How City Union Bank, Federal Bank have sustained investor interest

With gains of 7 - 10 per cent since September 24, both stocks have been an outlier among peers

The underpinning similarity between Federal Bank and City Union Bank (CUB) is their years of establishment as banks which span over several decades. Despite their regulatory classification as old private sector banks, despite the disagreement between bank chiefs over it, the other similarity lies in their ability to chart a strong trajectory and to harvest their deep rooted connection with the small and medium enterprise (SMEs). It is probably because of this that despite their regional peers such as Lakshmi Vilas Bank and Dhanlaxmi Bank running into serious trouble, stocks of Federal Bank and CUB have remained outliers with gains of 10 per cent and 7.7 per cent, respectively, since September 24, when trouble started brewing for their two peers. But the similarities end here. Whether in terms of size of business, the manner of diversification or even in terms of market capitalisation, both banks are poles apart.

Business growth

With a total business of Rs 84,840 crore in FY20, CUB’s balance sheet is 30 per cent the size of Federal Bank. In other words, with loan assets of over Rs 1,22,268 crore in FY20, Federal Bank has emerged as the largest among old private banks. Even in terms of business diversification, Federal Bank with presence in segments such as personal loans, auto loans, home loans and more recently tapping into the credit cards space has over a period of time significantly branched out from just being a SME lender. Geographically, too, just about 47 per cent of its branch strength comes from Kerala, as against over 55 per cent, four years ago. As the bank is in its silent period ahead of September quarter results, Shyam Srinivasan, the Federal Bank’s MD & CEO said the bank’s objective remains prominence to dominance and presence to prominence. In effect, he means that in Kerala, Federal Bank aspires to be the market leader and with its incremental share in its home state increasing to 12.2 per cent from 11.5 per cent in FY16, the bank is in-line with its objective. Likewise, in newer markets such as Gujarat, Punjab and Maharashtra, where it had less than a per cent’s share, Federal Bank’s market share has steadily improved to 1.6 per cent during this period.

On the other hand, CUB plans to remain focused on the South India market. “Five years down the line, we will still have 75 per cent of our branches in South India, with about half of them coming from Tamil Nadu,” says N Kamakodi, MD & CEO, CUB. Even in terms of product diversification, he is clear that the bank will remain focused on only SME loans. “We will not enter other products just for the purpose of diversification; other loans are more like pull-products and not push-products for the bank,” he explains.

Market perception

Despite being way smaller than Federal Bank, CUB commands a premium on the bourses. Trading at 2.1x FY21 estimated earnings, its valuations are over three times more than Federal Bank’s 0.6x FY21 estimated book. Analysts say, CUB’s sharp focus has made it less prone to unexpected asset quality surprises. Analysts at Centrum Capital, who have a buy rating on the stock, say they like the bank for its consistent performance and management quality.

However, that doesn’t mean that Federal Bank is less preferred. “Markets will take some time to understand how the bank’s product and geographic expansion will play out,” said an analyst from a foreign brokerage. “The bank seems to be having big plans and for the stock to rerate, we need to be convinced that it is on track to achieve these milestones,” the analyst added.

Their business strength is also a reason why the combined shareholding of foreign and domestic institutional investors has remained largely stable in the past few quarters ending June 2020 (September quarter data awaited), whereas many peers have seen sharp cuts.

With the Coronavirus (Covid-19) pandemic having resulted in another wave of asset quality woes, valuations may take a while to rerate.