City Union Bank (CITUNI) | 151 Target : | 166 Target Period : 12 Months Steady Performance Sustains; Strong Margins

Result Update February 10, 2017 Rating matrix Rating : Buy City Union Bank (CITUNI) | 151 Target : | 166 Target Period : 12 months Steady performance sustains; strong margins... Potential Upside : 10% • PAT came in at | 126 crore, up 12% YoY higher than estimated | 113 What’s Changed? crore, mainly led by strong traction in net interest income (NII), up Target Unchanged 21.4% YoY to | 307 crore & sharp surge in other income rising 38% EPS FY17E Changed from | 8.5 to | 8.1 YoY to | 143 crore (high trading income) vs. estimate | 116 crore EPS FY18E Changed from | 10.1 to | 9.6 • Asset quality witnessed marginal deterioration but was still better Rating Unchanged placed relative to peers. Absolute GNPA increased 9% QoQ and 31% YoY to | 649 crore. Net additions came in at | 118 crore similar to Quarterly Performance last two quarters. GNPA, NNPA ratios increased to 3%, 1.7% from | crore Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) NII 307.0 252.8 21.4 301.2 1.9 2.7%, 1.6%, respectively. Provision surged to | 9196 crore from | 67 Other Income 142.8 103.3 38.2 104.2 37.1 crore QoQ, higher-than-expected, which led provision coverage ratio PPP 273.6 206.9 32.2 236.7 15.6 to rise to 62% from 60% PAT 126.6 113.0 12.0 123.7 2.3 • Credit grew ~12.5% YoY to | 21800 crore in line with estimate. Deposits grew 15.5% YoY to | 29986 crore, with the share of CASA Key Financials surging to 24% from 20.7% QoQ. This led to better NII with net | Crore FY15 FY16 FY17E FY18E interest margin (NIM) at 4.18%. Accordingly, the operational profit NII 807 981 1,090 1,236 increased 16% YoY to | 273 crore PPP 682 835 911 1,028 Strong regional bank; expect 15.7% CAGR in loans in FY16-18E PAT 384 445 484 573 City Union Bank is the oldest bank in the “old private sector bank” category with 100+ years of existence with continuous profitability and Valuation summary dividend payout. It is largely a south India oriented bank with a network of FY15 FY16 FY17E FY18E 528 branches of which 472 are in South India and 362 in Tamil Nadu P/E 23.2 20.0 18.4 15.6 alone. CUB’s business traction at 29% CAGR in FY06-13 has been higher Target P/E 25.8 22.3 20.5 17.3 than industry except in FY14-15 wherein business growth fell to 8.6% at P/ABV 3.6 3.2 2.9 2.4 | 17965 crore, focussing on quality rather than growth. We revised credit Target P/ABV 4.0 3.6 3.2 2.7 growth lower to 12.9% from 15.7% CAGR in FY16-18E to | 26843 crore. RoA 1.4 1.5 1.5 1.5 NIM above 3%+ for over decade; expect healthy levels to sustain ahead RoE 15.9 15.6 14.9 15.5 One of the commendable features of CUB is that it has been able to Stock data maintain NIMs of 3%+ for over a decade across economic cycles despite Market Capitalisation |8979 crore a low CASA base (~20% of total deposits). This is owing to the structure GNPA (Q3FY17) |650 crore of its loan book, which is focused on the SME/MSME segment (~56% of NNPA (Q3FY17) |371 crore loans) that is high yielding and wherein re-pricing is possible. Further, NIM (Q3FY17) 0.0 ~90% of the book is on a floating basis, which reduces interest rate risk. 52 week H/L 168 /80 We expect calculated NIM to stay healthy at >3% levels in FY17-18E. Networth | 3716 crore Face value | 1 Asset quality expected to remain resilient compared to peers DII Holding (%) 37.5 CUB’s philosophy of giving small ticket secured loans help control NPA. FII Holding (%) 11.9 Around 1:1 loan to collateral ratio was maintained with unsecured loans at 1% of loans. It did not go overboard on growth in the peak years of Price performance (%) 2007-08. It maintained 25-30% credit growth and improved its NNPA from 1M 3M 6M 12M 7-8% in the FY00 crisis to <1.0% in FY10 and maintained till FY13. Post City Union Bank 13.4 3.8 23.3 86.5 this, in Q3FY17, GNPA ratio was at 3%. We expect GNPA, NNPA ratios at South Indian Bank 12.6 1.1 7.7 25.1 2.6%, 1.3% to | 705 crore, | 336 crore, respectively, by FY18E. Federal Bank 24.1 8.2 31.2 80.9 Operational performance holding up well vs. peers; maintain