Broker's call: City Union Bank (Buy)

| Updated on March 20, 2020

Centrum Broking

City Union Bank (Buy)

CMP: ₹163.7

Target: ₹170

Based on the feedback, there have been no major business disruptions till date because of Covid-19. Hoteliers have started facing cash flow issues. The bank is not too pessimistic as they are not seeing a proportional impact at the grass root level. Feedback from 2-3 garment manufacturers in Tiruppur is that the order book pipeline looks better as Tirippur being a textile hub might see higher export orders post the Wuhan impact in China.

Deposits have not seen significant outflows and institutional depositors’ contribution to total deposits is not meaningful. The bank is an authorised service provider to some State governments, municipalities and panchayats and their total contribution is about ₹2 crore or 0.5 per cent of overall deposits. In fact, the bank reduced deposit rates recently despite which there was a marginal increase in deposits.

Valuation and risks: Covid-19 causing an economic activity standstill in March, could see the March and June quarter witness weak credit growth and stretched recoveries causing higher slippages. The next 2-4 weeks might determine the extent of virus proliferation in India and hence the time taken for economic recovery, which we see by H2FY21. Hence for FY21E we lower estimates on loan growth and raise our provisions which could impact FY21/22E PAT by 7.5 per cent/5.3 per cent. With the BFSI space/HDFC Bank correcting by 33 per cent each we revise City Unio Bank’s multiple/TP to 2.0x/₹170 (vs 3.1x/₹263 earlier).

Risks: further NIM compression and stress in the SME segment.

Published on March 21, 2020

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