City Union Bank Small but Strong Franchise Viewpoint
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City Union Bank Small but strong franchise Viewpoint City Union Bank (CUB) posted modest results for Q1FY20, where Sector: Banks & Finance while its Net Interest Income (NII) growth was modest, asset quality Result Update and margins wise there was some disappointment. Its operating profit growth was healthy, helped by treasure gains. However, lower Change recoveries resulted in marginal worsening of asset quality. Net Interest á View: Positive á Margins (NIMs) declined by 29 / 13 BPS q-o-q / y-o-y, partly due to interest reversals and higher cost of fund. However, the bank has CMP: Rs. 195 stressed that it has no exposure to some of the corporate accounts, Upside potential: 22-25% á recently in news and the slippages (in line with Q4) were dominated by one large exposures. We believe management guidance for 18- á á Upgrade No change Downgrade á á 20% loan growth, RoA of ~160 bps and RoE of ~15% for FY20E, is achievable. We maintain our Positive view on the stock with an upside Company details potential of 22-25%. Market cap: Rs. 14,300 cr Key positives 52-week high/low: Rs. 220/157 As ~95% of book is on floating interest rates, it reduces the overall interest rate risk for the bank NSE volume: (No of 7.2 lakh shares) The management averred that it has no exposure to troubled corporates which are recently in news, and thus its asset quality BSE code: 532210 picture was stable from Q4 NSE code: CUB Key negatives Sharekhan code: CUB Lower recovery and upgradations resulted in higher net addition to NPAs Free float: (No of 73.5 cr shares) Our Call Valuation – CUB currently trades at ~2.2x its FY2021E book value, Shareholding (%) which we believe is reasonable, supported with its stable and consistent performance. Despite deep and industry wide stress seen in recent FII 24.4 times, CUB has consistently been maintaining decent core operating / return ratios supported with strong execution of a focused strategy, DII 22.4 thereby justifying its valuation. We maintain our Positive view on the Others 53.2 stock with an upside potential of 22-25%. Key Risks Price chart A prolonged economic slowdown phase may percolate and impact CUB’s 250 customers (primarily SMEs) as well 225 200 175 150 Valuation Rs cr 125 Particulars FY18 FY19 FY20E FY21E 100 18 18 19 19 NII (Rs) 1,430 1,611 1,792 2,255 - - - - Apr Dec Aug Aug Growth (%) 19.3 12.7 11.2 25.9 PPoP (Rs) 1,208 1,240 1,344 1,705 Growth (%) 21.5 2.7 8.4 26.8 PAT (Rs) 592 683 775 1,064 Price performance Growth (%) 17.8 15.3 13.4 37.3 (%) 1m 3m 6m 12m EPS (Rs) 8.9 9.3 10.5 14.5 BVPS (Rs) 62.6 65.9 74.3 85.7 Absolute -4.0 0.0 4.5 13.9 PE (x) 21.9 20.9 18.5 13.4 PBV (x) 3.1 3.0 2.6 2.3 Relative to 3.1 3.3 4.4 15.4 RoE (%) 15.3 15.2 15.0 18.1 Sensex RoA (%) 1.6 1.6 1.6 2.0 Sharekhan Research, Bloomberg Source: Company, Sharekhan Estimates August 08, 2019 35 Viewpoint Strong operating performance: City Union Bank (CUB) posted modest results for Q1FY20, where while its Net Interest Income (NII) growth was modest but asset quality and margins wise there was some disappointment. Its operating profit growth was healthy, driven by other income. However, its slippages were elevated during Q1FY20 on q-o-q / y-o-y basis, which is why asset quality deteriorated. NII growth moderated to 11.2% y-o-y to Rs 416.9 Cr in Q1FY20 due to slower advances growth of 14.23% y-o-y and de growth of 1.36% QOQ. However, it is explained by Q1 seasonally being a weak quarter in terms of business growth. However, non-interest income increased by 26.5% y-o-y to Rs. 163.3 crore driven by robust growth in treasury income, which grew by 131% y-o-y to Rs. 446 crore, as the fall in G-Sec yields have a positive impact on the treasury income. Going forward, the bank is confident of maintaining similar trajectory on treasury income, while it doesn’t have retiral liability higher due to falling yields, which is a positive. Net Interest Margins (NIMs) declined by 29 / 13 BPS QoQ / YoY to 4.11% during Q1FY20. As 95% of bank’s book is on floating interest rates, we believe the NIM contraction is partly due to Rs ~4 crores of interest reversals. The bank continues to maintain its earlier stance that margins may see some contraction in medium term, but was confident to maintain it at ~4% which we believe is positive. Cost-to-income (C/I) ratio for the quarter decreased by 105 BPS q-o-q to 39.43%, mainly due to smart pick-up in operational income. However, on a normalized basis, the C/I is factored at ~42% for FY20. Provisions increased by 48.9% y-o-y and 27.7% q-o-q mainly due to a rise in NPA provisions. Hence, the bank has reported a Net Profit of Rs 185.6 Cr during Q1FY20 which was up by 14.8% y-o-y. Slower