Reeling in City Union Bank

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City Union Banks | NSE:CUB– came onto our MWI Research List post the over dramatic correction in March’ 2020; This is what we saw!

City Union Bank, established over a 100 years ago is India’s oldest private sector bank. Though with 0 promoter holdings, the bank’s management has till now been able to keep the shareholders interests well protected.

Lesser known- CUB has been the second most outperforming bank across all its major peers since 2005

and the has been available to us at an extremely discounted price of 115/- viz.- 53.82% lower than its 52wk high prices of 249/-

Which is where we did initiate a buy on the bank. Though the bank has rallied 54%, we see no reason to book profits in a position that can probably multi-fold in the near future.

Looking at the fundamental strength of the bank’s books, we believe the strong regional focus, granular loan book and decent liquidity will help it steer clear of the covid situation. Probably, CUB might turn out to be the most unscathed bank after this crisis is behind us.

Strong Fundamentals– Though in comparison to banks like KOTAK and HDFC, CUB does have a higher NNPA ratio. Which is probably why we would’ve never bought it at its original >200/- levels. The company has consistently maintained financing margin, even during the very turbulent times post the IL&FS financial stress.
Considering, COVID would impact growth in the bank- it would probably still make 9.45% more than it did last year owing to the now lower effective tax rates.

Government Effect– The Recent steps taken by the RBI, have shown willingness of the regulator to take a conservative stance allowing banks to comfortably navigate through troubled waters. Relaxed NPA Reporting would probable result in better results (in the short term), but CUB has chosen to aggressively make provisions which would reduce result surprises when these NPA Relaxations are reversed.
Interestingly, less than 15% of the bank’s advances have opted for moratorium.

Effective Management– The MD & CEO of the bank-Dr. N. Kamakodi, has been with the bank for two generations. Though the bank has no promoters- “The bank has now 2700 employees; close to 10% are second generation employees while 50% are third generation employees” since similarly most clients are also third generation. The bank’s employees have build a culture of keeping the clients interest above all else, which has directly translated as more business/employee.
Also, RBI on 21st April’2020 has allowed N KAMAKODI to continue on as MD & CEO for the next 3 years.

Probably, owing to these above reasons the CUB stock has always traded at a premium until recently when it is trading cheap. In panic all stocks of the respective industry are looked at with the same amount of scepticism

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