City Union Bank delivered a mixed but strategically strong Q3FY26 performance, marked by robust loan growth, resilient margins, and steadily improving asset quality. While net profit marginally missed estimates, the underlying operating engine showed clear acceleration, supported by gold loans, MSME credit, and early traction in retail secured lending. Axis Securities remains constructive on the medium-term outlook, citing sustained credit momentum, stable net interest margins, and controlled credit costs. With earnings expected to compound at a healthy pace and valuation multiples re-rated upward, the brokerage has reiterated a BUY call with a revised target price of Rs 360.

Axis Securities Reaffirms BUY Call With Revised Target of Rs 360

Axis Securities has reiterated its BUY recommendation on City Union Bank Ltd., raising the target price to Rs 360 per share from Rs 275 earlier. The upgrade reflects improved confidence in the bank’s earnings trajectory, stronger growth visibility, and sustained asset quality improvement. At the current market price of Rs 285, the brokerage sees an upside potential of 26 percent, driven by higher return ratios and consistent balance sheet expansion

Credit Growth Engine Fires on All Cylinders

Loan growth reached a multi-quarter high in Q3FY26, with advances expanding 21 percent year-on-year and 6 percent quarter-on-quarter. The growth was led by the gold loan portfolio, which surged 33 percent YoY, and the MSME book, which posted a healthy 20 percent YoY increase.

Management has revised its FY26 credit growth guidance to the mid-to-high teens, citing strong traction in core segments. Gold loans now account for nearly 30 percent of the loan mix, while MSMEs remain a stable and scalable growth driver. Retail secured lending—particularly LAP and home loans—is gradually gaining momentum, supported by deeper penetration in semi-urban and rural markets.

Margin Surprise Strengthens Earnings Outlook

Net interest margins exceeded expectations, expanding by 24–26 basis points quarter-on-quarter to 3.89 percent in Q3FY26. The margin expansion was aided by the accrual of CRR cut benefits, deposit repricing, and a higher share of fixed-rate gold loans.

Looking ahead, the bank expects margins to remain resilient despite some pressure from the December 2025 rate cut. With over Rs 10,700 crore of deposits yet to be repriced over the next two quarters, Axis Securities expects NIMs to stay within the 3.8–3.9 percent range over FY26–FY28.

Operational Performance Remains Robust

Net Interest Income rose sharply by 28 percent YoY to Rs 752 crore, while pre-provision operating profit grew 18 percent YoY. Operating expenses increased in line with business expansion, but cost efficiency improved marginally, with the cost-to-income ratio easing to 48.8 percent.

Fee income remained a bright spot, rising 38 percent YoY, reflecting higher transaction activity and cross-selling momentum. While net profit grew 16 percent YoY, it came in slightly below estimates due to higher-than-expected provisioning.

Asset Quality Trends Continue to Improve

Asset quality strengthened further during the quarter, with gross NPAs declining to 2.17 percent and net NPAs improving to 0.78 percent. The provision coverage ratio rose meaningfully as the bank proactively built buffers.

Recoveries continued to outpace slippages, and the SMA (0+1+2) pool contracted sharply to 0.95 percent, signaling reduced stress formation. Management expects the benign credit cycle to persist over the next four to five quarters, particularly across the MSME and gold loan portfolios.

Deposits and Liquidity Remain Comfortable

Deposits grew 21 percent YoY, broadly in line with loan growth, keeping the credit-deposit ratio at a comfortable 85–86 percent range. CASA growth moderated during the quarter, but management reiterated its focus on granular retail deposits rather than wholesale funding.

Selective issuance of certificates of deposit during FY26 was described as exploratory rather than structural, with no deviation from the bank’s long-term liability strategy.

Earnings Estimates Revised Upward

Axis Securities has revised its earnings assumptions post Q3FY26, raising NII estimates by 4–7 percent over FY26–FY28 and PAT estimates by up to 3 percent for outer years. The brokerage expects City Union Bank to deliver an 18 percent CAGR in earnings over FY26–FY28, supported by operating leverage and stable credit costs.

Return ratios remain attractive, with RoA projected at 1.6 percent and RoE in the 14–15 percent range, positioning the bank favorably among mid-sized private lenders.

Valuation Re-Rating Reflects Improved Visibility

City Union Bank now trades at approximately 2.2x Sep’27E adjusted book value, compared with 1.8x earlier. Axis Securities believes the re-rating is justified, given the improved growth profile, margin stability, and declining risk metrics.

The revised target price of Rs 360 is derived using a 2.2x multiple on Sep’27E ABV, reflecting higher confidence in sustainable profitability.

Key Financial Snapshot (Standalone)

Key Risks to Monitor

Slower-than-expected credit growth remains the primary downside risk. Any unexpected deterioration in MSME asset quality or sustained pressure on margins due to aggressive rate cuts could also impact earnings assumptions.

Investment View

City Union Bank is transitioning into a phase of consistent, quality-led growth. With its core franchises firing in unison and risk metrics trending favorably, Axis Securities believes the bank is well-positioned to compound shareholder value over the medium term. The reiterated BUY call underscores confidence in management execution and balance sheet strength.