3QFY20 Result Update

City Union Bank

PAT growth now in single digit
13 February 2020

Jai Mundhra Bhavik Shah

Research Analyst Research Analyst
[email protected] [email protected]
+91-22-4031 7106 +91-22-4031 7173

This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
Prepared for B&K - Sales & Research Team
3QFY20 Result Update

City Union Bank

CMP (Rs): ) 223 Market cap. (Rs bn): 163 Target price (Rs): 190 Maintain Hold

First Cut Feel of the Results

• Pulled down by weak loan growth and elevated provisioning, City Union bank reported 3QFY20 PAT at
Rs 1.94 bn. The PAT growth has decelerated to single digit and at 8% YoY, it is the lowest in the last 23
quarters.
• Loan growth has decelerated to ~10% YoY from 18% YoY last year. NIMs have improved 5 bps QoQ but are
down 45 bps YoY to 3.96%.
• Slippages are higher QoQ, as expected. Recovery / upgrades are strong and hence rise in GNPA is
contained.
• The bank expects the tax rate to stabilize at ~18% under the new regime.

Financial highlights Key variables

(Rs mn) 3QFY19 3QFY20 YoY (%) 2QFY20 QoQ (%) Improvement on (%)

Interest Earned 9,666 10,609 9.7 10,368 2.3 B&K est. Consensus
NII (2.0) (1.0)
Interest Expended 5,485 6,336 15.5 6,253 1.3
Operating Profit (6.1) (11.1)
NII 4,181 4,273 2.2 4,115 3.8
Adj PAT 5.3 2.2
Other Income 1,198 1,424 18.8 1,950 (27.0)
FY19 FY20E FY21E
Total Income 10,865 12,032 10.7 12,318 (2.3)
Valuations
Total Net Income 5,379 5,696 5.9 6,065 (6.1) P/ABV (x) 3.7 3.2 2.8
Staff Expenses 927 1,134 22.2 1,131 0.2 PER (x) 23.9 21.4 20.6
Other Op Exp 1,383 1,479 6.9 1,469 0.6 Div./Yield (%) 0.1 0.2 0.3

Operating Profit 3,069 3,084 0.5 3,465 (11.0) Key Ratios

NIM (%) 4.0 3.7 3.7
Provisions 788 810 2.9 1,080 (25.0)
ROA (%) 1.6 1.6 1.5
Provision for tax 500 350 (30.0) 450 nm
ROE (%) 15.2 14.8 13.5
Adjusted Profit 1,781 1,924 8.0 1,935 (0.6) Book Value 65.5 75.3 85.4
EPS 2.4 2.6 7.8 2.6 (0.4) Adj. Book Value 60.2 69.1 78.9

Price to Adj. Book (1 year forward) Relative performance

3.5 250
3.0 240
2.5 230
2.0 220
1.5 210
1.0 200
0.5 190
180
0.0
17-Nov-19
25-Nov-19
03-Dec-19
11-Dec-19

04-Jan-20

05-Feb-20
24-Oct-19
01-Nov-19

28-Jan-20

13-Feb-20
19-Dec-19
27-Dec-19

20-Jan-20
30-Sep-19
08-Oct-19
16-Oct-19

09-Nov-19

12-Jan-20
Dec-12

Dec-15

Dec-18

Feb-20
Nov-14
Mar-12
Aug-12

Feb-14

Nov-17
May-13
Sep-13

Jun-14

Mar-15
Aug-15

May-16
Sep-16
Feb-17
Jun-17

Mar-18
Aug-18

May-19
Sep-19

Price/Book (x) Mean

+1 std dev -1 std dev City Union Bank (Actual) Sensex

2
This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
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3QFY20 Result Update
City Union Bank

