Rating Rationale
October 24, 2017 | Mumbai
City Union Bank Limited
Rating reaffirmed
Rating Action
Rs.250 Crore Certificate of Deposits Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the certificate of deposits programme of City Union Bank Limited (CUB) at 'CRISIL A1+'.
The rating continues to reflect CUB's adequate capitalisation and above-average earnings profile. These rating strengths are partially offset by the bank's average asset quality, average resource profile, and small scale of operations with geographic concentration.

Key Rating Drivers & Detailed Description
* Adequately capitalised
CUB has adequate capitalisation; its tier-I capital adequacy ratio (CAR) was above 11.5% and overall CAR was above 12.5% over the past five years. The bank's business registered a compounded annual growth rate of 14.4 per cent during the period. CUB had an adequate absolute net worth of around Rs 3,710 crore as on June 30, 2017 (Rs 3,570 crore as on March 31, 2017). Its net worth coverage for net non-performing assets (NPAs) was comfortable, at 8.7 times, as on the same date. CUB's earnings are stable and provide adequate accruals. In the past, CUB has raised equity capital through rights issue or preferential issue as and when required, to support growth. In view of healthy accruals and demonstrated ability to raise equity, CRISIL believes that CUB's capitalisation will remain adequate over the medium term.
* Above average earnings profile
CUB has an above-average earnings profile, marked by stable profitability over the past five years; core profitability, as represented by net profitability margin (NPM), was 1.05 over the period. Furthermore, CUB's average return on assets (RoA) during the past three years was stable, at 1.5%. Net interest margins (NIM) have improved by 36 bps to 4.17% during fiscal 2017 primarily on account of lower cost of deposits (6.8% as on March 31, 2017 compared to 7.6% as on March 31, 2016) and influx of funds post demonetisation. CUB's earnings has always been supported by relatively high yields on advances mainly driven by (a) small and medium enterprises with limited access to organised finance (b) small ticket loans that command higher pricing, and (c) product-mix (large working capital facilities that earn relatively high yields compared to term loans). Operating expense and credit cost have however remained flat year on   year at 2% and 0.9% of average total assets as on March 31, 2017.  CUB's security receipts (SRs) outstanding were at Rs.345 crore as on June 30, 2017, and accounted for 1.4% of the advances as on that date. CUB has already made provisions amounting to Rs 73 crore against the SR's and also made recovery of Rs 30 crore. CUB intends to make additional provisions of around Rs 40-50 crore annually over next few years. However, these provisions have to be made over a longer timeframe, it is unlikely to impact the quarterly profitability materially. CRISIL, therefore, believes that CUB will maintain its above-average earnings profile over the medium term.
*Average asset quality and resource profile
The bank has average asset quality, marked by gross NPA (GNPA) of 3.0% as on June 30, 2017.  The gross NPAs have increased from 2.4% as on March 31, 2016, because a few large and mid-corporate accounts have become NPAs The bank's ratio of slippages to NPAs decreased marginally to 2.3% during fiscal 2017, from 2.4% during fiscal 2016. However, the bank's restructured standard assets (RSAs) reduced to 0.5% of advances as on March 31, 2017, compared with 1.0% as on March 31, 2016 primarily because one of the accounts slipped to NPA from RSA. CRISIL also estimates the asset quality stress on the mid and large corporate exposures of CUB to be low.  However, the impact of introduction of goods and services tax (GST) is likely to have some impact on the asset quality of CUB. The bank has a predominant share of exposure to MSME sector and the sector is expected to take time to acclimatise to the new indirect tax regime. In view of the above and the continued sluggishness in the economy, CRISIL, believes that the asset quality pressure on advances portfolio is likely to continue for a few more quarters.  
CUB's resources profile is average, with a low share of CASA deposits and cost of borrowings in line with the industry average. The bank's CASA deposits increased over the past three years to 23.0% as on June 30, 2017, CUB's CASA deposits were much lower than the industry average of 35% as on June 30, 2017. CUB's cost of borrowings improved to 5.5% during first quarter of fiscal 2018, as against 6.6% in fiscal 2016. This improving trend is in line with that of other banks. Moreover, CUB's cos of borrowing is comparable with other small private sector banks. However, the share of retail deposits (retail term deposits and savings banks deposits) was comfortable, between 70-80%, during the past few years, lending stability to the bank's resources profile.
* Small scale of operations with geographic concentration
CUB's scale of operations remains modest, with high geographic concentration; the bank accounted for a mere 0.3% of the systemic deposits and advances as on June 30, 2017. CUB has a limited presence, with a small network of 550 branches, as on June 30, 2017. The bank's geographical concentration is high, with Tamil Nadu comprising 63% of its advances and 78% of its deposits as on June 30, 2017. Additionally, 69% of CUB's 550 branches are in Tamil Nadu. CRISIL believes that CUB will remain a small bank, with high regional concentration, over the medium term; the bank's business growth in new geographies in terms of resources, client profile, size, and type of exposure, will be a key sensitivity factor.
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 the bank. Consequently, it was renamed The Kumbakonam City Union Bank Ltd. In November 1980, CUB started to expand 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 operations, and, in 2006, implemented the core-banking-solution process across all of its branches.

Key Financial Indicators
As on / for the period ended March 31   2017 2016
Total Assets Rs crore 35271 31252
Total income (net of interest exp) Rs crore 1683 1391
Profit after tax Rs crore 503 445
Gross NPA % 2.8 2.4
Overall capital adequacy ratio (for Banks) % 15.8 15.6
Return on assets % 1.5 1.5

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue Size
(Rs. Cr)
Rating assigned 
with Outlook
NA Certificate of deposit programme NA NA 7-365 days 250 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  250  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt

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