City Union Bank Limited (CUB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to City Union Bank Limited Q1 FY '27 Earnings Conference Call hosted by AMBIT Capital Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Shial from AMBIT Capital. Thank you, and over to you, sir.

Yes. Thank you, Nirav, and good evening, everyone. On behalf of AMBIT Capital, I would like to welcome you all to Q1 FY '27 Earnings Call of City Union Bank. We have along with us Mr. R. Vijay Anandh, MD and CEO; Mr. V. Ramesh, Executive Director; and Mr. J. Sadagopan, CFO. I'll now hand over the call to Mr. R. Vijay Anandh, MD and CEO, for his opening remarks. Over to you, sir.

Thanks. Thanks, Jignesh. Good evening, everyone. I've been joined by my ED, Shri Ramesh; and CFO, J. Sadagopan; and other senior colleagues in this room. Hearty welcome to all of you for this con call to discuss the unaudited financial results of City Union Bank for the first quarter of FY 2027. The Board approved the results today, and I hope you all have received the copies of results on the presentation. Before we get into the results, it's truly a great honor and privilege to lead the 122-year-old franchisee. I thank the Board, regulators, and shareholders for approving my candidature. My sincere gratitude to my predecessor, Dr. N. Kamakoti, for his mentorship and steadfastly supporting the smooth transition of leadership. At this juncture, I want to congratulate our Director, Professor V. Kamakoti, who was conferred with prestigious Padma Shri award in recognition to his contribution to the nation. I hope you all have received the notice of the Annual General Meeting to be held on 14th August '26, which will happen face-to-face at Kumbakonam and also through the virtual mode. On behalf of the Board, I invite you all to participate in the AGM. During Q4 FY '26 con call, we have stated our expectations for FY '27. With respect to advances, we should be 2%, 3% over and above the credit growth of the industry. Our focus on MSME will remain same. Gold loans and secured retail will be an additional enhancer, but MSME proportion will continue to dominate. Our business through the third party, which is DSAs on our overall bank book, we envisage only 1% to 2%. Our focus on secured products will continue for the year. Our long-term average numbers with respect to PAT, ROE and NIM will hold good, and we hope the positive moments will continue. So these were the discussions we had at the end of Q4. Largely, we are in line with the expectations conveyed in the last quarter call. During the last financial year, we have achieved double-digit credit growth in all the 4 quarters. For Q1 FY '27 as well, we have achieved 25% credit growth quarter-on-quarter, the highest credit growth rate in June to June, and our advances have increased to INR 67,645 crores from INR 54,020 crores in Q1 FY '26. As stated in our earlier calls, with improved efficiency level aided by gold loan growth, coupled with digital lending process, we have achieved consistent credit growth, and we hope that current trend will continue. Deposits. Our deposits stood at INR 79,342 crores for Q1 FY '27 as compared to INR 65,734 crores in Q1 FY '26, registering a growth of 21%. As you all know, we always measure by average CASA not by terminal deposits. The average CASA grew by 22% in Q1 FY '27 to INR 20,062 crores compared to INR 16,478 crores in the corresponding period last year. Sequentially also, it has improved since Q1 FY '26, that is for 5 quarters consecutively. Our CD ratio for this quarter is at 85%, which is the level we indicated in our last call as well. With respect to the benefit given by RBI on FCNR deposits till now, the bank has mobilized a fresh deposit of INR 150 crores. Asset quality. On asset quality front, for the current quarter, the total slippages is around INR 195 crores, while the total recovery is INR 206 crores, consisting of INR 182 crores from live NPA and INR 24 crores from technically written-off accounts. So the trend of recovery more than slippages continues, and we are confident of maintaining recovery more than slippages for the next quarter as well, which is the current quarter. Our gross NPA has reduced from -- reduced to 1.73% in Q1 FY '27. Both gross NPA and net NPA in both percentage and absolute terms is reducing quarter-by-quarter for the past 12 quarters continuously. When compared to Q1 FY '26, the GNPA has reduced from 2.99% to 1.73%, which is almost 126 bps reduction. Similarly, in our net NPA, we have reduced to INR 405 crores and the net NPA percentages to 0.61% in Q1 FY '27, while the net NPA was at 1.2% in Q1 FY '26, which is a reduction of 59 bps on Y-o-Y basis. Again, overall SMA-2 to total advance for the second quarter, it is less than 1% -- sorry, it is there for the past 3 quarters, which is less than 1%. Based on our discussions with cross-section of our borrowers from various industries, we learned and observed that the domestic consumption remained largely insulated from the impact of West Asia crisis. For the Q1 FY '27, PCR, provision coverage ratio, with technical write-offs stood at 85%, which has improved from 79% during the corresponding period last year. For the current quarter, PCR without a technical write-off has improved to 65% compared to 61% during the corresponding period last financial year. For the past 8 quarters or so, we are steadily and continuously improving our PCR. Our interest income had grown by 24% in Q1 FY '27 and increased to INR 1,985 crores from INR 1,605 crores in Q1 FY '26. Our yield on advances stood at 9.79% for the current quarter, which is equal to our Q4 FY '26 level, which was almost at 9.8%. On the cost side, our cost of deposits stood at 5.56%, which is marginally lower than 5.6% in the previous quarter, that is Q4 FY '26, which is due to repricing benefit. Our NIM for Q1 FY '27 stood at 3.78%. With the term deposit rates on the verge of rise due to high demand, we expect the cost of deposits may slightly increase in the next few quarters, which will impact the NIM levels around 5 bps. But once the situation eases, it will come back to normal. Hence, we expect largely the NIM to be in the range of 3.65% to 3.7% in the next few quarters. During Q1 FY '27, the bank invested around INR 700 crores in mutual funds, which generated an income of INR 12 crores. This income has been classified under other income. Consequently, the yield on investments have declined to 6.42% in Q1 FY '27 from 6.61% in Q4 FY '26. Had the mutual fund income been recognized under interest income instead of other income, the yield of investments would have been 6.67% rather than the reported figure of 6.2% for the current quarter. Our operating profit had grown by 29% and stood at INR 581 crores compared to INR 451 crores in the corresponding period last year. By the way, this is the highest operating profit achieved by us. We had achieved a PAT growth of 25%, and our PAT stood at INR 383 crores in Q1 FY '27, which is again the highest in our bank history as against INR 306 crores in Q1 FY '26. Our cost-to-income ratio for Q1 FY '27 have reduced to 45.42% from 46.15% in Q4 FY '26. As we have discussed earlier, our cost-to-income ratio will be in the range of 47% to 48% for a few quarters. The ROA is in tune with our long-term average, and it is at 1.57% in Q1 FY '27 compared to 1.55% in the corresponding period last year. To sum up, with our best efforts, we have achieved consistent double-digit growth for the past 2 years. We will continue to explore various avenues of advances growth in addition to our core strength of MSME. We are very conscious in improving our credit growth through only secured lending, while venturing into other avenues to achieve credit growth at least 2%, 3% over and above that of the industry. Our deposit growth is aligning with our credit growth, which is helping us to maintain the desired CD ratio. We expect the NIM to hover around 3.65% to 3.7%. ROA is expected to be in the current level of 1.55% plus. Our PAT growth will continue with business growth and better asset quality. Our cost-to-income ratio will remain in the range of 47% to 48% for FY '27. Thanks a lot. Open to questions if any.

