City Union Bank Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Repair phase declared over, growth phase begins: Management stated the two-year consolidation and repair process is in its last leg, and FY25 should mark the beginning of a growth phase, supported by new senior hires and the bank's first-ever dedicated sales verticals.
• Cost-to-income ratio spikes to 51.2% as investments front-loaded: The ratio jumped sequentially due to upfront spending on digital lending, new manpower, and sales verticals; management expects it to stay elevated near 51% in H1 before moderating in H2, finishing FY25 between 47% and 51%.
• Asset quality continues its steady grind lower: Gross NPA fell for the third consecutive quarter and net NPA dropped below 2%, with live recoveries surpassing live slippages again; management guided to INR700-800 crores of slippage for FY25 and a year-end net NPA of 1.0-1.25%.
• NIM seen as stable barring a rate cut: Management expects NIM to hold at current levels, plus or minus 5-10 bps, assuming no headline rate decline in FY25; any cut is expected only in Q4 with limited impact this financial year.
• What to watch next quarter: Whether Q1 growth avoids the usual seasonal lull as management hopes, the pace of digital retail product launches targeted for end-Q2, and any update on the credit head's sudden departure announced on the day of the call.

The Repair-to-Growth Pivot

• Two years of consolidation are ending: Management characterized FY22-23 and FY23-24 as years of repair and consolidation, and stated that process is by and large complete, with FY24-25 intended to be the year the growth phase begins.
• Much of FY24's growth was back-ended into Q4: Sequentially, Q4 growth was substantially higher than Q1, Q2, and Q3, which management said gives sufficient confidence entering the new year.
• Q1 is normally a lull, but early signals are better: Inflow sanctions in the current first quarter are happening much better than in earlier first quarters, though management still expects some seasonal softness.
• The bank is unwilling to put a number on growth after last year's miss: Management gave guidance last year and did not achieve it, so they are refraining from committing a figure until numbers firm up, stating they will show results first and then give expectations.

Kamakodi: "Let us say 22-'23 and 23-24 has been a year of consolidation when we did much of our repair. The repair process is by and large complete, and we are in the last leg of that. And we should be seeing the growth phase fixing in the financial year '24, '25 as we move forward."

Cost-to-Income: The Investment Overhang

• The ratio moved to 51.2% sequentially because of costs from implementing digital lending, incremental manpower, and related investments; management is explicit that it is taking cost upfront before returns materialize.
• Two quarters before income catches up: Benefits from these investments are expected to take about two quarters to flow through, with moderation in the cost-to-income ratio starting in the second half of FY25.
• FY25 exit expected between 47% and 51%: The first half will stay around the existing 51% rate, the second half should see moderation, and the full year should finish somewhere between the Q4 FY24 figure of 51% and the full-year FY24 figure of 47%.
• Other income also took a hit, compounding the ratio pressure: The dent came from both core fee income and lower write-back of technically written-off NPAs, while changes in treasury treatment mean the bank cannot book treasury profit as it did in the past.
• Recoveries from technically written-off accounts help the cost-to-income ratio because they are accounted in income, while recoveries from live accounts help credit cost; management noted the ultimate impact on ROA is the same either way.

Kamakodi: "We are taking the cost upfront and there will be some more time before we get the return, and that's why. To start with, there will be increase in the cost-to-income ratio."

Asset Quality: Steady Improvement

• Gross NPA reduced for three consecutive quarters and net NPA came below the 2% mark, driven by a trend of live recoveries surpassing live slippages.
• Slippage guidance of INR700-800 crores for FY25: Management expects a similar reduction in slippage as seen recently, with the trend of reduced slippages coupled with improved recovery continuing through the current financial year.
• Year-end net NPA target of 1.0-1.25%: Management expects to close FY25 with net NPA around that level, plus or minus.
• Recovery is expected to improve over last year's ~INR1,300 crores: Management stated there will definitely be improvement in overall recovery in FY25, though it is difficult to fix how much will come from live versus technically written-off accounts.
• Gold loan portfolio risks are downplayed: The bank has conducted multiple audits in response to regulatory concerns; management claims losses from gold purity miscalculation over the last 10 years are negligible at less than INR1 crore. The KCC gold loan portfolio has been fully run down and the bank has decided not to re-enter that space.

Organizational Reset: Sales DNA, New Hires, and a Sudden Exit

• The bank is building a sales vertical for the first time: Management acknowledged the bank never had the concept of sales in its DNA; it has now built a sales vertical for core businesses and is building a team for retail, starting with secured products.
• About 10 senior executives have joined across retail, analytics, credit, and operations; the person in charge of the MSME sales vertical has already joined, and the retail sales vertical head is in the process of joining.
• R. Vijay Anandh joined as Executive President in March 2024, and the Board has recommended his appointment as Whole-Time Director, which is under consideration by RBI.
• The credit head departed on the day of the call: Mr. Mahesh, who joined in March 2024, conveyed his decision to the Committee of the Board on the day of the earnings call, citing family considerations and relocation to another city.
• The Board is contemplating one more whole-time Director, though the call is yet to be taken and the RBI approval process would follow.

Kamakodi: "We never had the concept of sales at all in our DNA. For the first time, we have built the sales vertical for even the core businesses."

Digital Lending and the Retail Pivot

• MSME digital disbursement is nearly live: All MSME loans up to INR5 crores are now digitally disbursed with TAT at 48 hours; KPI integrations for the SME/MSME segment are complete, converting many manual checks to digital processes.
• Digital lending is being expanded to secured retail: The model for housing, LAP, and micro LAP is targeted for completion before the end of Q1, with management also working to take digital disbursement up to the RBI limit of INR7.5 crores for retail lending.
• New retail secured products are planned for a Q2 launch: Home loans, affordable home loans, loan against property, and micro LAP will be the initial focus, with policies being finalized and systems being put in place for an end-of-Q2 start.
• The first cross-sell target is the bank's own customers: Management noted that existing customers have taken roughly INR7,000 crores of home loans, LAP, and auto loans from other financial institutions, making them the first segment to tap.
• Retail unsecured will come later, in a small test: Once secured product processes are established, the bank will look at unsecured retail business in a small way.
• Digitization is for efficiency and credit cost control, not fee income: Management does not expect fee income to substantially improve because of digitization; the goal is better TAT and more sophisticated risk calculation.

Margins, Capital, and the ROE Question

• NIM is expected to remain stable at current levels, plus or minus 5-10 bps, assuming no headline rate decline in FY25; any rate cut is expected only in Q4 with limited impact this financial year.
• The long-term NIM average is 3.4-3.7%: Management noted that over 35-40 of the last 50 quarters, NIM has been in that range, with only 8-10 quarters above 4%; margins historically expand in rising-rate scenarios and contract in falling-rate ones.
• ROA was restored to the long-term average of 1.5%+ in FY24, and management expects it to continue, with an endeavour to improve further despite the higher cost-to-income ratio, through lower credit costs and other levers.
• ROE is lower at about 13% because of higher capital conservation: Management chose to conserve capital for future growth rather than pay excess dividends, given the lower growth rate; once the growth engine kicks off and ROA improves, ROEs should automatically improve.
• The CASA ratio at 30% is a long-term trend: It has improved by about 7% over the last 3-4 years; management strives to improve it further but notes this level is typical for most regional banks.
• MSME reclassification shifted some loans this quarter: The change to 100% Udyam Registration-based classification reduced reported MSME exposure and moved some loans to "other loans."

Guidance & Commitments

Key Metrics