By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed City Union Bank’s (CUB) Long-Term Issuer Rating and INR100m lower Tier 2 subordinated debt programme (reduced from INR400m due to maturity) at ‘IND A+’. The Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect CUB’s demonstrated ability to manage its asset quality and its healthy capitalisation level, which is likely to be sustained over the medium term. The prevailing economic environment is likely to exert pressure on the bank’s loan portfolio, leading to a rise in delinquencies. However, the agency believes its robust pre-provision profitability provides a comfortable cushion to absorb expected increases in credit costs.

CUB is the sole lender to most of its non-individual borrowers. Its control over its borrowers’ cash flows and largely secured lending to small and medium enterprises have enabled it to significantly contain deterioration in its asset quality till date (gross NPAs: 9MFY16: 2.4%; FY15: 1.9%). Ind-Ra expects CUB’s significantly overdue portfolio in FY16 to exert pressure on its profitability. While its high geographical concentration in Tamil Nadu (68% of its branches, 78% of deposits and 66% of advances) has exposed it to the vulnerable textile and iron & steel industries, the bank has resisted large-ticket lending, as reflected in its moderate single-name concentration (top 20 advances to total equity was 59% against 100%-200% for peers in FY15).

CUB’s healthy Tier 1 capital (9MFY16: 14.7%; FY15: 16.03%; FY14: 14.43%) is also supported by a significant presence of regulatory retail loans (risk weight of 75%) and agriculture gold loans (risk weight of 0%). Its equity-to-gross advances ratio was 15.2% in 1HFY16 (FY14: 14.7%), higher than peers’ (9%-14%). The bank intends to maintain a somewhat higher level of capitalisation over the medium term and has demonstrated ability to raise equity. Management does not expect to require any equity or AT1 over the Basel III transition period and Ind-Ra expects internal accruals to suffice for credit growth of 15-20% p.a.

CUB’s pre-provisioning operating buffers are stronger than peers’ (CUB: 9MFY16: 3.3%; median for peers: 1.9%), supported by wide net interest margins due to its borrower profiles. Although credit costs have been low till date and provision cover is lower than peers’, Ind-Ra expects these to increase in FY16 and FY17 given the bank’s overdue but standard portfolio. Since CUB’s provision cover is lower than peers’ (9MFY16: 38%; median for peers: 41%), deterioration in asset quality can significantly affect profitability. However, Ind-Ra expects the bank’s profitability (FY15 and 9MFY16 (annualised) Return of average assets: 1.5%) to offer adequate cushion for any unforeseen asset quality deterioration and believes the bank may not see erosion in equity.

CUB’s funding profile is moderate, with limited access to low-cost CASA deposits, due to limited franchises. However, the term deposits are largely retail-based with a small proportion of deposits at differential card rates. CUB’s liquidity profile is comparable with peers’ and it has well-matched assets and liability tenors. The bank is concentrated in the relatively highly banked state of Tamil Nadu. A key monitorable would be whether CUB can protect its business market share in its home state against the aggressive operations of small finance bank applicants. 


RATING SENSITIVITIES

Positive: A sizeable increase in franchises, reduced regional and sector concentration and improved funding, while sustaining strong asset quality and profitability parameters, could lead to a positive rating action.

Negative:
Any substantial rise in slippages resulting in a sharp increase in credit costs with sharply reduced profitability or capitalisation buffers, or a significant loss of business to small finance banks, could lead to a Negative Outlook or even a rating downgrade.


COMPANY PROFILE

CUB is a Tamil Nadu-based old private sector bank. It has 491 branches across India (as at 9MFY16), of which about two-thirds are in Tamil Nadu.
 



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in.The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121