In the last one year, shares of City Union Bank have fallen nearly 8 per cent against a gain of 22 per cent in the BSE Bankex index and a 12 per cent gain in the equity benchmark Sensex.
In a BSE filing post market hours on May 26, the bank said its profit after tax (PAT) for Q4FY23 rose 4 per cent year-on-year (YoY) to ₹218.04 crore against a profit of ₹208.95 crore in the same quarter last year. Its operating profit for the quarter, however, fell 5 per cent YoY to ₹417.04 crore from ₹439.85 in Q4FY22.
Net interest income (NII) for the quarter under review rose marginally by 3 per cent YoY to ₹514.26 crore.
The bank said its gross NPA as on March 31, 2023, reduced to 4.37 per cent from 4.70 per cent in the corresponding period last year. Net NPA decreased to 2.36 per cent from 2.95 per cent for the same period. As of March 31, 2023, the provision coverage ratio (PCR) improved to 69 per cent against 64 per cent last year.
Brokerages sound cautious
Most brokerage firms highlighted that the bank’s March quarter numbers were weak and the road ahead appears challenging.
Brokerage firm Kotak Institutional Equities maintained an ‘add’ call on the City Union Bank stock with a target price of ₹150, valuing the bank at about 1.3 times book value, and nearly 10 times FY2025 EPS (earnings per share) for RoEs (return on equities) moving closer to 15 per cent levels.
Kotak said although it maintained its ‘add’ rating on the stock, it would prefer the other regional banks at this stage.
Kotak highlighted City Union Bank had witnessed a de-rating of its own multiples in recent years and has significantly underperformed peers to reflect the relative weakness of its balance sheet.
“The bank is trading closer to Federal Bank, but still at a premium to other peers, which have demonstrated better performance,” said Kotak.
“The bank’s results for the quarter were weak on most counts: (a) impairment ratios are still high and improvement is slower compared with peers, (b) loan growth is weak, but not surprising, as the focus is mostly on strengthening the balance sheet, and (c) credit costs are still elevated, as this cycle has seen higher slippages and write-offs annually,” the brokerage firm highlighted.
“We expect weak revenue growth ahead. Tight cost control and an optimistic assumption of recovery from bad loans, as resolution gathers pace, can help keep operating profit growth faster than revenue growth, but we do acknowledge that there are risks to our estimates, given the inability to forecast recovery from written-off assets. A weak coverage ratio implies that the credit cost is likely to be higher in the medium term. Overall, we see a challenging FY24 for the bank,” said Kotak.
Brokerage firm Elara Capital maintained its ‘accumulate’ view on the stock with a target price of ₹145.
Elara said while City Union Bank has historically been one of the most profitable regional banks in India, the past two years have been difficult, with recovery being slower than most peers. The brokerage firm believes challenges for the bank will persist for a while and call for time correction.
Brokerage firm ICICI Securities downgraded the stock to a ‘hold’ from an ‘add’, with a target price of ₹140 as it believes the outlook for FY24 appears soft with the guidance of backend credit growth and continued pressure on NIM.
“We estimate credit growth at 13 per cent for FY24E and model a nearly 30bps YoY decline in calculated net interest margin (NIM). We are modelling slippages at 2.0-2.5 per cent for FY24E-FY25E with credit cost at 1.1-1.2 per cent as we build in a sharp rise in PCR to 52 per cent/ 60 per cent in the same period versus 47 per cent currently,” said ICICI Securities.
“Overall, we see FY24E/FY25E RoA (return on assets) at nearly 1.3 per cent (1.46 per cent for FY23) and RoE (return on equity) at nearly 12 per cent. We thereby assign a target multiple of about 1.1 times FY25E ABV (adjusted book value), which is lower than the potential RoA, due to likely moderation in loan growth/NIM and relatively higher levels of stress (net-NPA plus restructured loans) versus peers,” said ICICI Securities.
Brokerage firm Nirmal Bang downgraded the stock to an ‘accumulate’ with a target price of ₹151 on account of a weak growth outlook.
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Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 29 May 2023, 01:07 PM IST