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City Union Bank’s strat­egy of pro­vid­ing se­cured work­ing-cap­i­tal loans to SMEs and traders has au­gured well for the lender, as it has main­tained its as­set qual­ity even as its peers’ delin­quen­cies sharply in­creased. We ex­pect the bank to main­tain 15 per cent+ RoEs in the medium term, aided by its granular loan mix and sta­ble as­set qual­ity.

De­spite down­ward pres­sure on yields, NIM (net in­ter­est mar­gin), now 4.3 per cent, was one of the strong­est. This was largely helped by the mix of a fall­ing cost of funds and a higher cred­it­de­posit ra­tio. We ex­pect

NIM to de­cline from cur­rent lev­els and hold how­ever above 4 per cent through FY19-20, driven by its fo­cus on granular lend­ing. Stressed as­sets (GNPA and stan­dard re­struc­tured loans) are now around 2.9 per cent of loans (down 26bps y/y, 18bps q/q). Man­age­ment main­tains its guid­ance of a 1.5?2 per cent slip­page ra­tio for FY19 and we have mod­elled it at 1.9 per cent (of the loan book). Be­sides, with 15.1 per cent cap­i­tal ad­e­quacy (14.7 per cent Tier-1), the bank is suf­fi­ciently cap­i­talised for high-teen loan growth in the medium term.

Higher slip­pages, lower than-ex­pected loan growth.

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