Rating Rationale
October 29, 2019 | 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 stable performance even during stress periods, adequate capitalisation and above-average earnings profile. These rating strengths are partially offset by the bank's average, though stable, asset quality, average resource profile, and small scale of operations with geographic concentration. The bank's liquidity profile continues to be comfortable with liquidity coverage ratio being at 198.6% on June 30, 2019.

Both having grown at 17% during fiscal 2019, the bank's advances stood at Rs 33,065 crore as on March 31, 2019 whereas deposits stood at Rs 38,448 crore on the same date. Slippages during the year remained stable at 2.3% in comparison to 2.4% for the previous fiscal, leading to a GNPA of 3.0% as of March 31, 2019. The bank's capital position remains adequate in relation to its scale and nature of operations, reflected in a tier I and overall capital adequacy ratio of 15.0% and 15.6%, respectively, as on March 31, 2019. Profitability has also remained above average evidenced by a return on assets (RoA) of 1.6% for the year.

For the first quarter of fiscal 2020, in light of the market scenario, the bank has been conservative in terms of growth. Advances and deposits as on June 30, 2019 stood at Rs 32, 229 crore and Rs 39,076 crore, respectively. Slippages during the quarter increased slightly to 2.8% - driven by addition of a few large and mid-sized accounts to GNPA. GNPA and NNPA on the same date - stood at 3.3% and 1.9%, respectively.

Nonetheless, capitalization - reflected in tier I CAR of 15.2% as on June 30, 2019, and earnings profile - reflected in a stable RoA of 1.6% for the quarter ended on the same date, continues to support the bank's financial risk profile of the bank.

Key Rating Drivers & Detailed Description
*Demonstrated ability to sustain performance during stress periods
CUB has demonstrated consistent performance in terms of growth, asset quality and profitability even as the banking industry, and, more particularly, the peer banks, are going through a period of extended stress in asset quality and profitability.  The bank recorded a healthy CAGR of 15.4% in advances and 11.8% CAGR in deposits over the five years through March 2019. In terms of asset quality CUB is among the top rung banks with peak gross NPAs being just over 3% during the current downturn in the banking sector. Similarly, profitability of CUB has consistently been healthy as reflected in the return on assets being over 1.5% over the past 8 years (except in fiscal 2014). In view of the above, CRISIL believes, CUB will maintain above industry average performance over the long term.

*Adequately capitalized
CUB's capital position is adequate in relation to its scale of business; its tier-I capital adequacy ratio (CAR) was 15.17% and overall CAR was 15.68% on June 30, 2019. On the same date, reported net worth was also adequate at Rs. 5,026 crore (Rs. 4,329 crore as on June 30, 2018). Its net worth coverage for net non-performing assets (NPAs) on June 30, 2019, was adequate at around 8.4 times. The bank's capital position remains supported by its stable earnings which provide adequate accruals. More so, CUB has demonstrated track record of raising 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 capitalization will remain adequate over the medium term in the normal course of operations.

*Above average earnings profile
Earnings profile of the bank is above average, evidenced by stable profitability over the past five years. Core profitability, represented by net profitability margin (NPM), has been above 1.3% over the last five fiscals. Furthermore, CUB's return on average assets (RoA) over the last 5 years, has remained stable at above 1.3%, for fiscal 2019 ' the bank reported an RoA of 1.6%. The bank has maintained its profitability at above industry-average level by being able to sustain its net interest margins (NIMs). Despite having low current account and savings account (CASA) deposits leading to a higher-than-industry-average cost of borrowings, the bank has been able to maintain spreads by charging high yields on advances. The bank's ability to charge higher yields are driven by its borrower segment comprising small and medium enterprises which have limited access to organized finance, the small ticket loans which CUB extends that command higher pricing, and lastly, its product-mix which is dominated by working capital facilities that earn relatively high yields compared to term loans. CRISIL believes that CUB will maintain its above-average earnings profile in a steady state scenario over the medium term, supported by its ability to maintain healthy NIMs and stable inflow of fee income. 

*Average asset quality
The bank's asset quality is average, owing to a few large and mid-corporate accounts becoming NPAs coupled with flat recovery. The bank's ratio of slippages to net advances has remained flat at 2.3% for fiscal 2019 as against 2.4% for the preceding fiscal. Slippages during the first quarter of fiscal 2020 have also remained stable at similar levels. CUB's security receipts (SRs) outstanding were at Rs 325 crore on March 31, 2019, which accounted for 0.99% of net advances as on that date. However, the bank's restructured standard assets (RSAs) have been reducing over the last 3 fiscals and constituted 0.2% of advances as on March 31, 2019, compared with 0.3% and 0.7% on March 31, 2018 and March 31, 2017, respectively. This decline is attributed to slippage of a few sizable accounts to NPA from RSA. The SMA -2 stood at 4.0% as on March 31, 2019 - flat in comparison to that a year ago.

Factors like the granular nature of advances, over two thirds of advances being working capital facilities high level of collateralization will continue to help CUB maintain its asset quality better than peers.  However, it is critical for the bank to maintain a tight control over fresh slippages over the near to medium term.

*Average resource profile
CUB's resources profile is average, with a relatively low share of CASA deposits and higher-than-industry-average cost of borrowings. While there has been a pick-up in CASA after demonetization, this proportion still remains below industry average of 30%. CUB's cost of borrowings has also been improving alongside gradual improvement in its share of CASA, for fiscal 2019' the bank's cost of deposits was 6.0%, improved from 6.3% for the previous fiscal. This improving trend is in line with that of other banks. Moreover, CUB's cost of borrowing is comparable with other old private sector banks. The share of retail deposits (retail term deposits and savings banks deposits) has been comfortably between 75-85% during the past few years, thereby extending stability to the bank's resources profile.

*Small scale of operations with geographic concentration
CUB's scale of operations remains modest marked by its small market share of 0.3% (in terms of total advances) as of March 31, 2019 along with high geographic concentration of operations in and around Tamil Nadu. The bank has limited presence with a small network of 650 branches as on March 31, 2019. The bank's operations are geographically focused in Tamil Nadu which accounted for 400+ branches and 77% of advances on March 31, 2019.

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

Liquidity: Strong
Liquidity position is adequate, supported by its access to systemic liquidity. The bank has positive cumulative mismatches across buckets over the next 12 months as per its SLS. CUB's liquidity position has been adequate. The bank had an excess SLR of 3.3% on June 30, 2019. Additionally, the bank can utilize 2% of its SLR investments to borrow under MSF facility.

Rating Sensitivity Factors
Downward factor
* Deterioration in asset quality evidenced by GNPAs increasing to >4.5%
* Weakening in operating and overall profitability, leading to a significant reduction in cushion in capital adequacy ratios.
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 computerized 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  Unit Q1 2020 2019 2018
Total Assets Rs crore 46,123 45,259 39937
Total income(net of interest expenses) Rs crore 580 2,126 1962
Profit after tax Rs crore 186 683 592
Gross NPA % 3.3 3.0 3.0
Overall capital adequacy ratio (for Banks) % 15.7 15.6 16.2
Return on assets % 1.6 1.6 1.6

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
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 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  250.00  CRISIL A1+      30-10-18  CRISIL A1+  24-10-17  CRISIL A1+  03-11-16  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt

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