Rating Rationale
October 31, 2020 | Mumbai
City Union Bank Limited
Rating Reaffirmed 
 
Rating Action
Rs.250 Crore Certificate of Deposits 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 comfortable capitalisation with heathy liquidity. The rating also factors in the stable resource profile, marked by high retail deposits. These rating strengths are partially offset by the bank's average asset quality, weakening profitability and small scale of operations, marked by geographic concentration.
 
The Covid-19-led pandemic has disrupted cash flows of several borrowers, especially small businesses. The bank has extended a moratorium to all the eligible borrowers in line with relief measures provided by Reserve Bank of India. As on June 30, 2020, around 70% of the borrowers had paid all instalments in full and only 12.45% of them had availed a full moratorium.
 
The bank's slippages and restructuring initiatives remain contingent on cashflow positions of borrowers as the economy slowly opens up. The bank has received multiple requests for restructuring till now and it will be monitoring the performance of the portfolio in December quarter of fiscal 2021, to understand the requirements of its clients. Gross non-performing assets (GNPAs) and net non-performing assets (NNPAs) stood at 3.9% and 2.1%, respectively, as on June 30, 2020. CRISIL believes that there is a risk of elevated slippages which may lead to an increase in the GNPA ratio.
 
Capital adequacy remains comfortable in relation to scale and nature of operations, reflected in a common equity Tier I (CET I) capital and overall capital adequacy ratio (CAR) of 15.7% and 16.8%, respectively, as on June 30, 2020. Further, the Bank is having necessary approval for raising capital, required if any, for Basel III complaint Tier I Bonds and Tier II Debt Capital Instruments. The bank's liquidity profile is also adequate with liquidity coverage ratio (LCR) at 270% as on the same date.

Key Rating Drivers & Detailed Description
Strengths
*Comfortable capital position
Capitalisation metrics have been comfortable over the past 3-4 years. Capital is adequate for the current scale of operations. As on June 30, 2020, CET I and overall CAR stood at 15.7% and 16.8%, respectively. The bank may focus on growth of calibrated risk-weighted assets in fiscal 2021, so as to avoid pressure on capitalisation. Reported networth stood at Rs 5,450 crore and networth coverage of NNPA was adequate at 7.6 times on June 30, 2020. Capital position was supported by stable earnings and hence, sufficient accrual. CUB has also demonstrated a track record of raising equity capital through rights or preferential issue as and when required. CRISIL thus believes CUB has adequate cushion to absorb any potential stress in the earnings profile due to higher credit cost.
 
* Stable resource profile marked by high retail deposits
The bank's resource profile is marked by a high share of retail deposits (term deposits of below Rs 1 crore and savings deposits) at 79% as of June 30, 2020. Bank deposits grew by 2.6% quarter-on-quarter to Rs 40,832 in March 2020 (from Rs 39,812 crore in December 2019). As on June 30, 2020, overall deposits stood at Rs 41,026 crore. CUB's cost of deposits was high at 6.1% for fiscal 2020. However, the bank has reduced its deposit rate in the last quarter of fiscal 2020, in line with the industry and cost of deposits has therefore, dropped to 5.89% during the June quarter.
 
Share of current account and savings account (CASA) deposits stood at 24.6% as on June 30, 2020, a drop from 24.97% as of March 2020. While CASA deposits have picked up post demonetisation, the 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 bank's total deposits during 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.
 
Weaknesses
* Expected weakening in asset quality metrics
Asset quality remains average as reflected in GNPA of 3.9% and NNPA of 2.1% as of June 30, 2020 (4.1% and 2.3%, respectively, as on March 31, 2020) with provision coverage ratio of 47% (45% as on March 31, 2020).
 
The pandemic has adversely affected cash flows of borrowers, mainly the small businesses. CUB has provided a loan moratorium to all its eligible borrowers, as highlighted in relief measures specified by the RBI.
 
Of the total exposure, borrowers constituting 87.55% of the loan book (Rs 26,918 crore) have paid at least one monthly installment/interest (excluding jewelry loans, loan against deposit and staff loans). Under cash credit (CC) accounts, borrowers forming 88.20% of the exposure have paid all four installments, and only 1.76% accounts have fully used the moratorium and not cleared interest dues. On the other hand, borrowers accounting for 46.17% of the term loan exposure have paid all installments till June 30, 2020, and those forming 26.54% of the exposure have fully availed the moratorium.
 
The bank's slippages and restructuring plans will largely factor in cash flow positions of borrowers as the economy gains momentum gradually. Having received multiple requests for restructuring, the bank shall monitor performance of the portfolio in the December quarter of fiscal 2021, for better understanding of client requirements. CRISIL believes elevated slippages could increase the GNPA ratio. The extent of restructuring and increase in stressed assets will be a key monitorable.
 
*Expected moderation in earnings profile
The bank's earnings profile has been above average over the five years through fiscal 2019. However, in fiscal 2020, the bank has reported return on assets (ROA) of 1.0%, contrary to over 1.4% maintained over the last decade. While the pre-provisioning operating profit (PPOP) has remained steady over the quarters at 2.8- 3.0% (PPOP to average total assets), overall profitability has moderated due to increase in credit cost. Going forward, the bank's operating profitability should sustain, supported by its steady net interest and fee income. The bank's provisioning coverage ratio (PCR) has improved to 45% in fiscal 2020, up from 40% in fiscal 2019, and stood at 47% as on June 30, 2020. However, over the next few quarters, slippages could increase due to Covid-related stress and higher restructuring of assets. Overall profitability is a key monitorable, given the expected rise in stressed asset provisioning. However, the Bank is having an adhoc COVID provision of Rs. 202 crore as on 30th June 2020 to meet any exigencies on account of slippages.
 
*Small scale of operations with geographic concentration
CUB's scale of operations remains modest, marked by a small market share of ~0.3% (in terms of total advances) as of June 30, 2020, along with high geographic concentration in and around Tamil Nadu. Tamil Nadu alone accounted for 485 branches (of 700 branches) and 63% of advances as on June 30, 2020.
 
CRISIL 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 a key sensitivity factor.
Liquidity Strong

Liquidity position is strong, 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 LCR of 270% as of June 30, 2020. The bank held 5.7% excess securities under the statutory liquidity ratio bracket on June 30, 2020.
 
Rating Sensitivity Factors
Downward Factors:
*Significant pressure on asset quality, evidenced by GNPAs exceeding 9%
*Weakening in operating and overall profitability, leading to a significant reduction in cushion in CET I ratio
*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 the bank. 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 computerized its 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 2021 2020 2019
Total Assets (Reported) Rs crore 49,265 49,734 45,259
Total income(net of interest expenses) Rs crore 597 2,355 2,126
Profit after tax Rs crore 154 476 683
Gross NPA % 3.9 4.1 3.0
Overall capital adequacy ratio (for Banks) % 16.8 16.8 15.6
Return on assets % 1.2 1.0 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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs.Cr)		 Complexity Level Rating assigned 
with Outlook
NA Certificate of Deposit Programme NA NA 7-365 days 250 Simple CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  250.00  CRISIL A1+      29-10-19  CRISIL A1+  30-10-18  CRISIL A1+  24-10-17  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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