business traction: During the quarter, CUB witnessed slower business traction as advances grew by 14.2% y-o-y, supported by 16% y-o-y rise in the term loan segment (which constitutes ~65% of loan book) and 13% y-o-y rise in cash credit and demand loan segment. Focus on a granular SME customer segment, both on the asset and liability side, helps CUB to build a granular asset/ liability profile. Around 99% of CUB’s loan book is secured loans, which is positive indicator of the strength of its book. The management has guided for 18-20% loan growth in FY20, RoA of 150-160 bps and RoE of ~15%, which we believe is achievable. Deposits accretion pace was also a bit slow during the quarter, reaching Rs. 390,768 crore, growing by 16% y-o-y, driven by 19% YoY growth in SA. However, CASA deposits rose by 14% y-o-y, but CASA as a percentage of total deposits declined by 49 BPS YoY and 178 BPS QoQ to 23.44%. Asset-quality performance deteriorates: CUB saw deterioration in overall asset quality, as gross nonperforming asset (GNPA) ratio increased by 39 BPS q-o-q to 3.34% and net NPA increased by 8 BPS sequentially to 1.89% during the quarter. The fresh Slippages for Q1FY20 were largely flat sequentially to Rs 199.9 crore from Rs 204.4 Cr during Q4FY19 which, but the lower recovery / upgrades resulted in higher addition to GNPAs. Recoveries and upgrades stood at Rs. 368 crore and Rs. 112 crore respectively (these were Rs. 467 crore and Rs. 136 crore, respectively, in Q4FY2019). CUB management averred that it does not have exposure to trouble corporate. One education institution account of Rs ~50 crore slipped into NPA. Management expects the asset quality to improve in H2FY20 and slippage ratio to be in the range of 1.75-2% for FY20E. Credit cost during the quarter increased to 35 BPS in Q1FY20 (from 13 BPS in Q4FY2019), which indicates that the trend of elevated credit cost will still take some time to improve/normalise. August 08, 2019 36 Viewpoint Results Rs cr Particulars Q1FY20 Q1FY19 YoY % Q4FY19 QoQ % Interest income 1,029.2 889.5 15.7 984.6 4.5 Interest expense 612.4 514.7 19.0 564.0 8.6 Net interest income 416.9 374.8 11.2 420.6 -0.9 Non-interest income 163.3 129.1 26.5 146.9 11.2 Operating expenses 228.8 204.5 11.9 229.7 -0.4 - Employee cost 100.4 87.3 15.0 91.4 9.8 - Other Costs 128.4 117.2 9.6 138.3 -7.2 Pre-provisioning profit 351.4 299.4 17.4 337.8 4.0 Provisions 115.8 77.8 48.9 90.7 27.7 Profit before tax 235.6 221.6 6.3 247.1 -4.6 Tax 50.0 60.0 -16.7 72.0 -30.6 Profit after tax 185.6 161.6 14.8 175.1 6.0 Source: Company; Sharekhan Research Loan Mix (%) Rs cr Particulars Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Cash credit & Demand loans 65% 65% 65% 65% 65% Term Loans 34% 34% 34% 34% 34% Bills purchased & Bills discounted 1% 1% 1% 1% 1% Source: Company; Sharekhan Research Reported Margins, Cost of funds and Yields on advances Quarterly Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 NIM (%) 4.2% 4.3% 4.4% 4.4% 4.1% Cost Of Funds (%) 5.2% 5.1% 5.2% 5.2% 5.4% Cost of Deposit (%) 6.2% 6.1% 6.2% 6.3% 6.3% Yield on Advances (%) 10.9% 10.9% 11.0% 11.1% 11.0% Source: Company; Sharekhan Research Movement in NPAs Quarterly Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Net NPA (%) 1.7% 1.7% 1.7% 1.8% 1.9% Gross NPA (%) 3.0% 2.9% 2.9% 3.0% 3.3% Gross NPAs (Rs Cr) 851.1 847.9 891.9 977.1 1076.2 Net NPAs (Rs Cr) 473.5 497.8 527.6 591.5 600.0 Source: Company; Sharekhan Research August 08, 2019 37 Viewpoint Financials in charts Advances trend Loan Mix 34,000 20.0 100% 33,000 32,000 15.0 80% 31,000 30,000 10.0 29,000 60% 28,000 5.0 27,000 40% 26,000 25,000 - 20% Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Cash credit & Demand loans Term Loans Advances (Rs Cr) Growth YoY (%) Bills purchased & bills discounted Source: Company; Sharekhan Research Source: Company; Sharekhan Research Deposits trend Asset Quality Movement 50,000 20.0 1200 4.0% 1000 17.0 3.0% 40,000 800 600 2.0% 14.0 400 30,000 1.0% 11.0 200 0 0.0% 20,000 8.0 10,000 5.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 GNPA (Rs Cr) NNPA (Rs Cr) Deposits (Rs Cr) Growth YoY (%) GNPA (%) NNPA (%) Source: Company; Sharekhan Research Source: Company; Sharekhan Research NIMs, Yields on Advances, Cost of Funds Return Ratios 6.0% 12.0% 2.5% 20.0% 2.0% 5.0% 18.0% 1.5% 4.0% 8.0% 16.0% 1.0% 3.0% 14.0% 0.5% 2.0% 4.0% 0.0% 12.0% Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 FY20E FY21E Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 NIMs (%) Cost of Funds (%) Yields on Advances (%) (RHS) ROA (%) ROE (%) (RHS) Source: Company; Sharekhan Research Source: Company; Sharekhan estimates August 08, 2019 38 Viewpoint Outlook We believe the accompanying vectors around growth indicate the sustainability and quality of the lender.