Is it in the Price?
The growth has moderated sharply while the reported PAT growth is the lowest in the last 5-6 years.
Slippages are higher QoQ though on expected lines, while recoveries are healthy. We estimate a downward
revision in the consensus core profitability. We expect the stock to decline based on these numbers.
Connecting the Dots
Growth moderated to multi-quarters low; outlook still uncertain: Overall growth continued its
moderating trajectory and decelerated to ~10% YoY from 18% YoY last year. On QoQ basis too, growth
remained weak at up 2%. The fall is driven by the lower utilization of the CC/OD limits by the borrowers as
well as continued cautious stance of the bank to choose quality (over growth) in the current uncertain
environment. Optically, there is huge jump in its exposure towards commercial real estate (up 61% YoY
and 6% QoQ) but this is predominantly due to re-classification of the borrower accounts from MSME to
CmRE, based on collateral. The bank believes that the economic revival has not been to the extent, it has
envisaged earlier. Historically, the 4Q has been seasonally strong and hence there should be some revival
in 4Q as well. In the near term, the bank aims to keep credit growth at 300-500 bps higher than the system
growth. We further cut our FY20 growth estimates to ~10% and expect ~15% growth for FY21E.
NIMs uptick but trajectory weak; CASA falls: The broad trajectory of the NIMs has been weak though
3QFY20 saw some marginal improvement in reported NIMs, partly aided by rise in LDR. NIMs increased
5 bps QoQ to 3.96%. The bank has been very conservative in cutting MCLR so far – 1 yr MCLR rates have
declined only 15 bps since August 2019 and hence is an added risk on loan yields. The bank maintains
that the pressure on yields / spreads will continue though it believes that it has further scope for LDR
improvement, which should aid reported NIMs. After sharp decline in FY20E, we factor-in largely stable
NIMs for FY21E.
Core operating profits decline YoY: Treasury gains were strong YoY though were lower on QoQ basis as
2QFY20 was exceptionally strong. Opex growth was elevated at 13% YoY, led by staff costs. Staff cost jumped
22% YoY and the bank clarified that a large part of incremental expenses was due to bonus payment,
retirement provisioning etc. Strong opex coupled with weak revenue growth led to a spike in reported cost
income ratio by 290 bps YoY to 45.9%. Reported operating profits was flat YoY, however core operating
profits (ex-treasury) declined 7% YoY. This is the second consecutive quarter of negative growth in core
operating profits.
Slippages elevated but recovery strong; PCR stable: Slippages were elevated at Rs 2.29 bn and included
a lumpy stressed account - Saraswati Udyog (Rs 0.7 bn). Positively, recovery / upgrades were robust at Rs
1.3 bn. Upgrades included 1 lumpy educational institute (Rs 0.6 bn) which was downgraded to NPA in 1QFY20,
as the bank has recovered the overdue portion. Hence, overall GNPAs rise was contained at 4.4% QoQ; ratio
up 9 bps to 3.5%. PCR has inched-up marginally by 18 bps to 45.2%. Net NPAs are now 1.95% (up 5 bpsQoQ).
O/s restructured stands higher QoQ at ~Rs 2.0 bn (60 bps of loans). The bank is seeing good traction in
repayment from SR book – saw Rs 179 mn recovery in 3Q and Rs 260 mn in 4Q so far. The SMA 2 book, as per
the bank is manageable and there is no alarming rise QoQ. However, the bank commented that slippages
are likely to remain elevated at around current levels due to not-so-good business environment.
Outlook and Recommendation
The bank has strong management pedigree and a superb track record of delivering strong and steady
RoAs. However, the business seems to be undergoing a rough patch with slowing growth (10% YoY now)
and moderating NIMs (below 4.0% now) clearly leading to pressure on profitability (3QFY20 PAT growth at
~6 years low). We estimate single digit profit growth for FY21E given headwinds on growth / NIMs. Despite

3
This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
Prepared for B&K - Sales & Research Team
3QFY20 Result Update
City Union Bank

