Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificate of deposit programme of City Union Bank Limited (CUB).

 

The rating continues to reflect the comfortable capitalisation of CUB and the adequate liquidity. The rating also factors in the stable resource profile, as indicated by high retail deposits and the modest earnings profile. These rating strengths are partially offset by the weaker, albeit improving, asset quality and the small scale of operations, marked by a concentrated geographical reach.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profiles of CUB.

Key Rating Drivers & Detailed Description

Strengths:

Comfortable capital position

Capitalisation metrics were comfortable, as reflected in networth of Rs 7,859 crore and networth to net non-performing assets (NPA) ratio of 7.9 times as on September 30, 2023 (7.3 times as on March 31, 2023). Capital cushion is adequate for the current scale of operations. As on September 30, 2023, the common equity tier I ratio and overall capital adequacy ratio (CAR) of the bank stood at 21.2% and 22.2%, respectively. The recent regulation by the Reserve Bank of India (RBI) on revised risk weights on unsecured consumer loans, including credit card receivables and loans to non-banking finance companies (NBFCs) beyond a specific threshold, is expected to have minimal impact on the capital ratios of the bank.

 

The capital position also remains supported by strong internal accrual. CUB has also demonstrated its track record of raising equity capital via rights or preferential issue, as and when required. CRISIL Ratings thus, believes CUB has adequate cushion to absorb any potential stress in the earnings profile arising from higher credit cost.

 

Stable resource profile, as indicated by high retail deposits

Retail deposits (term deposits less than Rs 2 crore and savings deposits) accounted for 78.2% of the total deposit base as on September 30, 2023. Overall deposits grew 5.7% year-on-year to Rs 52,714 crore as on September 30, 2023, as compared to Rs 49,878 crore as on September 30, 2022 (Rs 52,398 crore as on March 31, 2023). In line with the rising interest rates, cost of deposits rose to 4.6% for the quarter ending September 30, 2023 (compared to 3.97% in fiscal 2023).

 

The share of current account and savings account (CASA) deposits was stable at 29.6% as on September 30, 2023, compared to 31.3% as on September 30, 2022. While CASA deposits have been rangebound, their share still lags the industry average. However, the bank deposit base includes pure retail liability franchise with no reliance on corporate bulk deposits and certificate of deposits. Retail deposits have accounted for 75-85% of the total deposits in the past few years, thus lending stability to the overall resource profile. Increase in share of CASA deposits remains a key factor in improving the overall deposit profile.

 

Stable earnings profile

While the cost of funds has risen for the bank in line with the rising interest rate regime, ability to pass on the rate hike to borrowers and maintain a stable spread between yields and cost of funds, has supported the earnings profile.

 

As of March 2023, the NIM has narrowed by 10 basis points to 3.89%; however, the bank was able to report a return on average total assets of 1.5% during the fiscal (1.3%: fiscal 2022) on account of marginally lower provisioning cost, with the latter reducing to 1.0% during the period.

The drop in provisioning was primarily on account of higher recoveries in the last quarter of fiscal 2023, and resultant reduction in incremental provisioning.

 

Furthermore, during the six-months ending September 30, 2023, the bank reported an annualised RoA of 1.5%, in line with that of March 2023, supported by lower provisioning cost of 0.6% (annualised), while NIM declined by 15 bps to 3.74% during the same period.

 

Going forward, CRISIL Ratings expects the bank’s operating margin to sustain, supported by its steady net interest income and fee income. Any significant impact on the earnings profile due to unanticipated slippages and therefore, credit cost, remains a key monitorable.

 

Weaknesses:

Weakened asset quality metrics

Gross NPAs stood at 4.7% as on September 30, 2023 (4.4% as on March 31, 2023, and 4.7% as on March 31, 2022). The ratio has gone up marginally in the first half of fiscal 2024, owing to delinquencies in the small and medium enterprises segment. The SME segment, which formed 11% of the overall loan portfolio as on September 30, 2023, was impacted by the cyclical nature of the textiles and metals industries. GNPAs in the SME segment stood at 6.5% as on September 30, 2023, up from 6.0% as on March 31, 2023. GNPAs in the agriculture and retail segments stood at 3.4% and 2.8%, respectively, as on same date.

