Markets
City Union Bank is poised to see testing times ahead in FY24
Summary
While there has been a sequential improvement in Q4 in asset quality, aided by better recoveries, analysts point that this parameter is still at an elevated level.City Union Bank Ltd’s (CUB) shares tanked 10.5% in the last two trading sessions. Investors sentiment were hurt by an unfavourable combination of weak March quarter (Q4FY23) results and subdued outlook.
To begin with, asset quality remains a sticking point for its investors. In Q4, the gross non-performing asset (GNPA) and net NPA ratios stood at 4.37% and 2.36%, respectively. While there has been a sequential improvement in Q4 in asset quality, aided by better recoveries, analysts point that this parameter is still at an elevated level. The management is confident of continued recoveries in FY24 and expects net NPAs to improve in the next 4-5 quarters. Remember, the bank was penalised for divergence in NPA recognition during Reserve Bank of India supervisory exercise held last year. Thus, asset quality trends remain a key monitorable for the bank.
CUB’s net interest margin (NIM) saw a sharp sequential decline of 23 basis points to 3.65%. This was a consequence of relatively slower loan growth in Q4 and increase in cost of funds. The management expects NIM to be around 3.65% level in FY24. NIM was 3.89% in FY23, down by 9 basis points year-on-year (y-o-y).
“As against a sharp y-o-y rise in NIM for most of the banks, CUBK is one of the few banks that have seen a y-o-y dip in NIM for FY23. While the rise in CoD (cost of deposits) at CUBK is comparable to peers, the bank has seen y-o-y decline in yields as well suggesting lower pricing power amidst moderating growth and elevated asset quality issues," said an ICICI Securities report.
Analysts pointed out that the bank had been conservative in terms of lending in Q4 resulting in a slower loan growth of 7% y-o-y. This approach is understood given the continued slowdown in its core MSME segment. That said, deposits grew 10% y-o-y. However, FY24 loan growth guidance of 12-15% is a dampener.
The management expects the credit growth to remain at the current levels in H1FY24 due to fine tuning of internal processes and expects it to pick up in the second half. “With 50% of the deposit expected to reprice in the coming quarters, NIMs are likely to remain under pressure," said Dnyanada Vaidya, research analyst, Axis Securities.
A silver lining in recent months has been the full-term renewal for the existing MD & CEO. Even so, until CUB continues to show improvement in terms of asset quality, and loan growth, the stock’s meaningful upside is capped.