noise on MSME asset quality, the strong track record and prudent underwriting provide comfort and
hence asset quality should largely hold-up. Overall, the bank should still deliver 1.5% RoA and ~14% RoE but
premium valuations at 2.8x FY21ABV leave little margin of safety. Maintain Hold.
Con-call highlights
Asset Quality
• Slippages were elevated at Rs 2.29 bn and included a lumpy stressed account - Saraswati Udyog (Rs
0.71 bn). The bank does not see quick resolution here. The resolution would be auction and could take
time.
• During the start of the fiscal, the bank anticipated the economy to revive post 2QFY20. However, taking
cognizance of current economy environment, the bank indicated the propensity of things getting
better is still tighter. Hence, guided for broadly similar run-rate of slippages in the near-medium term.
• Recovery / upgrades were robust at Rs 1.28 bn and included recovery from one lumpy educational /
medical institute of ~Rs 0.6 bn which was downgraded to NPA in 1QFY20. The borrowers has re-paid Rs
100 mn to the bank and hence there is no overdue now.
• Good traction in SR repayment. O/s Security book stands at ~Rs 1.6 bn (0.5% of loans). The bank has made
no fresh sale to ARC on SR in 3QFY20. In 3QFY20, the bank recovered ~Rs 179 mn from its SR book against
which the bank had investment write-back of ~Rs 80 mn. Further, till date in 4QFY20, recovery from SR
has been ~Rs 260 mn.
• The bank did not explicitly give out SMA-2 numbers. However, indicated the increase in the SMA-2
portfolio isn’t alarming.
• Standard Restructured book stands at Rs 2 bn (0.6% of loans).
Business & Others
• Loan book grew by ~10% YoY. The bank indicated its trend has generally been to grow at 3-5% above
industry growth. Therefore, it indicated to remain within the band with system growth at ~7% YoY as on
3QFY20.
• The bank further indicated ground level economic conditions for MSME customers continue to remain
weak with bleak outlook of near term recovery. Under the current economic scenario, it would prefer to
rationalise growth only to better rated customers where asset quality outlook is healthy.
• NIMs improved by 5 bps QoQ to 3.96% mainly due to improvement in C/D ratio by 266 bps QoQ to ~83.7%.
The bank guided for NIMs to remain under pressure given competitive pressure on yields as most of
the banks in system are sitting on surplus liquidity. However, the bank alluded there does lie some
headroom for uptick in NIMs through improvement in C/D ratio by ~3-4% from 83.7% now.
• The bank has been very conservative in cutting MCLR rates and has only recently cut 1 Yr MCLR by 15 bps
(to 9.0%) since August 2019.
• Cost of deposits reduced by 8 bps QoQ to 6.17% in 3QFY20. The reduction in CoD is underpinned by ~50-
60 bps deposit rate cut by bank in the fiscal so far. The bank doesn’t expect any significant reduction in
CoD hereon as the avg. rate on the deposit book has broadly moderated to current renewal rates.
• The bank would further face some downward pressure on NIMs when loans to medium enterprises
(~25-30% of loans) come up for renewal/incremental disbursement as they would be linked to the
external benchmark (as mandated by RBI). However, there is not much risk as the repo rates seems to
have bottomed-out and are likely to remain stable.

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Prepared for B&K - Sales & Research Team
3QFY20 Result Update
City Union Bank

• Operating expenses were up 13% YoY mainly due to increase in staff expenses by 22% YoY. The bank
indicated much of the increase in staff expenses is led by incremental provisioning of ~Rs 100-150
mn towards ex-gratia, leaves encashment and related future employee benefits based on actuarial
valuations.
• Shifting to the newer tax regime, helped bank save ~Rs 0.6 bn on its tax expense for 9MFY20. The bank
indicated going forward overall tax rate would stabilise at ~18%.
• The bank mentioned it is working hard to maintain its RoA and RoE trajectory. The levers that would aid
these efforts would include tax rate cut benefit, recovery efforts and some 3-4% headroom available to
improve LDR indicating relatively better NIMs.

Key Ratios & Trends

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Loans Rs mn 257,370 278,528 278,524 294,251 303,220 326,733 317,439 327,603 333,030
Loans YoY 19.4 16.9 17.0 17.5 17.8 17.3 14.0 11.3 9.8
CASA % 22.3 24.2 23.9 23.6 23.9 25.2 23.4 24.7 23.3
NIM % 4.41 4.36 4.24 4.32 4.41 4.40 4.11 3.91 3.96
Slippages (Rs mn) 1,324 1,482 1,259 1,362 1,657 2,044 1,999 2,003 2,295
Slippges % 2.5 2.5 2.1 2.2 2.6 2.9 2.9 2.7 3.0
Restructured (O/s) % 0.0 0.0 0.0 0.0 – 0.2 0.2 0.4 0.6
SR (O/s) % 0.9 0.8 0.7 0.6 0.6 0.5 0.6 0.5 0.5
Tier I % 14.5 15.8 15.6 14.7 14.4 15.0 15.2 15.0 14.9
ROE Decomposition
NII 3.9 3.8 3.8 3.9 4.0 3.8 3.6 3.5 3.5
Other Income 0.9 0.9 1.1 1.0 0.9 1.1 1.0 1.0 0.8
Opex 2.1 2.0 2.0 2.2 2.2 2.1 2.0 2.2 2.2
PPOP 3.2 3.0 3.0 2.9 2.9 3.1 3.1 2.9 2.6
Provsioning Cost 0.9 0.9 0.8 0.7 0.8 0.8 1.0 0.9 0.7
PBT 2.3 2.1 2.2 2.2 2.2 2.3 2.1 2.0 1.9
ROA 1.7 1.6 1.6 1.7 1.7 1.6 1.6 1.6 1.6
ROE 15.8 14.9 15.2 15.3 15.6 14.8 15.1 15.2 14.6
Source: Company, B&K Securities