 

Additionally, the bank had an outstanding restructured portfolio of Rs 1,103 crore as on September 30, 2023, which accounted for 2.5% of overall advances as on September 30, 2023. The performance of this portfolio remains a key monitorable.

 

Going forward, slippages will largely depend on cash flow positions of restructured borrowers as the economy gains gradual momentum. Any change in payment discipline of borrowers will affect asset quality levels, and hence, the bank’s ability to manage asset quality.

 

Modest scale of operations with geographical concentration

CUB operates on a modest scale, as indicated by a negligible market share of around 0.3% (in terms of total advances) as on September 30, 2023, along with high geographical concentration in and around Tamil Nadu. The state alone accounted for 519 branches (of 752 branches) and 67% of advances as on September 30, 2023.

 

CRISIL Ratings believes CUB will continue to operate as a mid-sized bank with high regional concentration over the medium term. Business growth in new geographies, in terms of resources, clientele, size and type of exposure, will be key sensitivity factors.

Liquidity: Strong

Liquidity is supported by access to systemic liquidity. The bank has positive cumulative mismatches across buckets over the next 12 months. Liquidity position has been adequate with liquidity coverage ratio of 274% as on September 30, 2023. The bank held 6.3% excess securities under the statutory liquidity ratio bracket as on September 30, 2023.

 

Environment, Social, and Governance (ESG) profile

CRISIL Ratings believes CUB’s ESG profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact given its vast employee and customer base, and thus, can play a key role in promoting financial inclusion. While it does not have any direct adverse impact on the environment, the lending decisions may have a bearing on the same.

 

CUB has an ongoing focus on strengthening various aspects of its ESG profile.

 

Key highlights:

• The bank has been driving energy efficiency across all offices, having installed solar power panels in few branches and now plans to extend the same to all offices subject to feasibility.
• The bank considers ESG related criteria while making its lending decisions wherein projects require environment clearances and borrowers need to comply with all related stipulations.
• ESG disclosures of the bank are evolving and it is in the process of further strengthening these disclosures.
• For social aspects focuses on community development, particularly towards raising the standards of the underprivileged sections.
• In terms of gender diversity, female employees accounted for 28% of the total employee base as of March 2023.
• 90% of the board members are independent directors, except the MD & CEO who is a whole-time executive director. The bank has a dedicated investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. CUB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Rating Sensitivity Factors

Downward Factors:

• Significantly weaker asset quality with GNPAs exceeding 7.0%
• Decline in overall profitability, narrowing the cushion in CET 1 ratio considerably
• Material reduction in deposits

About the bank

CUB is one of the oldest private sector banks in India, incorporated as The Kumbakonam Bank Ltd, by 20 citizens of Kumbakonam, Tamil Nadu, in 1904. In 1957, the bank acquired Common Wealth Bank Ltd. In 1965, two local banks, The City Forward Bank Ltd and The Union Bank Ltd, were amalgamated with it. Consequently, it was renamed The Kumbakonam City Union Bank Ltd. In November 1980, CUB started expanding its operations outside Tamil Nadu and in 1987, came to be known by its present name. CUB is listed on the National Stock Exchange and Bombay Stock Exchange. In 1990, the bank computerised its operations and, in 2006, implemented the core-banking-solution process across all its branches.

Key Financial Indicators

As on / for the period ended	Unit	Sep-23	Mar-23	Mar-22	Mar-21
Total assets (reported)	Rs.Crore	67,274	66,595	61,531	53,312
Total income (net of interest expenses)	Rs.Crore	1,435	2,973	2,676	2,534
Profit after tax	Rs crore	508	937	760	593
Gross NPA	%	4.7	4.4	4.7	5.1
Overall capital adequacy ratio (for banks)	%	22.2	22.3	20.8	19.5
Return on assets	%	1.5*	1.5	1.3	1.1

   Note: *RoA annualized

Any other information: Not Applicable