City Union Bank Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Subdued growth, one-off slippage spike: Loan growth was muted while annualized slippages jumped to 3.6% due to a regulatory change in NPA accounting; the underlying trend was 2.9% and ₹98 Crs of recoveries will land in Q2.
• Asset quality in the "last leg": Management believes the bank is through 85–90% of its post-COVID stress, with SMA 2 pools down from 6–6.5% to 2–2.5% and slippages expected to normalize toward 2.5–3%.
• PCR pulled forward to 70%: The bank hit its coverage target a half-year early by deploying extra provisions from a closed Spicejet account, and it intends to hold that level.
• Digital and co-lending bets placed for H2: BCG has been hired to overhaul digital MSME underwriting, and co-lending evaluations with Tamil Nadu NBFCs have begun; both are expected to start contributing from Q3.
• What to watch next quarter: Whether the ₹98 Crs of deferred recoveries actually land, the pace of the promised H2 growth ramp, and any concrete successor name from the newly formed board subcommittee.

Loan Growth & the H2 Bet

• Q1 was a quiet quarter by design: Management had guided for subdued growth, and the bank delivered a sequential decline while peers pulled ahead on retail and co-lending tailwinds the bank had previously restricted itself from pursuing.
• Cash credit utilization fell sharply: Utilization of working capital limits dropped to 70–72% from 78–80%, a material drag on advances that management attributes to client behavior rather than any structural shift.
• Agri gold loan withdrawal compounded the slowdown: The product was pulled after a regulatory observation on interest subvention; a replacement product has been built and non-agri gold loans are already growing again.
• MSME investment cycle stirring: After a 3–3.5 year pause, proposals for capital investment have started coming, which management expects to accelerate in H2 and feed the core loan book.
• Growth phasing is back-end loaded: The bank normally does one-third of its annual growth in H1 and two-thirds in H2; management is targeting 12–14% advance growth for FY24, skewed toward the year-end.

Kamakodi: "But for improving the retail loans like housing loan and other segments, we need to go for the verticalization, for which we have started the action. But to have them in place and have a meaningful incremental, it will take a few quarters, if not a few years."

Asset Quality: The Accounting Shock & the "Last Leg" Thesis

• A regulatory observation inflated slippages by 70 bps: The bank used to give NPA credit for accounts that fully cured between quarter-end and audit sign-off. The regulator objected, so ₹98 Crs of such recoveries (₹75 Crs fully paid overdue, ₹23 Crs opening balance) were excluded from Q1 and will be recognized in Q2. Under the old method, annualized slippages would have been 2.9%, not 3.6%.
• MSME dominates the slippage pool: Of ₹382 Crs in gross slippages, ₹227 Crs came from MSME, which management says is proportional to the overall exposure mix.
• The "last 10–15%" argument: Pre-COVID slippages ran at 2–2.5%, rose to 3–3.5% during stress, and the bank expects to return to 2.5–3% this year. SMA 2 numbers have already compressed from 6–6.5% to 2–2.5%, which management cites as evidence the cycle is ending.
• Recoveries from the written-off pool remain slow: The ₹1,400 Crs technical write-off pool is moving slowly because the legal system, including DRPs that lacked presiding officers for half of last year, is the main bottleneck. Management did not address a direct question about collateral quality.
• Approval rates are climbing off the bottom: Pre-COVID approval rates were 50–60%, fell to 25–30% post-COVID, and have started improving, which is one reason the BCG digital project was accelerated.

Kamakodi: "So we see we are almost in the last 10, 15% of the issues. We typically used to have about 2 to 2.5% slippages before the COVID, which increased to about 3 to 3.5%. This year, our expectation is that we should be getting back to that 2.5 to 3%, and we are almost in the last leg of that particular issue."