BUY We expect PAT CAGR of 13.4% in FY16-18E to | 574 crore with RoEs at ~15% and RoAs at ~1.5%, which is remarkable to sustain in the current tough environment. We continue to prefer CUB as it is well placed among Research Analyst regional players and comfortable on the capital adequacy front with tier I Kajal Gandhi ratio at 14.4%. CUB has historically traded at a slight premium to other [email protected] regional banks owing to better return ratios. We maintain our BUY Vasant Lohiya recommendation and target price of | 166 with target multiple of 2.7x [email protected] FY18E ABV. The bank seems to be in a better position vs. peers to Vishal Narnolia leverage on the improving economic outlook as and when it happens. [email protected] Strength in major operating parameters would help sustain valuations. ICICI Securities Ltd | Retail Equity Research Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments NII 307 277 253 21.4 301 1.9 NII traction continued to be healthy with margins stable at 4.18% These margins seem unsustainable. The management has guided for full year margins NIM (%) 4.2 4.1 3.8 36 bps 4.2 -2 bps at 3.4-3.6% Within other income treasury income increased to | 79.3 crore from | 41.5 crore QoQ Other Income 143 116 103 38.2 104 37.1 led by a fall in 10 year G-sec yields by over 20 bps in Q3FY17 Net Total Income 450 393 356 26.3 405 11.0 Staff cost 80 83 63 27.0 77 4.4 Other Operating Expenses 96 94 86 11.5 92 4.5 PPP 274 217 207 32.2 237 15.6 Operational performance has sustained well Higher-than-expected provisions as slippages continued at Q2 levels, offset by higher Provision 92 62 65 41.8 67 37.3 other income PBT 182 155 142 27.9 170 7.0 Tax Outgo 55 42 29 89.7 46 19.6 PAT 127 113 113 12.0 124 2.3 PAT grew 12% YoY, better-than-expected as NII and other income beat estimates Key Metrics Slippages were | 118 crore similar to | 122 crore in Q2 and | 100 crore in Q1FY17. The incremental slippage was on account of a steel manufacturing account of | 44 crore, textile account | 7.85 crore, educational institution of | 6 crore with remaining GNPA 650 604 460 41.3 598 8.7 being small accounts spread across various industries NNPA 371 369 287 29.2 359 3.4 Provision coverage ratio improved QoQ to 62% vs 60% Outstanding restructured asset was flat QoQ at 0.9% of total credit. There is no Total Restructured assets 190 200 316 -39.8 187 1.4 pipeline of any accounts in the 5:25 scheme Source: Company, ICICIdirect.com Research Change in estimates FY17E FY18E (| Crore) Old New % Change Old New % Change Credit growth has been revised downwards to 9.6% for FY17 leading to lowered NII Net Interest Income 1,112 1,090 -2.0 1,309 1,236 -5.6 estimates Pre Provision Profit 933 911 -2.4 1,101 1,028 -6.7 NIM (%) 3.5 3.5 -3 bps 3.6 3.5 -12 bps High deposit growth with lower credit impacted margins PAT 508 484 -4.7 604 573 -5.2 Factored in higher provisions apart from lower NII reducing PAT expectation ABV (|) 52.5 51.7 -1.5 62.7 61.0 -2.7 Source: Company, ICICIdirect.com Research Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Credit growth (%) 11.6 17.2 9.6 16.3 15.2 16.3 Deposit Growth (%) 9.3 12.8 13.2 14.4 13.9 14.3 Higher savings deposit accretion due to demonetisation led to upward revision in CASA ratio (%) 19.2 20.4 21.2 21.5 20.7 20.9 CASA NIM Calculated (%) 3.2 3.5 3.5 3.5 3.5 3.6 Cost to income ratio (%) 43.7 39.9 40.8 40.8 40.2 39.2 GNPA (| crore) 336 513 651 705 610 666 NNPA (| crore) 233 323 389 336 367 290 Slippage ratio (%) 2.4 2.0 1.8 1.4 1.6 1.4 Continued slippages addition forced increase in slippage ratio assumptions Credit cost (%) 1.0 1.0 1.0 0.7 0.9 0.8 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Regional bank with focus on SME segment; expect 15.7% CAGR in loans CUB is a south India based small sized bank with a legacy of over 100 years. Based out of Tamil Nadu, it has a network of 528 branches with 472 branches concentrated in southern India and 362 branches in Tamil Nadu alone. CUB has a history of 100 years of profits and dividend payouts.

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