Stock Review: CITY UNION BANK

Bank's high-yielding loan portfolio and superior returns matrix should interest long-term players

 

South-based, City Union Bank (CUB) is among the few banks across the world that has remained profitable and paid an annual dividend since inception. The bank stands out from the rest due to its SME customer profiling and loan product mix resulting in higher net interest margin (NIM). Long-term investors should catch CUB young for maximum profit.

BUSINESS & GROWTH DRIVERS

City Union Bank (CUB) is one of the oldest south-based, small-sized banks. It operates 236 branches with 209 concentrated in southern India. The bank's competitive edge lies in its loan portfolio which is tilted towards high interest yielding working capital loans to SME customers.

FINANCIALS

CUB has witnessed steady business growth of 27.9% over FY05-11. The bank has sufficient headroom to push up its advances growth in future due to its low credit to deposit ratio of 72%.

The bank's deposits grew at 31% CAGR over FY06-11 with accretion of core retail term deposits.

Despite a low CASA ratio of almost 20%and a rising interest rate regime, the bank has managed to maintain its Net Interest Margin at 3.64% as of March 2011 This is because almost 80% of its loan book comprises of lower duration, high-yielding working capital loans. These are on a floating rate basis that enables the bank to re-price its loan book frequently. CUB does not have any asset liability mismatch as well.

The bank has been successful in bringing down its gross non-performing assets (GNPA) to 1.3% in the first quarter of FY11 from the peak level of 2% in Q1 of FY10. Its net non-performing assets (NNPA) have come down to 0.5% from a high of 1.5%. CUB has been able to maintain NPAs at the lower level since then. The provision coverage ratio has also shored up from 56% to a comfortable 77%.

CONCERNS

Asset quality is still a cause for concern as the proportion of restructured assets was higher at 3.5% as on March 31, 2011. The bank is vulnerable to region specific risk since most of its business is concentrated in Tamil Nadu. Also, it is susceptible to default in case of any kind of a slowdown in the economy due to its extensive SME portfolio.

VALUATIONS

At a price to book value (P/B) of 1.98 the stock of CUB does look expensive. However, it has a superior returns matrix compared to its peers. The bank's return on assets and return on equity are well ahead of peers South Indian Bank and Federal Bank. This justifies its high valuation.