With every disruption in the banking 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 City Union Bank (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.