City Union Bank Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Growth reset, not recovery: Management withdrew its 12–14% FY24 guidance, now expects to fall short of double digits, after three quarters of negative-to-low-single-digit growth. The last two months showed ~INR400 crores monthly credit growth, but the bank will not commit a firm number until it demonstrates 1–2 quarters of that run rate.
• Asset quality is doing the heavy lifting: Annualized slippage ratio fell to 1.70% from a peak of 5.56% in Q4 FY20, and live NPA recoveries surpassed live slippages this quarter, a trend management expects to continue. Reduced credit cost is the primary driver of PAT growth while operating profit faces headwinds.
• One-time interest reversal masked underlying NIM: A ~INR25 crores reversal on non-performing FITL accounts depressed reported yield to 9.85% and NIM to 3.67%; without it, the underlying trajectory was healthier.
• Digital lending Phase 1 is live, but the payoff is unproven: The BCG-advised automation for loans under INR3 crores is operational, with 70–80% of in-principle sanctions now possible within 48 hours. Phase 2 (up to INR5 crores) is in parallel testing, but the growth impact so far is only INR400 crores monthly, and management concedes it needs a few quarters to see the system’s effect on default probabilities.
• What to watch next quarter: Whether the INR400-crore monthly run rate holds and accelerates, the pace of Phase 2 digital lending rollout to INR5 crores, and any firm FY25 growth guidance once management has “total grip.”

Growth: The Guidance Reset

• From 12–14% to “hopefully closer to double digit”: Management initially guided 12–14% for FY24, moderated to double-digit, and now says it will not cross double digit. The bank is putting its best effort to get as close as possible, but is not giving any expected number.
• The KCC drag is finally over: Regulatory observation on KCC agri gold loans in December 2022 forced a ~INR4,000 crores degrowth starting January 2023, completely stopping new KCC loans. That unwinding is by and large complete, removing a structural headwind.
• Non-agri gold loan grew 28% (INR1,200 crores) even as the KCC book shrank, showing underlying demand in the secured gold loan franchise.
• Q4 optimism rests on seasonality and automation: Management cited historical Q4 growth of INR2,200–2,400 crores (highest INR2,768 crores in FY22) and the first phase of digital lending as reasons for hope, but acknowledged “it may look optimistic only and I will not be in a position to assure everything.”
• Deposit growth is not a constraint: Credit-deposit ratio at 80–83% and capital adequacy above 20% mean deposit growth will match credit growth without hampering advances.

Kamakodi: “No, I don't think we will be able to cross double digit. Hopefully, we should be getting closer to the double digit.”

Asset Quality: The PAT Engine

• Slippage ratio trending toward pre-COVID levels: Annualized slippage ratio fell to 1.70% in Q3, down from 2.06% in Q2 FY24 and a peak of 5.56% in Q4 FY20.
• Recoveries overtook slippages this quarter: Live NPA recoveries surpassed live slippages, and management expects this trend to continue in coming quarters, reducing both gross and net NPA along with provision requirements.
• Credit cost benefit has multi-quarter visibility: Management sees about INR200 crores in credit cost benefit from lower slippages versus recovery, visible for at least three to four quarters.
• SMA2 at an all-time low: Post-cleanup, SMA2 is at 2+%, the lowest ever, compared to a historical 6–8% range where about 2% would become NPA. This supports the expectation that slippages will stay contained.
• FITL reversal was a one-time cleanup item: Funded interest term loans given during COVID restructuring turned NPA, triggering a ~INR25 crores interest reversal. Without it, yield would have been 9.85% and NIM 3.67%.
• Divergence issue is behind the bank: The RBI divergence for 31st March 2022 is over; no disclosure was needed for 31st March 2023. An observation on post-balance-sheet-date event recognition was disclosed in Q1 and is now resolved.

Kamakodi: “During the COVID we had multiple headwinds from our various quarters, we are setting one piece after the other back on track and we are able to do that without basically compromising on the overall ROA and PAT.”

