>CITY UNION BANK

Healthy business growth, robust fees, stable asset quality; Buy 

City Union Bank’s 1QFY13 profits were driven by modest net interest income, healthy fees and lower provisions. We retain a Buy as prudent loan growth, stable productivity and robust asset quality are likely to drive profitability and sustain an RoA of 1.7% over FY12-14. The high tier-1 capital and low proportion of stressed assets provide considerable
balance -sheet comfort.


 Healthy business growth, strong savings-deposit growth. Advances grew 33.2% yoy, faster than deposits at 25.2% yoy, increasing credit deposit by 447bps yoy to 74.9%. NIM fell 41bps yoy to 3.2%, led by a larger share of priority-sector loan disbursements (where yields are lower) and a 101-bp yoy fall in share of CASA to 17.5%. While current deposits grew slower (8.8% yoy), a sector-wide trend in 1QFY13, savings deposits grew a robust 25.6% yoy and comprise 61% of CASA (57% in 1QFY12).


 Robust fee-income, investments in branches continue. Fee income grew 26.1% yoy and improved 8bps yoy to 1.42% of assets. Cost-to assets rose 26bps yoy to 2% as the number of branches rose 10% yoy to 303. Investment in distribution is likely to persist, albeit in low-cost semi urban/ rural areas, since the bank has 79 branch licenses and aims to reach 500 branches by FY15. We expect the bank’s branches to see better operating leverage with cost-to-assets estimated at 1.7% over FY13-14.


 High proportion of secured loans, capital-raising plans. With fresh slippage of `450m (1.4% of loans), gross NPA rose 11% qoq. NPA coverage (excl. technical write-offs) fell 463bps qoq to 53.6%. Yet a high proportion of secured loans (97%) and a strong track record of asset quality are reassuring. Likely capital-raising in FY13 via a `2.5bn rights issue would improve the bank’s capital adequacy (tier-1 of 11.3%).


 Valuation. At our Sep’13 target, the stock would trade at 1.9x FY13e and 1.5x FY14e ABV. Our target is based on the two-stage DDM (CoE: 15.6%; beta: 0.8; Rf: 8%). Risk: higher-than-estimated increase in NPA.

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