[Operator Instructions] First question is from the line of Parth Gutka from 360 ONE Capital.

Sir, my first question is slightly longer term, if I look at FY '27 [indiscernible] what will be the levers for NIM?

Sorry to interrupt you. We are losing your audio in between. Can I request to come in a better reception area, please?

Can you hear me now?

Yes. Better.

So my first question was on margins. Of course, you gave the guidance that cost of funds is expected to increase in the next couple of quarters. But if I look at slightly longer term, FY '27, FY '28, what will be the levers for margin improvement? Because what I'm seeing is the yields on the lending side are sort of stagnant or sort of -- or improving not so materially. So is it right -- is it fair to say that the only lever for margin expansion is the cost of funds? Or how are you looking at it?

I think broadly, we focus on MSME gold loans, as you would be aware. I think, we are maintaining a decent rate on gold loans, which will continue to give the returns as expected. And retail is also picking up nicely for us in secured lending. So broadly to explain, in gold loan space, we are around 10% to 10.5% for agri and 11% to 11.5% for non-agri. Broadly, we are at 9.6%, 9.7% in our LAP book in retail, and we are around 9.3%, 9.4% in MSME. So we are slightly confident of maintaining this. And traditionally, you would be aware that we are not the highest payers in deposits. So we will maintain the same cost of funds in terms of deposits as well. And hence, this trend should continue and more or less, we should be there with 3.7%, 3.75% range in the long term.

Okay. Okay, sir. And my second question was what led to the increase in cost of funds for this quarter?

