Buy City Union Bank; target of Rs 180: ICICI Direct

November 16
02:41 2017

ICICI Direct’s research report on City Union Bank

The bank’s earnings were slightly below estimates on higher provisioning. However, the overall performance was healthy PPP increased strongly at 35% YoY to Rs 320 crore. Such a traction was mainly led by health growth in NII at 18% YoY to Rs 355 crore with strong traction in other income Credit growth came in higher-than-expected at 14% YoY (highest in last four quarters) to Rs 25045 crore. Reported margins were maintained strong at 4.46% Asset quality witnessed pressure but was still under control with GNPA ratio at 3.07% vs. 3.05% in Q1FY18. Absolute GNPA was at Rs 780 crore. Fresh slippages were at Rs 147 crore (flat QoQ) The bank made higher-than-expected provisioning expenses of Rs 129 crore (highest in last several quarters) vs. estimate of Rs 107 crore However, such higher provisioning would help improve PCR but led to PAT being slightly below estimate at Rs 145 crore (up 17% YoY).


We expect PAT CAGR of 17.7% in FY17-19E to Rs 697 crore with RoEs at ~16% and RoAs at ~1.6%. To sustain this is remarkable, in the current environment. We continue to prefer CUB as it is well placed among regional players and comfortable on the capital adequacy front with tier I ratio at 15%. CUB has historically traded at a slight premium to other regional banks owing to better return ratios. We maintain our BUY recommendation and target price of Rs 180 with target multiple of 2.7x FY19E ABV. The bank seems to be in a better position vs. peers to leverage on the improving economic outlook as and when it happens. Strength in major operating parameters would help sustain valuations.

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