CASA Composition

(%) 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20
CA 7.3 8.5 8.2 7.9 7.2 8.4 7.3 7.8 7.1
SA 15.0 15.7 15.7 15.8 16.6 16.9 16.1 16.9 16.3
CASA 22.3 24.2 23.9 23.6 23.9 25.2 23.4 24.7 23.3
Source: Company, B&K Securities

5
This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
Prepared for B&K - Sales & Research Team
3QFY20 Result Update
City Union Bank

Movement of GNPA

(Rs mn) 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20
Gross NPA (Opening Balance) 7,804 8,598 8,566 8,511 8,479 8,919 9,771 10,762 11,354
Fresh Addition 1,324 1,482 1,259 1,362 1,657 2,044 1,999 2,003 2,295
Recovery 389 579 498 554 461 467 368 656 302
Write-off 22 845 695 736 620 589 528 624 518
Total Reduction 530 1,514 1,313 1,394 1,217 1,193 1,007 1,411 1,795
Gross NPA (Closing Balance) 8,598 8,566 8,511 8,479 8,919 9,771 10,762 11,354 11,854
Net NPA (Closing Balance) 4,478 4,748 4,735 4,978 5,276 5,915 6,000 6,241 6,494
Source: Company, B&K Securities

Asset Quality Ratios

(in %) 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20
Gross Slippage 2.1 2.1 1.8 1.9 2.2 2.5 2.5 2.4 2.8
Gross NPA 3.30 3.03 3.02 2.85 2.91 2.95 3.34 3.41 3.50
Net NPA 1.74 1.70 1.70 1.69 1.74 1.81 1.89 1.90 1.95
Provision Coverage 47.9 44.6 44.4 41.3 40.8 39.5 44.3 45.0 45.2
Provision Coverage 65.0 64.0 65.0 65.0 65.0 63.0 65.0 65.0 65.5
(incl. technical w/o)
Source: Company, B&K Securities

Yield, cost and margin

(in %) 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Yield on advances 10.86 10.86 10.96 11.07 10.97 10.76 10.73
Yield on funds 9.00 8.94 9.13 9.15 9.02 8.68 8.67
Cost of deposits 6.15 6.07 6.17 6.27 6.27 6.25 6.17
Cost of funds 5.21 5.10 5.18 5.24 5.37 5.23 5.18
NIMs 4.24 4.32 4.41 4.40 4.11 3.91 3.96
Source: Company, B&K Securities

Major shareholders (%) Relative to Sensex 3 Years

Sep 19 Dec 19 Change 300

250
Promoters 0.0 0.0 0.0
200
GOI 0.0 0.0 – 150
100
FIIs 22.9 22.6 (0.2)
50
MFs 25.6 26.2 0.6
0
Apr-18

Dec-19
Dec-16

Oct-18
Jan-19

Oct-19

Feb-20
Nov-17

Jul-19
Mar-17

Jul-17

Feb-18

Jun-18
Aug-18

Mar-19
May-19
May-17

Sep-17

BFSI's 4.4 4.4 0.0

Public & Others 47.2 46.8 (0.4)

City Union Bank (Actual) Sensex
Pledge 0.0 0.0 0.0

6
This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
Prepared for B&K - Sales & Research Team
3QFY20 Result Update
City Union Bank

Income Statement Key ratios

Yr end 31 Mar (Rs mn) FY19 FY20E FY21E FY22E Yr end 31 Mar FY19 FY20E FY21E FY22E

Interest income 37,672 41,988 47,017 53,994 Valuation ratios (Rs)

Interest expense (21,557) (25,154) (28,523) (32,781) Adjusted EPS 9.3 10.4 10.8 12.0

