ICICI Securities has upgraded its recommendation for City Union Bank (CUBK) from ADD to BUY, with a revised target price of Rs 190 from the previous Rs 180, offering a potential upside of 26% from its current price of Rs 151. This revision follows a strong Q2FY25 performance, driven by healthy business growth, an improvement in asset quality, and a robust return on assets (RoA) of 1.59%. City Union Bank has shown consistent improvement in reducing non-performing assets, raising its provision coverage ratio (PCR), and growing its loan book. Investors are advised to capitalize on these gains for long-term returns.

Strong Business Growth Amid Improved Asset Quality

Q2FY25 Performance Exceeds Expectations
City Union Bank delivered a better-than-expected performance in Q2FY25, with a PAT of Rs 2.85 billion, a 9% beat on estimates. The bank’s loan growth accelerated by 12% year-over-year (YoY), showing a 5% growth quarter-over-quarter (QoQ). The focus was on traditional products, with gold loans witnessing 8% QoQ growth and NBFC loans growing by 23% QoQ. This underscores the bank’s strategy of diversifying its lending portfolio and expanding into key segments, particularly those with strong demand.

Asset Quality Improves Significantly
A major highlight of Q2FY25 was the improvement in asset quality. The Gross NPA ratio declined sharply to 3.54% from 3.88% in the previous quarter, and the Net NPA ratio fell to 1.62% from 1.87%. This was supported by strong recoveries and upgrades, which led to negative net slippages for the fifth consecutive quarter. The bank has also raised its PCR to 55%, up from 52.8% QoQ, demonstrating its focus on strengthening its balance sheet.

Loan Growth Driven by Key Segments

Gold Loans and NBFCs Drive Growth
City Union Bank’s loan book grew by 12% YoY, primarily fueled by growth in gold loans and lending to NBFCs. Gold loans now constitute approximately 25% of the total loan book, with NBFC loans representing 3.5%. The bank expects further expansion in these areas as it continues to push for higher penetration in the retail and MSME segments. The launch of new retail products, including home loans and loan-against-property (LAP), is expected in Q4FY25, positioning CUBK for accelerated growth in FY26.

Deposit Growth and CASA Stability
On the deposit side, the bank reported 9% YoY growth, with a 4% QoQ increase. The CASA ratio remained stable at 29.5%, indicating a healthy deposit mix. However, the bank will focus on increasing its non-callable deposits to enhance liquidity. Its Liquidity Coverage Ratio (LCR) fell sharply to 121% from 262% in the previous quarter due to a change in methodology. Despite this decline, the loan-to-deposit ratio (LDR) remains at a comfortable 83%.

Cost Management and NIM Expansion

Net Interest Margin (NIM) Improvement
In Q2FY25, City Union Bank’s NIM improved by 13 basis points QoQ, reaching 3.67%. This improvement was driven by an increase in the yield on advances, which rose to 9.81%, aided by better pass-through of gold loan interest rates and recoveries in penal interest. Management has maintained its NIM guidance at 3.6% (+/-10bps), signaling continued focus on optimizing its cost of funds and maximizing loan yields.

Cost of Deposits Remains Stable
The cost of deposits (CoD) was largely stable at 5.75%, a marginal increase from 5.72% in Q1FY25. This stability in deposit costs, coupled with rising yields, contributed to the improvement in NIM. The bank continues to focus on containing operating expenses, which rose moderately by 5.2% QoQ. City Union Bank’s cost-to-income ratio (C/I) declined from 49.3% to 47.1%, with further reductions expected as operational efficiencies are realized from new products and expanded loan offerings.

Outlook for Investors

Revised Target Price and Valuation
Based on the bank’s strong Q2FY25 performance, ICICI Securities has raised its target price to Rs 190, reflecting a 26% upside from the current price of Rs 151. The bank is trading at a P/BV of 1.2x FY25E and 1.1x FY26E, making it attractively valued compared to peers. The bank’s focus on improving asset quality, growing its loan book, and managing costs is expected to drive profitability, with EPS projected to grow from Rs 13.7 in FY24 to Rs 16.0 by FY26.

Long-Term Growth Drivers
Key drivers for long-term growth include the bank’s entry into new retail products, expansion in gold loans, and improved credit quality. With its Net NPA expected to drop to 1–1.2% by FY25, and a continued focus on increasing its PCR to 62% by FY25, City Union Bank is well-positioned for sustained growth. The launch of new retail loan products in Q4FY25 will also contribute to enhanced revenue streams, supporting the bank’s expansion strategy.

Conclusion

City Union Bank has shown remarkable resilience in Q2FY25, exceeding expectations on multiple fronts, particularly in asset quality and loan growth. With the management’s focus on improving profitability, lowering NPAs, and expanding into new product segments, the bank’s outlook remains positive. ICICI Securities’ upgraded BUY recommendation with a target price of Rs 190 reflects confidence in the bank’s ability to capitalize on growth opportunities, making it an attractive investment for both short- and long-term investors.