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  • Stock recommendation: City Union Bank — Add — Target price Rs 190

    Publish date: August 9, 2018

    Results update: NII comes under pressure

    City Union Bank reported a jump in its earnings and is primed to deliver higher profitability, but margins pressure may prove to be a hurdle.

    The bank’s net interest margin (NIM) — the difference between interest income earned by a bank and the interest money it owes to its lenders — saw a decline for the fourth consecutive quarter, despite posting a healthy loan growth.

    Key highlights

    • Earnings increased by 15% (YoY). A 33% decline in provisions was one of the key reasons for the bank’s earnings spurt.
    • The net interest income (NII) — an indicator of a bank’s performance — grew by 10% on the back of a 17% (YoY) loan growth. But in overall terms, the NII expansion was fairly tepid.
    • We believe the bank is well-placed to deliver 15% return on equity (RoE) but the lower margins may eat into the profitability. The margin strains can be seen as the bank earlier delivered around 20% RoE.
    • The asset quality of the bank remained steady, with the gross non-performing loan (GNPL) ratio pegged at 3%.
    • The current account, savings account (CASA) ratio grew at a healthy 13%.

    Valuation & outlook

    We are not sure whether the bank can provide the historical levels of RoE at 20%. This, coupled with strong stock valuation expansion, makes us feel that there are limited upsides at the moment.

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