We have come down on cost of funds, right? Repricing, we have done better repricing and borrowing cost. Borrowing cost has come down. INR 72 to INR 94 has increased.

Yes. So that's largely because of the borrowing cost, right?

Right.

[Operator Instructions] Next question is from the line of Subramanian K. from Itus Capital.

Congrats for the good set of numbers, sir. My first question is on the gold loan. So everyone is expanding in taking market share of the gold loan, how do you see the competition going forward? And what would be the strategy to continue growth in this segment?

Broadly, the competition is there in all the spaces, not necessarily on gold loans, but every type of firm, whether it is banks or NBFC, typically, they have their own customer base and the kind of customers. I think we are predominantly branch-driven customer base, and we get the customers who walk into the branch and pledges and do the transactions. I think we are at 30%, 31% as we speak today, and we expect it to be in the same range of 31%, 32%. We don't expect it to go up. And hence, we don't see much threat to gold loans from the competition at this juncture.

Okay. Got it. So the second is on the MSME. So currently, the system MSME is growing pretty strong, but we are growing at 15% range. So what are the reasons for this growth, this 15% growth? Like is it going to continue this range? Or is there any specific reason for the MSME growth?

The market is good. The consumption is good. So we -- and the funding is also a function of asset quality. The asset quality has been given -- the asset quality has been given benefit to us. And if you -- even if you see MSME bank like us have INR 900 crores of repayment per month. So every quarter, we almost come down by INR 2,700 crores. So in spite of that, we could move this engine quite faster basis the consumption and the market and asset quality. And we envisage this to grow 2%, 3% more than the system growth. That's our expectations on this.

Okay. But I'm asking specifically MSME. I think the system level MSME is growing faster, I think more than 20%, but our book is growing at 15%. So is it some reason like you are maintaining asset quality? Or is it like you are a bit cautious in terms of lending? So that was actually...

We were always cautious on lending. So it's not -- so if you see one of the major reasons -- there are a couple of reasons, I would say, okay? One is INR 900 crores of repayment per month. And most importantly, only in this quarter, we have seen this, our unutilized portion, which our utilization used to be 73% on an average, this has come down to 70%. So the utilization level has dropped from 73% to 70%, and we are also slightly cautious on pricing now. I think combination of these 3 factors, you would have seen some drop. But actually, I would say that it is not a drop because with INR 900 crores of repayment and utilization coming down by 3%, I think we are very fairly poised for a good growth. And on pricing, we are conscious of what we have taken a call.

[Operator Instructions] Next question is from the line of Sonal Minhas from Prescient Capital.

This is Sonal Minhas, I hope I'm audible.

Yes. You are audible.

Great set of numbers, sir. Congratulations. My first question was with regard to the credit cost and the slippage numbers. I wanted to understand the industry is actually going through a bubble patch, especially the MSME industry, and there are not too many write-offs on the gold loan side. So from a 1- or 2-year perspective, what should be a number that we should be comfortable with in terms of our slippage and also our credit cost guidance, if you can?

If you see credit cost at a steady state, we should be around 0.4%. That's a number we see once it stabilizes, we don't envisage to go up much for sure with respect to credit cost. The other question was on write-offs, is it?

No. Slippage.

The slippages continues to be more than -- the recovery continues to be more than slippages. We have been doing this for the last 10 quarters almost, and we expect this continue for this quarter as well. So we don't see much change to this. And our slippages, whatever we have committed in the last year that what we will achieve this year, I think we are on track. INR 700 crores to INR 750 crores was the number which we discussed. I think the slippages would be in the same range.

Okay. So from a 1-year, 2-year guidance also, this is a slippage number we should be around, if at all, percentage basis as well, like around 1%, 1.25%?

Yes, 0.4% credit cost and 1.2%, 1.3% should be the number. Yes, you are broadly right.

Next question is from the line of Jayant Kharote from Axis Capital.

Congrats on a good set of numbers. Sir, my question is again on the growth. If I'm correct, you have guided for above system growth by a couple of 200, 300 basis points. If that is to be kept with the mix intact between gold and non-gold, SME needs to grow much higher, sir, right, closer to 20%, around 20% or 18%, 19%, which is not happening right now. So how do you plan to catch up during the rest of the year? And not just SME, if you could also talk about other products outside gold. How do you ensure the mix doesn't change as you achieve your growth target for the full year? And if you can add some numbers on SME guidance?

