ICICI Securities, through its retail research arm ICICI Direct, has reaffirmed a Buy rating on City Union Bank (CITUNI), pegging a 12-month target price of Rs 240 a share against a current market price of Rs 204 — an implied upside of 18%. The call lands just as the Tamil Nadu-based lender's stock turns ex-bonus following a 1:3 bonus share issue that took effect on June 12, 2026. Analysts Vishal Narnolia and CA Parth Chintkindi point to brisk advances growth, a thriving gold-loan book, steadying margins and improving asset quality as the four pillars propping up their thesis, with return on assets projected to climb toward 1.65–1.67% by fiscal 2027.

Stock Snapshot

A Bonus Issue Resets The Share Count, Not The Story

Under the 1:3 bonus, every shareholder holding three shares now holds a fourth at no additional cost, which mechanically dilutes per-share metrics like price and book value even though the underlying business and the total value of each investor's holding remain unchanged. ICICI Direct has factored this dilution into its arithmetic, revising its target price to Rs 240 while holding its valuation anchor steady at 1.7 times estimated book value for fiscal 2028 — and keeping its Buy rating squarely in place.

A South India Franchise Built On Small Business And The Soil

City Union Bank, one of India's older private-sector lenders, operates 949 branches, of which 770 sit in South India — a concentration that has long defined its identity. Its loan book leans heavily on small enterprises and farming: MSME advances account for 38% of the portfolio and agricultural loans another 16%, together making up roughly 54% of total advances. Management is steadily widening its net into home loans, personal loans and other retail products as it works to diversify beyond this traditional core.

Advances Sprint 25.7%, With Gold Loans Doing The Heavy Lifting

The fourth quarter delivered brisk momentum: advances climbed 25.7% year-on-year (9.5% sequentially), driven in large part by a gold-loan portfolio that expanded 36% year-on-year. Deposits kept pace, rising 23% year-on-year (11% sequentially), aided by 19% growth in low-cost CASA balances and 24.8% growth in term deposits — keeping the credit-deposit ratio at a comfortable ~85%. Management's guidance calls for mid-to-high-teens credit growth, running 2 to 3 percentage points above the broader banking system, with the portfolio mix holding steady at 55–60% MSME, 30–32% gold loans and the remainder in secured retail. ICICI Direct itself is modeling 17–18% credit growth for both fiscal 2027 and 2028.

Margins Hold Steady, Bad Loans Keep Shrinking

Net interest margin came in at 3.87%, only marginally below the 3.89% recorded in the December quarter, helped by a roughly 29% fixed-rate gold-loan book even as the bank completed full transmission of rate changes. Management expects margins to stay within a tight ±5–10 basis point band going forward, supported by liquidity coverage ratio flexibility and continued CD-ratio optimization. Asset quality, meanwhile, kept improving: gross NPAs fell to 1.91% and net NPAs to 0.68%, while special-mention accounts dropped to 2.47% from 3.68% the previous quarter, with recoveries outpacing fresh slippages — a combination analysts read as pointing to a benign credit-cost outlook. Operating expenses are likely to grow 15–17% as the bank expands its branch footprint, but management still expects roughly a 10-basis-point lift in return on assets, to 1.65–1.67%. The bank's upcoming leadership transition to incoming managing director R. Vijay Anandh is expected to preserve continuity in both strategy and execution.

The Earnings Run-Rate: FY25 Through FY28E

Net profit is projected to compound at roughly 15% annually between fiscal 2026 and 2028, while net interest income grows at a faster 18% clip over the same stretch — a gap analysts attribute to operating leverage kicking in as the branch network matures.

Institutions Tighten Their Grip

Domestic institutions have steadily added to their stake, with DII holding climbing from 35.2% in June 2025 to 40.7% by March 2026, even as foreign institutional investors trimmed exposure from 27.4% to 23.4% over the same stretch. City Union Bank carries no promoter holding, a structural quirk of its old-private-bank lineage.

Risks That Could Cap The Upside

ICICI Direct flags two swing factors worth watching: a slower-than-anticipated pace of business growth, and any deterioration in asset quality stemming from geopolitical uncertainty — a risk that could pressure both credit costs and loan demand simultaneously.

Bottom Line For Investors

ICICI Direct's thesis hinges on durable earnings visibility — healthy credit growth, resilient margins and steadily improving asset quality converging to lift return on assets toward 1.65–1.67% in fiscal 2027. With a target price of Rs 240 implying 18% of headroom from current levels, the brokerage maintains its Buy rating over a 12-month horizon. Under ICICI Securities' own rating framework, a Buy denotes upside beyond 15%, a Hold spans -5% to 15%, a Reduce covers -15% to -5%, and a Sell applies below -15%.