Stock Review: City Union Bank

 

 

The stock hits 52-week high on Wednesday, has trebled in the last one year

 

The City Union Bank's stock touched a 52-week high on Tuesday amid sluggish broader market. Over the last one year, the stock has earned good returns for shareholders. Its price has nearly trebled during the period, while the benchmark Sensex gained 22%.

   City Union Bank is one of the smaller banks in India. Notwithstanding its size, the bank is in the top league in terms of margins and asset quality.

   Currently, the bank has a network of 222 branches. It further plans to add 62 branches in the current financial year. An expanding branch network helps banks in increasing the base of low-cost current account and savings account (CASA) deposits. This, in turn, reduces its cost of funds. CASA balances formed 21% of the total deposits of City Union Bank at the end of the June quarter. Its management has indicated plans to increase its CASA share to 25% by the end of the current financial year. This looks feasible given its expansion plans.

   The bank reported a robust performance in the June quarter. Its bottomline grew by 40% compared to the year-ago period. This healthy growth was fuelled by a 26.7% growth in the loan book. A large part of the growth came from the increased demand for funds from textile companies and metal manufactures.

   Another important feature was its net interest margin (NIM). At 3.6% in the quarter, it was the highest in the last 12 quarters. NIM is a measure of the difference between the cost of borrowings and yield on loans, which reflects the profitability of a bank's lending operations. Given the fact that top Indian banks reported NIM in the range of 3.5-4% in the June quarter, City Union Bank's performance is commendable. Moreover, the bank has achieved this while maintaining a much lower share of CASA compared to its bigger peers.

   While the bank grew its advances at a high rate, its asset quality remained intact. Its net non-performing assets formed 0.5% of net advances at the end the June quarter as against 1.5% in the same quarter last year.

   At the Wednesday's closing price of 47.7, the stock traded at a price-to-book value of 2 and price-to-earnings ratio of 10.7. The stock is trading at its all-time high valuations. Its current valuations seem to fully reflect its high loan book growth and better asset quality.