So I will broadly categorize into three. We have three major sets of products. One is MSME, one is gold loans, one is retail. As we said in the previous calls as well, we would be on the gold loan between 31%, 32%. MSME would be around 55% -- yes, 55%, 60% and remaining would be 10% of the book should be retail secured. That's what broadly the plan is. We aren't changing the goalpost much. Probably, if I would have got the utilization of the same level, what was happening for the last at least 10, 12 quarters, we would have been another 2% more, I think. 2%, 3% more in MSME. That would have happened because traditionally, we used to be 73%, 74% on our utilization. As I said before, this has come down to 70%. So we had a drop of 3%, 4%. So it's -- again, the utilization is a function of the business utilized, how much they are utilizing and how is the business growing. So that's going to continue. In terms of MSME growth, as I said before, we will not hesitate to grow probably the asset quality is fantastic. I think the growth on MSME is going to be 2%, 3% more than the credit growth, system growth, and we are quite confident of that.

Okay, sir. Sir, the next question is on the branch rollout. You have upfronted this year's branch rollouts and we see OpEx growth has come in healthy 15.5%. How should we think about the rest of the year on the OpEx? And given where you are on the OpEx, why the ROA guidance to 1.55% from 1.65%? I mean, is there anything that we are missing in the ROA tree?

So largely, the branch opening is done, as you rightly said, but our hikes are from July. So as we speak, the staff hike is from day after tomorrow. So we expect the cost to move up. That's precisely the reason why we said our CIR would be in the range of 47%, if you see our commentary. So we are quite confident of maintaining the cost to income at 47%. We are currently at 45% as we speak. In terms of ROA, I think we wanted to be realistic in the numbers what we commit. So with 1.6%, 1.65% ROA, I think that's the number which we are looking at in terms of the exit ROA. My other income should also comfortably move up. That's around the corner. Considering this, I think if you see Q2, Q3, Q4 of last year, we moved from -- we were in the range of INR 259 crores. And in the Q4, we moved almost close to INR 300 crores, if you see our Q4 other income. We have -- we are currently in this quarter at INR 243 crores in the other income. So this INR 243 crores to INR 300 crores, INR 320 crores, even if we replicate the same last year's performance and retail just picking up, I think 1.65% ROA is visible. There is a visibility for 1.6% to 1.65% there.

Sir, you said that is the exit ROA, right?

Yes. Exit ROA.

Okay. And full year, you're expecting in between 1.55% to 1.65%.

1.55% to 1.65%.

[Operator Instructions] Next question is from the line of Aman from ICICI Securities.

I just wanted to understand our cost of funds has inched up this quarter, despite the moderation in cost of deposits. So can you explain that?

Sorry, I could not hear. Cost of funds. Sorry, if you can just repeat the question, sorry.

The cost of funds has inched up during the quarter despite moderation in cost of deposits. So can you help us understand that?

Yes. Sir, that is mainly because of the other borrowing and refinance, whatever we avail. The Q4 cost was around INR 72.50 crores, which has increased to INR 94 crores during Q1. That's the main reason.

So what would be the borrowing cost for the bank?

INR 94 crores for the quarter.

Okay. Got it. And sir, second question, if you can spell out the treasury gains during the quarter.

Treasury gains. The total treasury gains which is around INR 52 crores for the current quarter. Last Q4, it was INR 29 crores.

Next question is from the line of Pritesh Bumb from DAM Capital Advisors.

Congrats on a great set of numbers. Just a few questions. One is, have you participated in the ECLGS scheme? Have we sanctioned anything? And have we disbursed as well?

Yes, we are -- we have participated as we speak today. Last quarter, it was INR 200 crores. And till today, we are at INR 800 crores, and it's pretty decent.

Sir, as in terms of context, how much will be the portfolio eligible in terms of the portfolio?

So we expect ECLGS to be in the range of INR 2,000 crores to INR 2,500 crores totally for this -- under the scheme.

Total INR 2,500 crores.

INR 2,000 crores to INR 2,500 crores. Yes, INR 2,500 crores.

We would have sanctioned everything? Or is it that this is just the eligibility, but we are going to do it as it comes?

Based on the merits and whoever is eligible, they will be entitled for this scheme.

Right. Sir, second question was on the SME side. I think you mentioned that for multiple quarters, we have been less than 1%. But any particular rise quarter-on-quarter or any trends in that where we could know that the stress is rising as a trend or this West Asia crisis is not a problem for us?