Margins, Yields & the MCLR Reset

• NIM held stable at 3.67%: Yield on advances rose sequentially to 9.53% as policy rate hikes passed through, while cost of deposits also moved up to 5.36%, leaving the margin flat.
• A regulatory MCLR adjustment is running through the book: The bank was asked to strip out an extra 15–20 bps markup embedded in its MCLR model; implementation began in Q4 FY23. Despite that headwind, overall yield still improved sequentially due to other transmission effects.
• NIM guidance is tight: Management expects the full-year margin to stay within plus or minus 10 bps of the current level, consistent with a historical pattern where NIM sat between 3.4% and 3.7% in 40 of the last 49 quarters.
• Rate-cycle view: Management sees the hiking cycle fading and expects a declining rate cycle possibly beginning early next year; before that, both cost of deposits and NII should stabilize.

Kamakodi: "This is my 49th quarter I'm discussing. Out of the 49 quarter, if you see about the 40 quarters-or-so, our overall net interest margin, except for COVID period, it used to be between 3.4 and 3.7. It used to expand when the interest rate cycle is on the northward trend, and it used to contract when the interest rate cycle is coming back."

Digital Lending & the BCG Mandate

• BCG has been hired to rewire MSME underwriting: The project aims to digitize the lending process, introduce scorecard-based decisioning, and cut turnaround time for soft approval from 1 week–15 days to 1–2 days. BCG has executed similar projects at peer banks.
• The starting point is existing customers: Digital lending will launch with MSME loans under ₹5 Crs and renewals for the existing base; unsecured lending is explicitly not the starting point. LAP will be introduced later.
• Benefit expected in H2: Management expects the digitized process to begin transferring into growth during the second half of FY24, with co-lending also starting from Q3.
• Approval rate recovery is tied to this: The bank expects to climb back toward a 50%+ approval rate as digitization takes hold, moving step-by-step from the current 30–35% range.

Kamakodi: "Our current level of turnaround time is 1 week to 15 days. This will improve that probably to 1 to 2 days for giving the soft approval, followed by other policy, the legal opinion and the other procedural aspect, which has to be taken into account."

The New Growth Engines: Co-lending & Retail

• Co-lending evaluation has begun: The bank is in discussions with NBFCs based in Tamil Nadu whose operations are predominantly outside the state, focused on secured products: gold loans, vehicle loans, and housing loans.
• New portfolio could reach 7–10% of the book in five years: Management expects co-lending and NBFC-related portfolios to grow at close to 15%, while the core MSME, commercial trading, and gold loan book grows at 10–11%. Together, new areas should contribute about 25% of incremental growth and reach 12–15% of the overall book in 4–5 years.
• Retail verticalization is a multi-year project: The bank has started building retail verticals for housing and other segments, but management was explicit that meaningful contribution will take a few quarters to a few years.
• Near-term growth will come from the existing engine: Initial H2 growth drivers are the core MSME and commercial trading book, co-lending, and corporate relationships, all using existing internal capacity.

Succession, Costs & Profit Path

• A board subcommittee has been formed for succession: The MD's tenure ends 30 April 2026; the committee is tasked with finding a successor and ensuring an overlapping transition period. Management estimates not less than 6–12 months to identify a candidate, not less than one year of overlap, plus RBI approval time.
• Profit was flat but the bank is aiming for a four-digit figure: Q1 PAT came in at ₹227 Crs vs ₹225 Crs last year. Q2 may dip (last year's Q2 was ₹275 Crs on favorable factors not all available this time), but management expects H2 to compensate on lower slippages and improved recoveries.
• Cost-to-income rose and will stay elevated: The ratio moved to 41.98% from 39.78% on lower other income, higher provisions, and the slippage spike. Full-year guidance is 42–44%. Staff costs are expected to rise 10–12% on average increments.
• ROA is climbing toward the 1.5% long-term average: Q1 ROA reached 1.4%, with sequential improvement; management expects to close the year close to the long-term average.
• PCR pulled forward and intended to stick: The bank achieved 70% PCR with technical write-offs and 50% without, using extra provisions from the closed Spicejet account. Management will strive to maintain these levels.

Kamakodi: "The committee is assigned with the task of finding a successor and ensure a smooth transfer of responsibility when the tenure ends in 2026, considering the fact that there has to be an overlapping period between the successor and myself, which will be a slow and steady process happening over a period of time."

Guidance & Commitments

Key Metrics