Small yet focused approach makes City Union Bank an interesting bet

High concentration in the south Indian market, particularly the SME belt is working to its advantage

With every disruption in the banking sector, whether concerning asset quality or a change in preference, the industry has reinvented to either offer new products or diversify into new territories. The 115-year-old Kumbakonam (Tamil Nadu)-headquartered City Union Bank (CUB), however, is an exception.

Having started as an outfit catering for small businesses, CUB remains committed to the segment and draws roughly 72 per cent of its business from Tamil Nadu and almost 90 per cent from south India. Being a small and medium enterprise (SME)-centric bank, on a steady state basis, it has drawn 35 per cent of its business from SMEs and about 15-17 per cent from traders, irrespective of the environment for SMEs.

Normally, the Street is wary of banks with high concentration risk. CUB, though, enjoys preference, with 18 of 28 analysts polled by Bloomberg recommending a “buy” rating, besides 8 “hold” rating. At 2.8x FY21 estimated book, the stock also trades at a premium to larger peers, such as Federal Bank and RBL Bank.

The asset quality, though, in the near term may be a tricky factor. The gross non-gross performing assets (NPA) ratio, which stood at 3.44 per cent in Q2, is reasonably high, even going by its past data, especially against FY19’s 3 per cent (CUB’s best year in recent times). Also, one must be mindful that slippages for FY21 may increase from the September quarter’s near-zero level to 3-3.5 per cent; 5-6 per cent of loans under moratorium can come up for recast, thus pushing up the gross NPA ratio for FY21 and FY22 to 5.2 per cent and 4.2 per cent, respectively, estimate analysts.

Yet, analysts at HDFC Securities say, going by CUB’s record, they remain confident. CUB’s book is 99 per cent backed by security and this type of lending is its core principle. Also, lower exposure to traditional stressed sectors, such as power and infrastructure, and strong relationship with borrowers support its asset quality. Another comforting aspect is working capital loans accounting for 59 per cent of its loan book, which according to the brokerage, will keep slippages at an acceptable level. 

For now, the anticipated build-up in asset quality stress may keep the CUB stock muted for a while. On a year-to-date basis, CUB's stock price is down 24 per cent. 

Considering that the stock is way off its all-time high, corrections may present an attractive entry point to investors.