City Union Bank (CUB)

City Union Bank may be small in size, but it has scaled the heights in terms of performance. Investors can consider buying it for long term

CITY Union Bank is one of the most efficient banks in the country. With a network of 202 branches, it is present in many parts of the country but its operations are primarily concentrated in southern India. City Union Bank (CUB) ranked among the top 10 banks in three of the four main parameters. Of the 39 listed Indian banks, CUB stood 7th on efficiency, 10th on growth and 10th in terms of return to shareholders. It is well known that CUB is one of the strongest banks in the country. Our study showed that it is equally good in terms of rewarding its shareholders. The bank has consistently reported net interest margin (NIM) in excess of 3% in the last nine financial years. Only a handful of Indian banks have managed to achieve this feat.

In FY 2009, the bank posted the second highest return on assets (RoA) across listed banks. Only Indian Bank did better. While CUB clocked a RoA of 1.5% in FY 2009, the average RoA of Indian banks was only 1%. This is a key ratio in the banking industry because it explains how efficiently a bank is utilising its assets.

The current fiscal year has been the most challenging for the banking industry since the start of the boom in 2003. For starters, the pick-up in credit slowed down. As per latest Reserve Bank of India data, the growth in aggregate bank credit has slowed to 10.6% year-onyear. Moreover, bankers are still grappling with shrinking spreads, which is an offshoot of tight monetary conditions in the last months of calendar year 2008. Despite such headwinds, CUB managed to grow its loan book at 19% y-o-y at the end of Sept ’09 quarter. Though, its net interest income fell down by 4% y-o-y, it still managed to grow its net profit by 21% in the six months ending Sept ’09. Net interest income is calculated by deducting interest expense from interest earned and is a measure of spread between cost of deposits and yield on advances. In the absence of growth in net interest income, non-interest income, which grew by 59%, came to the bank’s rescue. Meanwhile, the bank has come out with a rights issue in the ratio of one share for every four shares held. The price of one rights share will be Rs 6. The current market price is Rs 25 per share. This shows that there is significant discount embedded in the rights issue. So, it makes lot of sense for investors to subscribe to rights issue. The issue closes on December 16, 2009

VALUATION:

The stock is trading at 1.4 times its book value. Compared historically, the stock is just inches short of its all-time high valuations, as it was trading at 1.6 times its book value in March 2008. However, the banking sector, and CUB in particular, have shown resilience in tough times. Going forward, investors are likely to give more premium to the banking sector in general and efficient banks like CUB in particular. Its peers like Federal Bank, South Indian Bank, Karur Vysya Bank and Indian Bank are trading at an average price to book value multiple of 1.3 times. This shows that City Union Bank’s stock, at 1.4 times price to book value, is reasonably priced. Moreover, the bank consistently pays dividend to its shareholders. At the current price, the dividend yield stands at 2.4%, which shows that the stock offers value to conservative investors as well.

Indian Bank

INDIAN Bank is one of the oldest banks in the country. It is also one of the best-managed state run banks in India. Its performance in the last three years, since it absorbed all its accumulated losses in its capital, is at par with best in its industry. Investors are advised to consider it for long-term investment.
BUSINESS

Headquarted in Chennai, Indian Bank is a leading bank in South India with widespread presence in Tamil Nadu, Kerala, Andhra Pradesh and Pondicherry. It was nationalised in 1969. It is a medium-sized bank and its balance sheet size stood at Rs 84,122 crore in FY 2009. It has 1,642 branches.

In the current decade, the bank has seen a turn-around. At the end of March 2000, bad loans, or net non-performing assets, formed 16% of Indian bank’s net advances. In FY06 it absorbed all the losses in its capital, which fell to Rs 744 crore from Rs 4,574 crore in the previous year. Since then, Indian Bank’s profit has grown at compounded annual growth rate (CAGR) of 35% every year, while its balance sheet has grown at a CAGR of 21%. This shows that it has enough reach and scale to leverage.

GROWTH DRIVERS

Indian Bank’s performance is clearly a cut above most state-run banks, notorious for inconsistent performance that puts down investors. The bank has performed well on all quality parameters while maintaining an impressive growth rate, achieving a delicate balance that has eluded several of its peers.

For instance, its net interest margin (NIM) stood at more than 3.5% in last six financial years. The only banks, which can better Indian Bank on this count are Kotak Mahindra Bank, Federal Bank and HDFC Bank. Its return on assets (RoA), at 1.6% in FY 2009, was the highest across all banks.

Its bad loans formed less than 0.2% of its net advances at the end of the year. Only Punjab National Bank has better record than Indian Bank on this count. The composition of its lending portfolio is very much on the lines of other state-run banks: agriculture loans constituted 15%, SME loan formed 11% and corporate sector contributed 50% to total loan book.

That the bank’s performance is superior despite similar lending profile shows the efforts being put in to choose the customers. The bank is expanding its presence. It opened 101 new branches in FY 2009.

VALUATION

Indian Bank is trading at a price to earning (P/E) multiple of 4.8 times. This is lower than the average of smaller banks that are no match to it in performance.

This indicates that the stock market is not giving premium to its performance. Moreover, the earnings growth is far ahead of P/E, which shows that the possibility of rise in stock price is much higher. In terms of price-to-book value P/BV), the stock is trading at close to 1, which is the average at which other banks are trading. Even based on P/BV, the bank is not getting the premium it deserves in terms of valuations.

We think it will be re-rated some time in future and therefore advise long-term investors to buy the stock at current levels.

Arihant Capital Markets Views on Smallcap Banking Sector

INDIAN BANK

Although the banking sector has seen huge corrections in the market but Indian Bank remains one of the shining stars in the small cap space. A healthy level of CASA ratio reflects that the bank is less dependent on bulk deposits and has a high fee based income. The bank also has a healthy NIM of 3.2% and low level of net non performing assets.

Bank Of India

Bank Of India (BOI) has become a good bet among the PSU Banks. The bank has a sound balance sheet, and a good CASA ratio of 34%. Even the FII holdings are very low., just around 16%. Bank of India’s growth in aggregate business is reflected in its healthy NIM of 3.3%. The net non performing assets also stand at just 0.52%.