City Union Bank (CUB) ~ Conservative Lending Franchise

Stock Opportunities
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CITY UNION BANK CMP 45 fv Rs 1 MARKET CAP 1816 CRORES

Some data about the bank:

CUB has been in operation since more than 100 years and has an enviable track record of profitability and dividend payment in all these years.

Its business has been growing at 30% CAGR and net profits at 31% since past five years.

Book value is around 24 as on Dec 2010.

9M EPS is around 4 and full year EPS expected to be in excess of Rs 5 per share.

HIGH RETURN RATIOS: ROE as on Dec 2010 was 24.7% and ROA was at 1.7%.

Net NPA was down to 0.53% for Dec 2010. Asset quality for the bank remains healthy.

NIMâthe net interest margins as at 9M fy 11 ended Dec 2010 was at 3.5% which was up from 3.3% fo 9M fy 10. The bank is likely to maintain its NIM above 3.25% over the longer term.

Working capital loans form 56% of total advances which would help the bank to tide over higher interest rate cycle. Repricing these working capital loans is much easier for the bank.

CUB is well capitalized at 13.06% as on Dec 2010.

The bank has a network of 236 branches out of which 209 are located in South India and 150 in Tamil Nadu alone. Till Feb 2011, the bank had opened 14 branches out of a license for 62 branches. It aims to open 48 branches till July 2011.

A look at the net profit figures for the past few years shows very good consistent growth.

YEAR

05

06

07

08

09

10

9M FY 11

NP

46

56

72

102

122

152

163

Equity 40.36 cr face value Rs 1

POSITIVES:

The bank has managed to maintain good balance between growth and quality, without being too aggressive pursuing growth.

With high proportion of advances as working capital loans, the bank has enough room to manage higher interest rate cycle.

Focussed business approach with more emphasis on SME sector.

Healthy asset quality with NPAs of 0.53% as on Dec 2011.

Consistent growth combined with healthy return ratios makes the bank attractive for long term investment.

Any takeover by other banks could provide significant upsides.

NEGATIVES

Lower provisioning to the tune of around 50% as against RBI guidelines of 70%.

Lower percentage of fee based income.

Lower CASA ratio as compared to other comparable banks.

Geographical risk due to higher concentration of bank branches in South India.

There has been an announcement regarding resignation of directors and installation of new directors on bse.

1 Like
2

FY 11 results out and expectedly good.

Excellent set of numbers from CUB.

q4 fy 11q4 fy 10fy 11fy 10
int earned346250 1218 957
OP 97 74361 258
NP 51.4 34.8 215 153

eps for fy 11 is 5.35
div declared 85 paise per share
net npa 0.52%
ROA 1.67% vs 1.52%

3

Hi, I think gross NPA is a better measure of the asset quality and not the net NPA. The latterwill look good afterbetter provisioning (though provisioning will hit the bottomline).

Rgds

Vinod

4

perhaps it will be multibagger

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Hi Hitesh,

I had followed this company for few days and these are some observations from my side:

Some more positives:

1)L&T finance holds 5% and seem to be interested in this company.

2)Their is a expectation that this company will be a acquisition target for new companies getting bank license.

More Negatives:

1)Find this company less appealing while comparing nim,growth and return with respect to big banks like HDFC Bank,Indus Ind and Housing Finance companies like Gruh,M&M Finance.

2)High concentration of branches in single state makes it exposed to regional pressures. I guess this was the lesson learnt i learn from SKS Micro finance debacle where most of its transactions were concentrated in AP.

6

Ravikanth,

To your points

  1. CUB is not an aggressive player and has a conservative model ,plus lacks a pan-India presence of HDFC or Axis.They dont chase market share,but prefer to concentrate in their particular niche. Hence the ratios on which you compare CUB with HDFC are unfavorable.However,if you take CUB’s peer group,which is old private sector banks concentrated in South India, like South Indian Bank,Federal Bank,Dhanlaxmi Bank etc,CUB comes out favourably on all parameters.

