Stock Fundamentals

City Union Bank: Buy

Radhika Merwin | Updated on March 12, 2018 Published on September 21, 2013

Branch expansion will propel growth. — Bijoy Ghosh   -  Bijoy Ghosh



Stable margins, sufficient capital cushion and high returns are positives for the bank.

In the current scenario in which most public sector banks are riddled with structural risks and large private sector banks trade at a premium, there are a few regional players which offer a good buying opportunity for investors.

City Union Bank (CUB) is one such small-sized private sector bank that has outperformed the industry and maintained healthy loan growth over the past five years. This is thanks to its strong regional presence in South India.

Stable net interest margin (NIM), sufficient capital cushion, good asset quality and high return ratios are the bank’s positives.

While the bank has a smaller proportion of low-cost deposits compared with peers, its ability to quickly adjust interest rates on loans has stood it in good stead.

The recent liquidity tightening measures by the RBI saw rates for short-term deposits spiking. But CUB, with nearly 68 per cent of its deposits in the one-three-year category, has been better insulated to withstand the pressure and defend margins.

Its return on assets (ROA) at 1.5 per cent is well ahead of peers with regional focus. IngVysya Bank has an ROA of 1.2 per cent, while South Indian Bank and Karur Vysya Bank have an ROA of 1 per cent and 1.3 per cent respectively (2012-13).

The bank’s earnings are expected to grow at around 20 per cent annually over the next two years, aided by strong loan growth, stable margins and relatively low asset quality stress.

Regional focus

At the current price of Rs 43, the CUB stock trades at one time its one year forward book value, which is at a 20 per cent discount to its historical five-year average. Investors with a two-to- three year horizon can consider buying the stock.

CUB grew its loan book 27 per cent annually over the last five years, outperforming the industry growth rate of 17 per cent. While a smaller balance-sheet size helped, CUB’s strong regional focus in South India and branch expansion have also been key drivers.

The bank has a well-entrenched presence in Tamil Nadu. Almost two-third of its network of 385 branches, as of June-end, is in the State. The bank has over the years built deep, niche relationships with SME (small and medium enterprise) clients. This has translated into healthy yields and better control over the loan quality.

CUB has added 153 branches in the last three years. Urban and semi-urban constitute 66 per cent of the total branch network.

Building presence through branch expansion has delivered steady growth in the past few years. With plans to open 125 more branches in the coming year, the bank’s loan book is expected to grow more than 20 per cent annually over the next two years.

The expansion is also likely to be around its existing base of Tamil Nadu, Andhra Pradesh and Karnataka, which account for close to 84 per cent of the total branches.

Ring-fencing margins

What is also comforting is the quality of the bank’s assets. Nearly 98 per cent of the loans are secured and 67 per cent is for working-capital financing, which is short-term in nature.

Nearly half the loans are lent to high yielding segments — MSME (micro, small and medium enterprises) clientele, and wholesale and retail traders. While working capital loans yield higher interest, they also help CUB to adjust the interest rates faster and at shorter intervals.

The share of advances in the less-than-one-year category is high at 46 per cent — this aids margins in a tight liquidity scenario.

Also, 80 per cent of the bank’s loan book is on floating rate basis. This reduces the risk of interest rate volatility.

On the deposit front, deposits of less than one year constitute only 27 per cent of the total deposits. Lower dependence on short term deposits insulated the bank better from the recent rise in short-term rates, thereby protecting its margins.

A combination of high-yield loans and nimbleness to adjust rates has enabled the bank to maintain its net interest margin (NIM) in the range of 3-3.4 per cent over the last five years.

This is noteworthy as the bank’s proportion of low cost CASA (current account savings account) is small at 16 per cent. CUB lags in terms of CASA deposit mobilisation — one of the drawbacks of its focussed regional strategy.

However, a clear focus on the high yielding SME segment should enable the bank to deliver consistent and healthy margins.

Good asset quality

In spite of its large exposure to the SME segment, CUB has been able to maintain its asset quality.

The gross non-performing assets for the bank stood at 1.25 per cent of loans in the June quarter, amongst the lowest within the regional banks (most are in the range of 1.6-1.8 per cent).

The NPAs were at 0.6 per cent of loans with healthy provision coverage of 71 per cent.

The restructured assets for the bank are also among the lowest at 1.4 per cent of loans. The bank has minimal exposure to stressed sectors such as power and infrastructure.

CUB has sufficient capital to drive its growth plans with capital adequacy of 13.2 per cent as of June end.

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Published on September 21, 2013
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