Buy City Union Bank; target of Rs 240: ICICI Direct

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ICICI Direct's research report on City Union Bank

City Union Bank (CUB) reported steady operating profit of Rs 338 crore on the back of stable NII growth of 14.3% YoY at Rs 421 crore & strong other income growth of 22.6% YoY at Rs 147 crore led by higher recoveries from written off account. Margins remained flat QoQ at 4.4% as rising cost of fund was offset by increase in yield on advances. Credit growth remained consistent at 17.3% YoY at Rs 32673 crore, led by growth in agriculture & retail book by 19% & 18% YoY, respectively. Reclassification of certain business loan backed by commercial real estate a collateral impacted SME growth. Deposit growth was stronger at 17% YoY at Rs 38448 crore, highest in last 20 quarter on back of 25% YoY & 15% YoY growth in savings & current deposits. Accordingly, CASA ratio stood at 25.2%, up 100 bps YoY & 137 bps QoQ.

Outlook

The bank has consistently delivered healthy business growth along with a tab on asset quality. CUB has guided at maintaining RoAs >1.5%+ and RoE ~15%, going ahead, on the back of healthy credit growth of 18-20%, stable margins and controlled asset quality. We continue to prefer CUB as it is well placed among regional players and comfortable on the capital front with tier-I ratio at 15%. CUB has historically traded at a premium to other regional banks due to better return ratios and a consistency in earnings. We maintain our BUY rating and target price of Rs 240 (earlier Rs 225) valuing at a multiple of 2.6x FY21E BV.

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