Banking

City Union Bank: Corrections may present good entry points to investors

Read more at www.business-standard.com


With every disruption in the sector, whether asset quality-led or caused by a change in preference, the industry has reinvented itself to offer new products or to diversify into new territories. The 115-year-old Tamil Nadu-headquartered (CUB), however, is an exception. After starting as an outfit catering to small businesses, CUB remains committed to the segment and draws roughly 72 per cent of business from Tamil Nadu, and nearly 90 per cent from southern India. Being a small and medium enterprise (SME) centric bank, on a steady state basis it has drawn 35 per cent of its business from SMEs and about 15 – 17 per cent from the traders (see table), irrespective of the environment for SMEs.


Normally, the Street is wary of banks with a high concentration risk. CUB, however, enjoys preference with 18 out of 28 analysts polled by Bloomberg recommending ‘buy’ (8 ‘hold’ ratings). At 2.8x FY21 estimated book, the stock also trades at a premium to



larger peers such as Federal Bank and RBL Bank.


The asset quality, however, in the near-term may be a tricky factor. The gross non-gross performing asset (NPA) ratio at 3.44 per cent in Q2 is reasonably high even going by its past data, especially against FY19’s 3 per cent (CUB’s best year in the recent times), and may even touch 5 per cent in FY21 due to the loan recast. Yet, analysts at HDFC Securities say that going by CUB’s past record they are confident. CUB’s book is 99 per cent backed by security and this king of lending is its core principle. Also, lower exposure to traditional stressed sectors such as power and infrastructure and a strong relationship with borrowers support its asset quality.


Another comforting aspect are working capital loans, which account for 59 per cent of its loan book, and which according to HDFC Securities will keep slippages at acceptable levels. That said, one must be mindful that slippages for FY21 could increase from September quarter’s near-zero level to 3 – 3.5 per cent, while 5 – 6 per cent of loans under moratorium could come up for recast, thus pushing the gross NPA ratios for FY21 and FY22 to 5.2 per cent and 4.2 per cent, respectively.


The anticipated build up in asset quality stress may keep CUB stock muted for a while. On a year-to-date basis, CUB’s stock price is down 24 per cent. Considering that the stock is way off its all-time high, corrections may present an attractive entry point for investors.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Read more at www.business-standard.com

Show More

Related Articles

Back to top button