Rating Rationale

Strengths
* 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 19.2% in advances and 15.6% CAGR in deposits over the past 8 years. 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 capitalised
CUB's capital position is adequate in relation to its current and planned scale of business; its tier-I capital adequacy ratio (CAR) was 15.6% and overall CAR was 16.06% on June 30, 2018. The tier-I CAR has remained above 14% over the past 5 years reflecting the strong capitalization levels maintained consistently over long term. On the same date, reported net worth was also adequate at Rs. 4,329 crore (Rs. 3,710 crore as on June 30, 2017). Its net worth coverage for net non-performing assets (NPAs) on June 30, 2018, was comfortable at 9.1 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. The bank's last equity infusion was Rs. 350 crore in 2015. In view of healthy accruals and demonstrated ability to raise equity, CRISIL believes that CUB's capitalisation 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 1.4% over the last five fiscals. Furthermore, CUB's return on average assets (RoA) over the last 9 fiscals, has remained healthy at above 1.3%, for fiscal 2018 ' the bank reported an RoA of 1.57%. 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 due to its yields on advances. The bank's ability to charge higher yields are driven by its borrower segment comprising small and medium enterprises the small ticket loans which CUB extends that command higher pricing, and lastly, its product-mix which is dominated by working capital facilities (~70%) 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.

Weakness
* Average asset quality
The bank's asset quality is average, owing to a few large and mid-corporate accounts becoming NPAs and on account of lower than expected recovery during the period ended March 31, 2018. The bank's ratio of slippages to net advances increased marginally to 2.4% for fiscal 2018 from 2.3% for the preceding fiscal, for quarter ended June 30, 2018 ' slippages declined to 2.1%. CUB's security receipts (SRs) outstanding were at Rs. 341 crore on March 31, 2018, which accounted for 1.2% 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 0.3% of advances as on March 31, 2018, compared with 0.6% and 1.0% on March 31, 2017 and March 31, 2016, respectively. This decline is attributed to slippage of a few sizable accounts to NPA from RSA. The SMA -2 stood at 4.3% as on March 31, 2018.

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 at 23.9% as on June 30, 2018 and higher-than-industry-average cost of borrowings (deposits + other borrowings) at 6.0% for fiscal 2018. While the bank's CASA deposits increased to 24.2% as on March 31, 2018, helped by demonetization, it is still far below the industry average of ~30%. On the positive side, the share of retail deposits (retail term deposits and savings banks deposits) continues to be high and has been between 70-80% during the past few years, thereby extending stability to the bank's resources profile. Further, dependence on certificate of deposits is minimal. Nevertheless, improving the share of CASA would continue to be a key factor in improving overall deposit profile of CUB

* 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, 2018 along with high geographic concentration of operations in and around Tamil Nadu. The bank has limited presence with a small network of 600 branches as on March 31, 2018. The bank's operations are geographically focused in Tamil Nadu which accounted for 415 branches and 64% of advances and 79% of deposits on June 30, 2018.

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, clientile, size, and type of exposure; will be a key sensitivity factor.