The dark horse: City Union Bank an outlier among regional peers

Has emerged as one of the best banking stocks in 2018

City Union Bank’s (CUB’s) balance sheet may be less than a tenth of top league private banks. Yet it has maintained its profitability (net interest margin or NIM) at over four per cent for almost a decade. 

The stock, with year-to-date gains of 15 per cent, has outperformed its peers such as South Indian Bank, Federal Bank and Karnataka Bank which have lost 15-50 per cent so far this year.

CUB’s niche positioning, strong market presence and asset-backed lending practice have steered it through a profitable trajectory. Being one of the oldest south-based banks, it draws nearly 90 per cent of its business from the region and 68 per cent from Tamil Nadu, in particular. 

Loans to micro, small and medium enterprises (MSME) account for 33 per cent of its loan book and the rest are constituted by loans to traders, agriculturists, retailers and so on. Consequently, nearly 65 per cent of its lending is working capital loans. Yet, unsecured loans are only a small percentage of the total loan book as the bank maintains a 1:1 loan to collateral ratio, thus keeping a lid on its asset quality. 

Analysts at HDFC Securities say they have consistently had a positive view on the bank for its conservative management and unparalleled lending franchise. Returns on assets and returns on equity of over 1.5 per cent and 15 per cent, respectively, maintained over the last 18 months places CUB on a par with larger private banks.

Yet, there is scope for improvement. For one, while gross non-performing assets (NPA) ratio is comparatively better among regional banks, at 2.85 per cent in the September quarter, it is high compared to RBL Bank or DCB. Analysts expect the ratio to fall below 2.5 per cent from FY20 as a large portion of these bad assets can be attributed to lending prior to 2015. Dismal share of low-cost current account-savings accounts (CASA) deposits ratio at 24 per cent is another worry. The number is far below the private banks’ average of 35-40 per cent. While a majority of its CASA comes from retail customers, focus on bulk deposits would help the bank streamline its costs.

Despite these concerns, analysts at ICICI Securities feel CUB is well placed among regional players. “CUB has historically traded at a premium to other regional banks due to better returns ratios and consistent earnings,” they say while affirming ‘buy’ rating on the stock. CUB trades at 3 times its FY20 book value.