The brokerage remains long-term positive on the stock, given its strong capital position, stable management and robust core earnings.
Emkay Global has given a hold rating to City Union Bank with a 12-month target price of Rs 132. The share price moved down by -5.04 per cent from its previous close of Rs 136.80. The stock’s last traded price is Rs 129.90.
According to the brokerage, the bank’s loan book growth slipped to 4 per cent year on year, due to its continued conscious stance in SME loans and moderation in retail loans. City Union Bank sees a growth opportunity in the SME book of Rs 12 billion (out of eligibility of Rs 18 billion under the SME guarantee scheme). However, it would prefer to remain cautious in corporate growth.
Deposit growth also slowed down in Q4 to 6 per cent year on year / 2 per cent quarter on quarter, but CASA ratio improved 163 bps qoq to 25 per cent amid the flight of deposits from small/mid-size banks. NIMs were down 5 bps quarter on quarter to 3.9 per cent due to interest reversal on NPAs and sticky cost of funding. The bank has cut deposit rates, but the brokerage believed that elevated NPA formation may still weigh on margins in the near term.
Investment Rationale
The brokerage has cut its earnings estimates for FY21/22 by 39/27 per cent, factoring in lower credit growth, NIMs and higher LLP, given elevated asset quality pressure in its SME book. Factoring in a sharp earnings/multiple cut, the brokerage has lowered its rating on the bank to hold with a revised target price of Rs132.
However, it remains long-term positive on the stock, given its strong capital position, stable management and robust core earnings, which should help the bank reclaim its pre-Covid-19 superior RoAs (1.5 per cent in FY23) as asset quality pressures should recede by then. Key risks: Higher-than-expected NPAs from the SME/corporate pool.
Financials
For the quarter ended March 31, 2020, the company reported standalone interest income of Rs 880.60 crore, down -.34 per cent from last quarter Interest Income of Rs 883.60 crore and up 5.04 per cent from last year's same quarter Interest Income of Rs 838.34 crore. The bank reported net profit after tax of Rs -95.29 crore in the latest quarter.
Promoter/FII Holdings
FIIs held 20.79 per cent stake in the company as of March 31, 2020, while DIIs held 32.08 per cent and public & others 47.13 per cent.
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