City Union Bank shares crash 13.5% after Q3 earnings dip on quarterly basis

City Union Bank shares crashed 13.5 per cent to Rs 138.4 on the BSE in the intra-day trade on Monday as the lender's profitability took a hit on a sequential basis in the December quarter. Private-sector lender City Union Bank, on Saturday, registered a net profit of Rs 217.83 crore for Q3FY23, down 21.2 per cent quater-on-quarter (QoQ) from Rs 276.5 crore in Q2FY23. 

Its net interest income (NII), too, fell 2 per cent sequentially to Rs 555.7 crore from Rs 567.9 crore. Net interest margin (NIM) also contracted 21 basis points to 3.9 per cent. 

"Improving trajectory in earnings derailed during Q3FY23 as reflected in PAT plunging 21 per cent QoQ, resulting in return on asset (RoA) falling to 1.34 per cent from 1.72 per cent in Q2FY23. Considering the lack of visibility on meaningful improvement in credit growth, we downgrade the stock to ADD (from Buy) with a revised target price of Rs 180 (earlier Rs 225), as we cut our multiple to 1.8x (earlier 2.25x) P/BV on Sep'23 BVPS. Management continued to maintain its long-term RoA guidance of 1.5 per cent even after factoring for ECL impact, if any," said analysts at ICICI Securities.

Credit growth remained flat QoQ during Q3FY23, after registering 4 per cent QoQ growth in Q2FY23. Management was upbeat about growth acceleration but delay in pick-up in investment cycle resulted in lower credit off-take during Q3FY23. Hence, management believes overall credit growth is likely to remain below the guidance range of 15-18 per cent in FY23. Except gold loan (25 per cent of loan book), which grew by 7 per cent QoQ, rest of the segment reported negative growth.

According to analysts, CUB's results had several areas of weakness this quarter. These include asset quality issue was flagged off during the divergence report; recovery from Covid on asset quality metrics was already slow and this has made it a bit slower-than-expected; business performance has been weak on loan and deposit growth with a sharp pressure on CASA growth; the bank has been working on an extremely tight costs as compared to other banks in recent years; the management is also looking to improve coverage higher than where it is currently suggesting that return on equity (RoEs) are likely to be capped closer to current levels.

"We maintain a REDUCE rating, with the fair value at Rs 170 (from Rs 180 earlier) valuing the bank at ~1.4X book and ~10X December 2024EPS for RoEs moving closer to 15 per cent levels. We have marginally reduced our estimates to reflect the progress of the bank thus far. CUB is still one of the most expensive regional banks in our coverage universe. The investment thesis is to maintain that superior valuations is yet to come through this cycle either on stronger loan book growth, better credit costs, and return ratios," said analysts at Kotak Institutional Equities.

That said, on a yearly basis, net profit increased 11 per cent, NII rose 13.4 per cent, and operating profit jumped 34.6 per cent. NIM, however, slipped 12 bps.