorium. However, borrowers with exposures aggregating to ~86% of the restructured book still in moratorium have already started making voluntary repayments. Thus, only restructured exposures to the tune of Rs 120cr are yet to commence repayments. "As the bank holds provisions worth Rs 156cr against the restructured book, we believe the overall outcome from this book should pose no significant challenges. Management guides for slippage ratio of ~2-2.5% for FY23. If achieved, this would mark an improvement over the FY22 level," the brokerage firm said.

Outlook and valuation

Edelweiss Wealth Research said, "We previously highlighted that the bank's focus on growth should return on account of signs of easing stress. We now see this playing out, as the bank appears well-equipped against stress, and management notched up their guidance on credit growth. We expect opex to increase, as the bank enters expansion mode. However, return ratios have been improving QoQ, and we expect these to remain strong on the back of a healthy NIM and moderation in credit cost. We continue to remain positive on City Union Bank and reaffirm our BUY call with a revised target price of Rs 205 per share, implying a 26% upside. We have increased our target price on account of strong growth guidance, potential improvement in NIM, and lower expected slippages."

About - City Union Bank Limited

City Union Bank Ltd is one of the leading scheduled commercial banks in the private sector with a major presence in urban semi-urban and rural centres in South India. The Bank operates in four segments namely Treasury Retail Banking Corporate Banking and Other banking operations. Their products include savings accounts current accounts fixed deposits cash certificates VIP deposits Flexifix deposits CUB Smart deposits and tax saver gold deposit accounts. The Bank's services include automated teller machine (ATM) services mail transfer demand draft phone transfer standing instructions and a nomination facility. The main focus of the bank is lending to MSME Retail/Wholesale Trade with a granular asset profile including providing short-term and long-term loans to the agricultural sector. The bank has a strong presence in South India.