Digital Lending: The Growth Bet

• Phase 1 is live for loans under INR3 crores: The BCG-advised project’s first phase is complete, with turnaround time as low as one day and 70–80% of in-principle sanctions happening within 48 hours, versus weeks or months previously.
• Phase 2 testing has begun for INR3–5 crores: Both manual and system processing are running in parallel for about one month to compare results and tweak parameters. If successful, 80–90% of cases under INR5 crores could get in-principle sanction within 48 hours.
• Phase 3 will extend to INR7.5 crores: Work has started for INR5–7.5 crores, which is the regulator’s threshold for retail. It will be a combination of automated and manual decision-making, reducing manual intervention to a greater extent. Phases for INR5–7.5 crores will go up to June.
• The payoff is not instant: Management expects the digital lending system to continuously reduce the probability of default over a few quarters as it stabilizes, and the cost-to-income ratio will remain elevated for the next couple of quarters due to automation costs before returning to the 40–45% range.
• 60–70% of the loan book falls under INR7.5 crores in number of proposals, though a significant portion are under INR50–55 lakhs, so the automation addressable market is large but granular.

Kamakodi: “The slippages will drastically come down as we move forward, which has...”

Margins, Yield & Cost Dynamics

• NIM has been range-bound for 50 quarters: Management noted that NIM has stayed in a small band over the last 50 quarters, with above-4% being an aberration for only 3–4 quarters. Margins expand during rising-rate scenarios and see smaller contraction during falling-rate scenarios until term deposits reprice.
• Cost of deposits rose steeply, but yield moved in tandem: The increase in cost of deposits during the quarter was normal with no one-offs, and yield increased almost proportionately.
• Cost-to-income ratio is temporarily elevated: Automation-related costs are keeping the ratio high; management expects it to return to the 40–45% range post-completion, with the maximum impact over the next couple of quarters.
• ROA profile is stable: Management expects ROA to move in a band of plus or minus 10%, with a long-term average of 1.5%. Current ROE is about 13%, recovering from 10% in the first COVID year toward the historical 15–16%.
• Bond yield impact is uncertain: Some profit booking is possible since yields increased significantly, but the drop seen is only 10–15% of the yield increase over the last year. HTM holding rules and profit booking concepts change from April 2024, making the outlook unclear.

Portfolio & Sector Trends

• MSME demand is improving in phases: Significant requests are coming from MSME borrowers for solar energy financing, a shift from the earlier windmill focus. Textile export sector, representing 15–20% of overall capacity, remains sluggish with some reduction in cash credit utilization. Overall activity levels are not gloomy.
• Gold loan franchise is pivoting back to growth: With the KCC unwinding over, some growth in gold loans is expected to resume. Non-agri gold loan already grew 28% during the degrowth period.
• Unsecured portfolio is a distant ambition: Management may introduce some unsecured portfolio over the next five years, starting small with automation, but no major changes in overall composition are expected in the immediate future.
• Flood impact was negligible: Thoothukudi floods affected 3–4 branches for 2–3 days; Chennai floods caused extra holidays. No significant impact expected.
• No regulatory pressure to diversify geographically: Management stated it has received no feedback or specific directions from the RBI to diversify outside Tamil Nadu or change its product mix.

Leadership & Organizational Build-Out

• Senior hires incoming to strengthen digital and retail: The first set of senior team members will join in February, with most expected to be onboard before next quarter’s results, aimed at building capabilities in digital lending, retail, and data analytics.
• Branch expansion continues: 20 branches opened this financial year, taking the total to 772, with a plan to reach 800 by FY24 year-end.
• PAT milestone in sight: The bank is marching toward a four-digit profitability figure (INR1,000+ crores) for the first time in its history this fiscal year.

Kamakodi: “After we demonstrate for at least 1, 2 quarters, I will commit to you a firm number. But as of now, it appears that all the factors are favourable for going towards that 1% plus every month, which total to 13% to 14% pa.”

Guidance & Commitments

Key Metrics