City Union Bank: Asset quality, retail play key to City Union Bank’s growth

ET Intelligence Group: The shares of City Union Bank have fallen by 11% over the past month, underperforming the 1% drop in the BSE Bankex, following higher provisioning, margin pressure and declining deposits from the current account and savings account (CASA) route, which raised the cost of funds. However, the country’s oldest private sector bank has shown a gradual uptick in loan book and improvement in asset quality, prompting analysts to raise the target price by over 9%.

The Kumbakonam-based bank offers loans to the MSME (micro, small and medium enterprises), retail, wholesale and agriculture segments. The bank’s advances grew by 15% to ₹50,409 crore while deposits rose by 11% to ₹58,271 crore year-on-year at the end of December 2024. MSME and agriculture loans accounted for more than 42% and 18% of the total loan book, respectively. The bank’s activities are concentrated in Tamil Nadu, which has 65% or 533 of the total 822 branches in the country and contributed 73% to its business. The bank has been expanding in other regions, which has reduced the branch concentration in Tamil Nadu from 69% four years ago.

Apart from regional concentration, another weakness for the bank is the lower concentration of CASA in total deposits at 27.7%, as of December 2024, which keeps the cost of funds elevated. The bank’s cost of funds increased to 4.8% as of December 2024 from 3.9% as of March 2022, while net interest margin (NIM) shrank to 3.6% from 4%. The bank’s provisioning coverage ratio increased to 77% in the December quarter from 71% a year ago.

While the gross non-performing assets (GNPA) ratio looks elevated, the bank has been showing a gradual improvement in asset quality since the June 2023 quarter. Its GNPA fell to 3.4% in the December quarter from 4.5% a year ago and 4.9% in the June 2023 quarter.

The bank reported double-digit year-on-year growth in income and profits in the December quarter. Net interest income grew by 14% to ₹587.7 crore while net profit rose by 13% to ₹286 crore.

In November 2024, credit rating agency Icra revised the outlook for the bank to “positive” from “stable”, citing its expectation that asset quality, solvency and profitability would remain comfortable in the near term.Elara Capital in a recent report highlighted that the bank’s investments in strategic changes, including revamping the retail sales team and digital transformation, will drive the future narrative.”We believe operational parameters are starting to turn as changes made by CUBK are starting to take shape,” said the brokerage. It revised the stock’s target price to ₹205 from ₹188 earlier, implying a target price-book multiple of 1.4.