Net interest income 16,115 16,834 18,494 21,213 BVPS 65.5 75.3 85.4 96.6

Growth (%) 12.7 4.5 9.9 14.7 Adjusted Book NAV/share 60.2 69.1 78.9 90.1
PER (x) 23.9 21.4 20.6 18.6
Non-interest income 5,144 6,755 6,707 7,587
Price/Book (x) 3.4 3.0 2.6 2.3
Operating income 21,259 23,589 25,201 28,800
Price/Adjusted book (x) 3.7 3.2 2.8 2.5
Operating expenses (8,859) (10,168) (11,761) (13,673)
Dividend Yield (%) 0.1 0.2 0.3 0.3
- Staff expenses (3,644) (4,383) (5,060) (5,857)
Du-Pont ratios
Pre-provisions profit 12,400 13,421 13,440 15,127
NII/Avg. Assets (%) 3.8 3.5 3.5 3.5
Core operating profit 12,074 11,621 12,450 14,137
Non-int. income/Avg Assets 1.2 1.4 1.3 1.2
Growth (%) 16.1 (3.8) 7.1 13.5
- Fee income/Avg Assets 1.1 1.0 1.1 1.1
Provisions & Contingencies (3,151) (3,955) (3,751) (4,410)
- Trading gains/Avg Assets 0.1 0.4 0.2 0.2
Pre-tax profit 9,249 9,467 9,689 10,717
Cost/Avg Assets 2.1 2.1 2.2 2.2
(before non-recurring items)
Non-tax Provisions/Avg Assets 0.7 0.8 0.7 0.7
Pre-tax profit 9,249 9,467 9,689 10,717
Tax Provisions/Avg Assets 0.6 0.4 0.3 0.3
(after non-recurring items)
ROA (%) 1.6 1.6 1.5 1.4
Tax (current + deferred) (2,420) (1,799) (1,744) (1,929)
Leverage 9.5 9.2 9.0 9.1
Net profit 6,829 7,668 7,945 8,788
ROE (%) 15.2 14.8 13.5 13.1
Adjusted net profit 6,829 7,668 7,945 8,788
Balance Sheet ratios (%)
Growth (%) 15.3 12.3 3.6 10.6 Loan growth 17.3 9.6 14.8 15.9
Net income 6,829 7,668 7,945 8,788 Deposit growth 17.0 12.1 12.5 15.5
Loans/Deposits 85.0 83.1 84.7 85.0
Balance Sheet Investments/Deposits 20.1 19.9 18.8 18.7
CASA ratio 25.2 26.0 26.3 26.0
Yr end 31 Mar (Rs mn) FY19 FY20E FY21E FY22E
Profitability ratios (%)
Cash and balance 29,633 35,842 39,338 45,402
NIMs 4.0 3.7 3.7 3.7
with RBI/Banks
Interest spread 3.5 3.2 3.2 3.2
Investments 77,122 85,760 91,252 104,927
Yield on advances 10.7 10.5 10.5 10.5
Advances 326,733 358,007 411,009 476,287
Cost of deposits 5.9 6.0 6.1 6.1
Interest earning assets 433,488 479,609 541,600 626,616
Efficiency/other P/L ratios (%)
Fixed assets (Net block) 2,500 2,757 3,056 3,487
Non-int. income/Net income 24.2 28.6 26.6 26.3
Other assets 16,600 19,905 21,488 23,381
Trading income/Net income 1.5 7.6 3.9 3.4
Total assets 452,589 502,271 566,144 653,484
Cost/Income 41.7 43.1 46.7 47.5

Asset quality ratios (%)
Deposits 384,479 430,984 485,016 560,155
Gross NPLs 3.0 3.4 3.4 3.3
Other interest bearing liab. 4,809 6,111 6,712 7,374 Net NPLs 1.8 1.9 1.7 1.5
Total Int. bearing liab. 404,446 446,933 503,419 582,530 Net NPLs/Net worth 12.0 12.2 11.2 9.9
Other liabilities and prov. 15,157 9,837 11,691 15,001 Loan provisions/Avg loans 0.9 1.2 1.1 1.1
Share capital 735 735 735 735 Provisions cover 39.5 45.0 50.0 55.0
Reserves & surplus 47,408 54,604 61,990 70,220 Capitalisation ratios (%)
Shareholders’ funds 48,143 55,338 62,725 70,954 Tier I cap.adequacy 15.0 15.3 15.2 14.9
Total equity & liabilities 452,589 502,271 566,144 653,484 Total cap.adequacy 15.6 15.8 15.6 15.3

7
This document is being provided for the exclusive use of JIGAR SHAH at QUEST INVESTMENT ADVISORS PVT LTD
Prepared for B&K - Sales & Research Team
3QFY20 Result Update
City Union Bank

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securities described in this report must be effected through Enclave Capital (19 West 44th Street, suite 1700, New York, NY 10036. Tel No: (646) 454 8600).

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