'Buy' City Union Bank, Maintains Nirmal Bang On Improved Growth Prospects

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Nirmal Bang Report

We hosted the management of City Union Bank Ltd., in order to gain a better understanding of the bank's business model and growth outlook ahead.

Based on queries by institutional investors following are the key takeaways:

1. FY26 loan growth guidance is at 2-3% higher than system credit growth.

2. Net interest margins are expected to be under pressure in the near term, but deposit repricing should start in the next four-five months, which should lead to ~3.5% NIMs for FY26.

3. Higher recoveries and savings in credit costs, increase in third party distribution income, and expected improvement in productivity of retail business should sustain RoA at 1.5% in FY26.

4. Retail lending should form 5-7% of the bank's loan book in the next five years.

5. The recoveries should continue to be higher than slippages in FY26.

6. The process of application for new MD & CEO will start September 2025 onwards.

We have estimated a loan/earnings CAGR of 14.2%/15.7%, respectively, over FY25-FY27E, which will lead to improvement in RoA/RoE to 1.6%/13.3% in FY27E. We have valued City Union Bank at 1.65x Jun-27E adjusted book value (as against 1.6x Mar27E ABV earlier) thus deriving a target price of Rs 260 (as against Rs 240 earlier).

Our target multiple is at an 11.7% premium to the past five-year average multiple of 1.5x. We are positive on City Union Bank due to its improved growth prospects from the turnaround in the core MSME loan business and incremental contribution from the recent launch of the retail business.

The asset quality and PCR have also improved. We maintain a 'Buy' rating on City Union Bank.

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