City Union Bank’s (CUBK) Q1FY23 earnings beat our estimates on the back of higher recoveries from written-off accounts, lack of treasury drag, and lower-than-expected credit costs (1.6 per cent annualised). Slippages were relatively higher (about 2.9 per cent), partly offset by recoveries/upgrades, driving GNPA to 4.7 per cent. The total stress pool (NNPA + restructured + SR + SMA-2) remains sticky at about 10 per cent. The management remains confident of higher momentum in recoveries resulting in lower credit costs and guided for 15-18 per cent credit growth on the back of a favourable economic environment.
NII grew about 17 per cent year-on-year on the back of a pick-up in the loan growth (+13 per cent year-on-year) and stable NIMs at about 4 per cent (6 bps quarter-on-quarter moderation due to slippages). Loan growth was led by gold (+37 per cent year-on-year) and corporate segments. On the back of broad-based rebound in economic activity, the management revised its loan growth target to 15-18 per cent.
Despite higher slippages at about 2.9 per cent, GNPA/NNPA improved sequentially to 4.65 per cent/2.89 per cent (Q4FY22: 4.7 per cent/2.95 per cent), led by healthy recoveries and prudent write-offs. CUBK upgraded the stressed aviation asset to standard on the back of renewed repayments and revised terms that include an agreement to settle the outstanding by June 2023.
With credit costs gradually mean-reverting and a stable margin outlook (evidence of pricing power), CUBK appears on track to clock 1.5 per cent RoA for FY23 (Q1FY23: 1.46 per cent). We remain constructive on CUBK’s ability to sustain its core positioning and market share in the flagship MSME business despite the rising competitive intensity.