City Union Bank's Q1FY19 revenue has improved by 6% yoy to Rs1,018.6cr. The bank’s NII for the quarter came at Rs374.8cr as against Rs342.4cr yoy, which is a growth of 9.5%. The bank has reported net profit of Rs161.6cr, which is 6% above our estimates as against Rs140.3cr reported in corresponding quarter last year. The beat on estimates was due to lower provisions. Its GNPA for Q1FY19 stood at 3.02% against 3.03% qoq, which has decreased by 1bps qoq. NNPA for the quarter were flat qoq to 1.7%.
Loan growth of 17% yoy in 1QFY19 was driven by retail loans and wholesale trader loans.
Loan growth was driven by retail loans (+22% yoy) and wholesale trader loans (+20% yoy). Growth in the two largest segments of MSME of agriculture loans stood at 17% and 13% respectively.
Provisions for the quarter has declined by 33.3% yoy to 77.7cr.
CASA ratio has been stable at ~24% over the last five quarters.
CUBK added Rs126cr in slippages into GNPLs in the quarter (15% qoq decline). NPA ratios were stable sequentially, while slippage ratio declined to 2.1% of opening loans in 1QFY19.
Management expects a slippage ratio of 1.75- 2.0% for FY19E (2.5% for FY18)
The PCR for the quarter stood at 65%.
Margins compressed 23bps yoy and 12bps QoQ to 4.2% in 1QFY19 due to pressure on lending yields (down 93bps yoy), excess liquidity and funding through market borrowings which come at a higher cost NIM for the quarter came at 4.24% down 12 bps qoq.
Key takeaways from the earnings call
Margins in the past 4-6 quarters have trended above the long term average by 50-70bps. Historically, margins have been in the range of 3.4-3.7% and management expects downward pressure going forward. NIM as of 1QFY19 stood at 4.2%.
Of the total loans, 93-95% are MCLR linked.
The bank currently has ~Rs1,500cr of surplus liquidity and hence has not raised deposit rates. Management expects increase in MCLR by ~25bps in August 2018 and there would also be an increase in deposit rates, but to a lesser extent.
Management expects muted treasury income in FY19E on account of unfavourable yield movement in government securities. Therefore, better NPL management and lower provisions will drive performance in FY19E.
CUBK added 2 branches in 1QFY19. The bank plans to add 50-75 branches in FY19E (including BC branches), implying acceleration in branch addition over the coming quarters.
Management has taken an enabling resolution for capital raising through a QIP to the tune of Rs500cr. This is done as a standard practice; the resolution will be used only if required.
Management has guided for loan growth of 18-20% and Slippage ratio of 1.75-2% for FY19E.
CUBK has had a mixed experience with stress in the SME segment. It has used the RBI dispensation to recognize MSME NPLs on a 180- dpd basis for 4 accounts (Rs19cr) and does not expect to use this dispensation for other accounts.
The bank has two stressed accounts with an exposure in excess of Rs50cr – one paper mill and one educational institution. The combined exposure in these two accounts stood at ~Rs150cr.
SMA-2 loan book has been constant over the last 4 quarters at ~4% of loans.
City Union Bank Ltd is currently trading at Rs. 181.15, up by 7.55 points or 4.35% from its previous closing of Rs. 173.60 on the BSE.
The scrip opened at Rs. 173.50 and has touched a high and low of Rs. 192.50 and Rs. 173 respectively. So far 18,66,927 (NSE+BSE) shares were traded on the counter. The stock is currently trading below its 50 DMA.
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