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.