Tactics of City Union Bank
Incorporated in 1904, City Union Bank Ltd (CBUK) is the oldest private sector bank in India. Headquartered at Kumbakonam, Tamil Nadu, the bank went public in 1998. The primary focus of the bank is lending to micro, small and medium enterprises (MSME), retail, and wholesale trade with granular asset profile including providing short term and long-term loans to agricultural sector.
CBUK has now a strong network of 525 computerised branches and 1292 ATMs which is spread throughout India. In December 2006, Larsen & Toubro bought ten per of the bank.
City Union Bank has posted results despite conservative provisions towards security receipts and increasing coverage. The bank’s book continues to be concentrated in Tamil Nadu with contribution of 64 per cent of loans. This was led by a resilient NIM performance, healthy fees surge of 20 per cent quarter over quarter (QoQ), and moderation in operating expenses growth increase of 16 per cent YoY.
Strong loan growth in MSME
CBUK’s core segment MSME, which is 34 per cent of loans, has surged15 per cent QoQ and stood at Rs 8,220 crore. Despite the increase in MSME, the overall loan growth remained flat sequentially as other segments decline on QoQ basis.
The banks’ loans were flat at Rs 24,000 crore, with a sharp drop of 15 per cent in agriculture segments and fall of 12 per cent in retail traders. The drop in retail traders is attributable to higher levels of un-utilised limits in the cash-credit segment of 22 to 23 per cent.
The banks’ focus segment of traders de-grew 5 per cent sequentially and now forms 17 per cent of loans whereas the large corporate segment, which is 7.4 per cent of loans, was flat at Rs 1,780 crore; the non-agriculture gold loans jumped 7 per cent QoQ.
With the growth drivers such as capital to risky asset ratio (CRAR) and weak PSBs in place, the loan CAGR at 18 per cent over the 2017-19 period is maintained. The management has continued its loan growth guidance in the range of 15 to 18 per cent for the current financial year 2018. The branch expansion could be curtailed to 20 to 25 as systemic loan growth remains tepid.
Marginal rise in slippages, impaired assets stable
For the quarter, slippages were at Rs 145 crore and elevated at 2.45 per cent per annum with the largest non-performing asset (NPA) having exposure at Rs 93 crore from iron and steel sector.
Nonetheless, the slippages remain elevated, the overall stress levels were stable on QoQ including net NPA and restructured book at 2.3 per cent.
The management has indicated that 15 to 20 per cent of total non-performing assets (NPAs) are from accounts with less than Rs 50 lakh and 50 per cent of NPA’s are from accounts with more than Rs 10 crore.
The management has maintained its guidance of slippages at 1.75 to 2 per cent in the fiscal 2018. It has also maintained its list of stressed accounts under watchlist at two to four accounts, having exposure of more than Rs 50 crore each with one account expected to slip to NPA in the second quarter of 2018.
However, lower proportion of the restructured book, high impaired assets in the stressed segment, coupled with gradual improvement provides comfort on asset quality. Over the upcoming 2017-19, higher slippages are assumed at average 1.8 per cent, which provides an upside risk and expects a positive surprise. The trends in the recovery upgrades are key metrics.
On the NIMs front
The fee income saw a robust growth of 27 per cent YoY to Rs 69.7 crore, 1.2 per cent of loans; this was driven by an increase in service charges and fees. The treasury gains grew nine per cent QoQ to Rs 39 crore; strong growth owing to robust fee growth and higher treasury gains.
Stable book growth and higher-than-estimated NIMs led to strong NII growth of 22 per cent YoY to Rs 340 crore. The non-interest income (NII) hiked eight per cent QoQ, led by higher treasury gains and the non-interest income includes Rs 11 crore towards interest on tax refund.
More than 90 per cent of CUBK’s book is linked to marginal cost of funds based lending rate (MCLR). The gross non-performing assets were marginally higher at Rs 735 crore; surged 32 per cent on year over year basis and recovery and upgrades of Rs 43 crore.
Over the last several quarters, there was expectation that net interest margins will compress. However, CUBK continued to pleasantly surprise on the NIM front with an improvement of 27bps QoQ to 4.47 per cent. This was driven by a drop in CoF 18bps, even as CD ratio dipped 110bps QoQ and steady yields, while loan growth and CASA ratio were stable QoQ.
Owing to the resilient performance, the NIM assumptions are marginally improved to 3.9 per cent and provide a cushion to the estimates. The management believes that NIMs are not sustainable and will trend downward with a pressure on yields
C-I improves
With a healthy beat in core earnings and higher non-interest income, CUBK’s core cost-income (C-I) ratio improved 600bps quarter over quarter (QoQ) to 41.2 per cent, which is the lowest in last 22-quarters.
With healthy NIM performance and controlled operating expenses (opex), a stable core C-I of 43.3 per cent is factored in the estimates of 2019, which provides a cushion to earnings. After the one-offs in fourth quarter, C-I ratio moderated to 37.8 per cent down 542bps sequentially. For fiscal 2018, the management has guided for a C-I ratio in the range of 40 to 42 per cent.
The bank’s opex de-grew four per cent QoQ, driven by a six per cent drop in other opex. In the last quarter of 2017, CUB reported higher opex due to repairs and maintenance cost. The management hinted at an impact of R1 150-180mn owing to GST-related issues.
CASA stable QoQ
The deposits growth moderated to nine per cent YoY with strong growth in current account savings account (CASA) ratio being stable QoQ at 23 per cent. Consequently, CASA ratio dipped merely 8bps QoQ. On QoQ basis, sequentially, SA was stable and remained flat, and CA grew two per cent.
Conservative Provisions
CUB conservatively provided Rs 30 crore towards security receipts anticipating future haircuts on outstanding security receipts. The bank has guided for additional provisions of Rs 50 to 60 crore in the next three quarters. CBUK has received repayments of Rs 1.4 crore in security receipts. During the quarter, there were no slippages in the restructured book or sale to asset reconstruction companies (ARC).
Non-tax provisions were 64 per cent higher QoQ at Rs 12 lakh with Limited Liability Partnership (LLP) at Rs 86 crore. With slower than-anticipated recoveries and upgrades that are key monitorables, for 2017-19 period, non-tax provisions of 1.12 per cent is taken in account. The provision coverage ratio (PCR) spiked 100bps QoQ at 62 per cent.
The outstanding security receipts (O/S SR) stood at Rs 345 crore, which is 1.5 per cent of loans and for which CUBK has provided Rs 73 crore. With no incremental restructuring during the quarter, and payments of Rs 1.4 crore, the outstanding restructured book dipped at Rs 133 crore, which is 55bps of loans and the restructured book remains lower compared to its peers.
The Verdict
CUBK’s has asset franchise, superior NIMs and lower impaired assets in its kitty. Although the bank has addressed concerns on asset quality and costs to a certain extent, an uptick in growth will be keenly eyed. Its well-capitalised balance sheet and weak regional competition amongst PSBs give CUBK an opportunity to revive growth.
An astute management, healthy margins, proactive provisions towards security receipts and a superior return on assets (RoA) profile are additional virtues. In the short-term, expected improvement in growth trends and receding asset quality pain will keep the stock buoyant.