2)Yes,high concentration of business in single state is both a boon and a bane.If there is some instability/political interference, business and profits could suffer.However,CUB has a very high shareholder presence,a 100 plus years of operating history and a 100 year history of paying out dividends.So these facts can lend some confidence to a prospective investor unlike the SKS debacle. When was the last time you saw heavy duty publicity on CUB?:slight_smile:

1 Like
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[quote="hitesh2710, post:1, topic:827925765"] UNION BANK CMP 45 fv Rs 1 MARKET CAP 1816 data about the has been in operation since more than 100 years and has an enviable track record of profitability and dividend payment in all these business has been growing at 30% CAGR and net profits at 31% since past five value is around 24 as on Dec 2010. ** EPS is around 4 and full year EPS expected to be in excess of Rs 5 per RETURN RATIOS: ROE as on Dec 2010 was 24.7% and ROA was at NPA was down to 0.53% for Dec 2010. Asset quality for the bank remains net interest margins as at 9M fy 11 ended Dec 2010 was at 3.5% which was up from 3.3% fo 9M fy 10. The bank is likely to maintain its NIM above 3.25% over the longer capital loans form 56% of total advances which would help the bank to tide over higher interest rate cycle. Repricing these working capital loans is much easier for the is well capitalized at 13.06% as on Dec bank has a network of 236 branches out of which 209 are located in South India and 150 in Tamil Nadu alone. Till Feb 2011, the bank had opened 14 branches out of a license for 62 branches. It aims to open 48 branches till July look at the net profit figures for the past few years shows very good consistent 40.36 cr face value Rs bank has managed to maintain good balance between growth and quality, without being too aggressive pursuing high proportion of advances as working capital loans, the bank has enough room to manage higher interest rate business approach with more emphasis on SME asset quality with NPAs of 0.53% as on Dec growth combined with healthy return ratios makes the bank attractive for long term takeover by other banks could provide significant provisioning to the tune of around 50% as against RBI guidelines of percentage of fee based CASA ratio as compared to other comparable risk due to higher concentration of bank branches in South has been an announcement regarding resignation of directors and installation of new directors on bse. ** **** [/quote]

CITY

CRORESSome

bank:CUB

years.Its

years.Book

9M

share.HIGH

1.7%.Net

healthy.NIMâthe

term.Working

bank.CUB

2010.The

2011.A

growth.

YEAR

05

06

07

08

09

10

9M FY 11

NP

46

56

72

102

122

152

163

Equity

1

POSITIVES:

The

growth.With

cycle.Focussed

sector.Healthy

2011.Consistent

investment.Any

upsides.

NEGATIVES

Lower

70%.Lower

income.Lower

banks.Geographical

India.There

8
[quote="akumar40, post:7, topic:827925765"] UNION BANK CMP 45 fv Rs 1 MARKET CAP 1816 data about the has been in operation since more than 100 years and has an enviable track record of profitability and dividend payment in all these business has been growing at 30% CAGR and net profits at 31% since past five value is around 24 as on Dec 2010. ** EPS is around 4 and full year EPS expected to be in excess of Rs 5 per RETURN RATIOS: ROE as on Dec 2010 was 24.7% and ROA was at NPA was down to 0.53% for Dec 2010. Asset quality for the bank remains net interest margins as at 9M fy 11 ended Dec 2010 was at 3.5% which was up from 3.3% fo 9M fy 10. The bank is likely to maintain its NIM above 3.25% over the longer capital loans form 56% of total advances which would help the bank to tide over higher interest rate cycle. Repricing these working capital loans is much easier for the is well capitalized at 13.06% as on Dec bank has a network of 236 branches out of which 209 are located in South India and 150 in Tamil Nadu alone. Till Feb 2011, the bank had opened 14 branches out of a license for 62 branches. It aims to open 48 branches till July look at the net profit figures for the past few years shows very good consistent 40.36 cr face value Rs bank has managed to maintain good balance between growth and quality, without being too aggressive pursuing high proportion of advances as working capital loans, the bank has enough room to manage higher interest rate business approach with more emphasis on SME asset quality with NPAs of 0.53% as on Dec growth combined with healthy return ratios makes the bank attractive for long term takeover by other banks could provide significant provisioning to the tune of around 50% as against RBI guidelines of percentage of fee based CASA ratio as compared to other comparable risk due to higher concentration of bank branches in South has been an announcement regarding resignation of directors and installation of new directors on bse. ** [/quote]

CITY

CRORESSome

bank:CUB

years.Its

years.Book

9M

share.HIGH

1.7%.Net

healthy.NIMâthe

term.Working

bank.CUB

2010.The

2011.A

growth.