I think, it was not -- West Asia crisis, I think it was not a big issue as of now. Whatever we speak is as of now for us. I think ECLGS is something which was fabulous, which came at the right time because there were not any stress. I've been meeting customers. We have gone and met multiple customers on this space. I think most of the customers have not shown any stress, and it's only the working capital cycle for that ECLGS has helped them to come back to normal. So as such, we have not seen any stresses and our numbers are also speaking on the same. One, the visit what we did for the customers is comfortable. Second, the backing up for the same is percentage of SMA-2 to advances is less than 1%. And not only SMA-2, even SMA 0 and SMA 1, we are seeing the lowest been quarter-on-quarter, I think we have not seen much stress on this space because of West Asia crisis.

Sure, sir, sure. Third question was on utilization levels. You mentioned that it has actually dropped this quarter, given that whatever is happening in the economic standpoint of you, it is surprising that the utilization levels have gone down actually. So just because you mentioned that the ECLGS requirement came in at the right time. So why would utilization level drop? Any analysis on that?

Utilization is normally a function of the business, how it goes and what is the requirement required. And it's good. If somebody is very conscious of how they are utilizing, then from a credit perspective, you feel comfortable. Typically, when the market is good, the utilization will be as high as 80% -- 75% to 80% and for an industry which is probably not in great and the margins are lesser, it will be around 60%. So on an average, you get 75% -- 73%, 74% to be on utilization. And if somebody is conscious of what they are utilizing, I think it's a good sign. We keep monitoring this very closely. And we don't see it as an issue. If you're a primary banker and if you're monitoring where the money is going and where the money is coming from and if you can understand them better, I think more or less, the kundli is there with you and you feel more comfortable. I think we have not seen much cycle.

Right. And lastly, sir, our fee income this quarter looks slightly lower than what we have built in the last 1 year. So as you mentioned that it builds up over the year, but looks like 15% year-on-year, 19% decline a little bit -- looks like a little bit lower. So any thoughts on that because that is also an important lever for ROA to move on?

Yes, hopefully, we'll catch up in Q2, Q3, Q4. Hopefully, we'll catch.

But that will be driven by disbursement -- higher disbursements? Or will it be driven by any other fee income line item? What will be the driver in your view?

Broadly, the factors contributing to other income would be prop fee and suit recovery and the insurance income. I think if these three can deliver, we will be as per the plan. And proxy is a function of what we disburse, which is functional to the business. Suit recovery again is from what they -- what we collect from write-off recoveries and insurance income is something which we always keep it at last because we really don't push that much. So it's a function of what is happening in these 3 heads broadly. Other than the treasury income is something which we -- so even the last quarter, we -- last year, we started the same -- almost with the same number, and we could scale up till almost INR 390 crores, INR 400 crores. We expect this to grow as well in the quarters to come. We are quite confident of that, hopefully.

Got it, sir. Sir, last question, I couldn't get the treasury income number, sir, I missed that number.

Treasury income I think INR 52.5 crores. INR 52.5 crores is the number.

INR 52.5 crores. Okay. Okay. Got it, sir.

[Operator Instructions] Next question is from the line of Punit Bahlani from Dolat Capital.

Sir, firstly, on the yield bit, your -- it looks like the yield increase is driven by gold loans because the portfolio yield there is higher. But some peers had highlighted that because of the strong increasing competition in this segment, they had to cut down the yields. Have we cut out any yields in our portfolio for the gold loan bid? Or are we still going with the same yield?

We haven't changed any rate of interest for gold loans. We are at the same rate, and we continue to do the same. We have not seen much to it.

Okay. Got it. Also, on the utilization levels that you commented that they are dropping down because, just extending other participants question, is could competition be a reason for utilization levels coming down because across other peers, we hear that working capital utilization levels are going up because of the demand, higher treasury yields, everything. So any comment on that? And also, what would be the disbursement -- MSME disbursement growth Y-o-Y or Q-o-Q, if you could highlight that?

So competition cannot be a function for utilization. That when you are a primary banker for a majority of your book. Utilization, again, is a function of a business needs. And it's just not that the utilization keeps on rising because, as I said a couple of minutes before, the type of industry, the demand, the supply and other stuff -- and some of the business plans were also really cautious on what was happening in Q1. And people are really [indiscernible] about the future business prospects considering the European agreement, what has been signed, particularly in the textile space. So we are really not much concerned on the utilization level. We are confident that this would slightly go up above the threshold as well, considering the future prospects of the European agreement, what textiles have signed with India, with Europe. So that part is -- we are quite confident. What was the second question? You asked the second question.

Disbursement.

Disbursement, we don't have the figures. I can share it in last quarter.