YEAR

05

06

07

08

09

10

9M FY 11

NP

46

56

72

102

122

152

163

Equity

1

POSITIVES:

The

growth.With

cycle.Focussed

sector.Healthy

2011.Consistent

investment.Any

upsides.

NEGATIVES

Lower

70%.Lower

income.Lower

banks.Geographical

India.There

I think this information is a bit dated as provisioning currently meets RBI guidelines.

9

S. Sunder, CFO of the bank addressed the call: Highlights by Cpital Mkt:

  • Bank is not chasing growth and it is strongly focusing on asset quality. Bank has scaled down its advances growth target to 12-15% for FY2014 from earlier target of 15-16% for FY2014 a quarter ago.

  • Gold loans portfolio of the bank has touched 20% of the advances book, while bank plans not to be aggressive on the gold loan book.

  • Bank has witnessed spike in expense ratio on account of strong branch expansion, while bank expects to maintain the expense ratio below 45% on full year basis.

  • Fresh slippages of advances stood at Rs 90.7 crore for quarter ended December 2013. One account from steel sector with the exposure of Rs 40 crore slipped to NPA category in Q3FY2014. Bank has started the process for speedy recovery of the account.

  • One account from steel sector with the exposure of Rs 116 crore had also slipped to NPA category last quarter. Bank has completed the settlement process and received about Rs 40 crore as first installment in Q3FY2014 and expects to receive the balance amount by end March 2014.

  • As per the historical trends, bank has seen recovery of at least 75-80% of the bad loans.

  • The restructured advances book increased to Rs 302.1 crore at end December 2013 from Rs 217.3 crore at end September 2013.

  • Bank does not have any restructuring pipelines. It is not part of any Corporate Debt Restructuring (CDR) cell proposal, while do not expect any bilateral restructuring also.

  • Bank is planning sales of bad loans worth Rs 10-15 crore to Asset Reconstruction Companies (ARCs) in Q4FY2014.

  • Bank expects to maintain the GNPA steady with strong recoveries performance.

  • As per the bank, more than 50% of the fee income is linked to loan growth.

  • Bulk deposits of the bank stood at 5%, while it does not have any exposure to CDs.

  • Bank has added about 32 branches in the nine months ended December 2013 taking the branch count to 407 branches, while expects to add 20-25 branches in last quarter of FY2014 and proposes to reach the network of 500 branches in FY2015.

1 Like
10

S Sunder, CFO of the bank addressed the call.Highlights by Capital Mkt:

  • Advances growth of the bank was muted at 7% in Q2FY2015. The subdued advances growth was mainly on account of Rs 648 crore of de-growth in the jewel loan book in the year ended September 2014. The non-jewel loan book of the bank has increased at higher pace of 11% at end September 2014.Bank is not focusing on pushing up jewel loan book, which it expects jewel loan book to remain stable at current levels.
  • Bank has targeted overall 10% growth in loan book for FY2015. Bank expects loan growth to pick up to 16-17% in FY2016.Capital adequacy position of the bank is healthy. Bank do not expects capital infusion requirement till FY2016. Bank recently completed QIP issue for Rs 350 crore in Q1FY15.
  • Net Interest Margin increased to 3.54% in Q2FY2015. Bank has consistently maintained the average NIM around 3.30% for the last 11 quarters.
  • Fresh slippages of advances at Rs 83.49 crore in Q2FY2015 were lowest in last 5-quarters. Bank expects the declining trend on asset quality stress to continue going forward.Bank has not conducted any sales of assets to Asset Reconstruction Companies (ARCs) in Q2FY2015. Outstanding securities receipts book of the bank against sales of assets to ARCs stands at Rs 318 crore at end September 2014.
  • Bank did not conducted in fresh restructuring of advances for second straight quarter in Q2FY2015. Meanwhile, about Rs 11 crore of repayment was received in restructured advance book.The restructured standard advances book stood at Rs 250 crore at end September 2014, representing 1.48% of total advances.Bank has one account from steel with the exposure of Rs 45-50 crore in the restructuring pipeline.
  • Bank proposes to touch a branch network of 500 branches by end March 2015. Thus, expects cost-to-income ratio to rise to 44-45% in H2FY2015.
1 Like
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Hitesh sir, what 's your opinion about CUB looking at its current progress.

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@RadheyShyam_Aggarwal

CUB and DCB both remain some of the better managed smaller private banks. Both have done well in terms of consistent growth and reasonably good asset quality.

I have mentioned earlier too that well run small private banks could be an interesting area to look for good investment candidates. I prefer DCB though havent invested in any of these private banks.

2 Likes
13

Sir , as a novice I was comparing DCB with CUB ,would request insights from your eminent experience on which one to choose.

I find following points in favor of CUB over DCB:

  1. City Union Bank has a bit longer history and the track record is also good.

  2. In CUB, the net slippage is at 1.55% (FY18) which is far superior to the average ratio of
    2.9% of its peers (especially smaller ones in South India)

  3. The 5 year average ROA has been at 1.5% and ROE is at 17%. whereas in case of DCB , the ROE has barely crossed 10 in recent quarter. (am more worried about low ROE of DCB)

  4. In FY18, the bank has reported healthy growth in adjusted book value of 17%.

  5. As of now , it has Tier 1 ratio of 15.79% and would not require any capital even under stress scenarios.

1 Like
14


Biased

2 Likes
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When i check 10 year history, City Union Bank has performed better than HDFC bank and Kotak bank. Is this a high quality company? Can I compare it with HDFC bank or Kotak bank?

image

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Recently, I came across a measure that I am still working on and that is Deposit / Branch and it’s significance. The deposit / branch for City Union is very low as compared to Federal or RBL or DCB. As per the annual report 2019, they have 629 branches with total deposit of 38448 crs thus giving a ratio of 61crs per branch but situation changes with when you compare CUB with Federal OR DCB in terms of Interest Income / Branch or Employee etc.

But where CUB stands out from any other mid size banks is in it’s consistency in NIM - Repo Rates have fluctuated over the 10 year period

repo rate
repo rate711×303 5.38 KB

but CUB have been able to maintain its NIM and ROA over all these years - it tells a lot about this bank. Unfortunately we won’t find this in other competitive banks.

Since only future matters - aspects like credit card growth, CASA proportion are of great deal and must be look into by banks. CUB is expanding into Gujarat and Maharashtra as well (slowly and steadily) and as on date, 90% of the Bank’s total branches are operational in South, 5% in West, 4% in North and 1% in Eastern parts of India

Section from 2019 Annual Report which gives dynamics of how you need to CHANGE along with society.

"During the year, the Board of Directors of your Bank, considering the business potential to earn income from Insurance and Mutual Fund sectors, has approved a business plan on marketing and distribution of Health Insurance and Mutual Fund products to offer additional services to all its stakeholders. The Bank is in the process of making necessary tie-ups / agreements with the InsuranceandMutualFundCompaniesmentionedhereunderformarketinganddistributionoftheirproducts subject to necessary regulatory approvals.

lStarHealthandAlliedInsuranceCo.Ltd.,fordistribution of Health Insurance products.
lIntegrated Enterprises India Ltd., for distribution of Mutual Fund products through online platform to our customersinDematformandthroughbranchnetwork.
lBSE Star Mutual Fund to offer Mutual Fund products through web based platform and through branch network.
lFinwizard Technology Pvt. Ltd. (widely known as FISDOM)toofferMobilebasedMutualFundInvestment solution. "

I wish to have this consistency continue in future as a shareholder otherwise its just too bad.

Disc : Invested

4 Likes
19

Is there any announcement by CUB such as one below by RBL?

20

CUB as a bank has good persona. But, HDFC Bank is better on most important metrics; better NPA and growth.

However, the current situation begs our attention:

HDFC Bank is at 2.90 P/BV
CUB at 1.74 P/BV

In plain words, HDFC Bank is now at 67% premium, this is an incentive enough.

If we stop comparing it with HDFC Bank, even then, it is rare to get a good stock to be available at a 10% Yield and EPS growth of 5 to 10% CAGR.

5 Likes