City Union Bank Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Advances growth inflection after a decade: Q1 FY25 delivered the first positive sequential advances growth in 10 years, with YoY growth returning to 10%, giving management confidence in the trajectory.
• Asset quality tailwind persists: Slippages of ₹178 cr were outpaced by recoveries of ₹226 cr, pulling GNPA down to 3.88% and net NPA to 1.87%, a dynamic management expects to continue for another 4-5 quarters.
• NIM compressed by regulatory reclassification: Reported NIM fell to 3.54% from an adjusted 3.6%, entirely due to an RBI-mandated shift from penal interest to penal charges that shaved ~6 bps off the margin.
• Cost-to-income to stay elevated through the investment cycle: The ratio improved sequentially to 49.34% but will remain in a 48-51% band for the next 4-6 quarters as upfront spending on digital lending and a new retail team runs ahead of revenue.
• What to watch next quarter: Whether the new retail secured products (home loans, LAP, micro-LAP) begin pilot disbursals by mid-September as promised, and if the double-digit advances growth holds into Q2.

Advances Growth & Asset Quality

• A structural break in Q1 seasonality: Historically, Q1 always posted negative sequential growth versus Q4; this quarter broke that pattern with a marginal increase, taking the book to ₹46,548 cr and restoring double-digit YoY growth for the first time in several months.
• Recovery engine running ahead of fresh stress: Total recoveries of ₹226 cr (₹192 cr from live NPA, ₹44 cr from technical write-offs) exceeded slippages of ₹178 cr, driving both gross and net NPA ratios lower sequentially.
• Slippage trend is bending down: Management guided to a full-year FY25 slippage number of ~₹800 cr or slightly below, down from ₹1,000 cr last year and ₹1,300 cr the year before, while the recovery run rate is stable at ₹200-250 cr per quarter.
• Credit cost moderation is the ROA bridge: The favorable gap between slippages and recoveries is the main reason ROA held at 1.51% despite upfront cost increases compressing operating profit. Management expects this benign credit environment to last at least another 6-7 quarters.

Kamakodi: "we have reached a double digit from 30th June to 30th June and also first time positive growth in the 1st Quarter after about 10 years which is giving us sufficient confidence that things should be better as we move forward."

Margin & Yield Mechanics

• The entire NIM drop is a one-time accounting reclassification: RBI's April 2024 guideline required banks to book penal charges as other income rather than penal interest in yield. This reclassification reduced reported yield on advances by ~8 bps (from 9.67% to 9.59%) and NIM by ~6 bps. Without it, NIM would have been 3.6% and yields stable in the 9.65-9.7% range.
• Cost of funds has nearly peaked: Management believes the deposit repricing cycle is largely done, though it cautioned that the expected rate-cut cycle may not arrive as quickly as the market anticipates.
• LCR circular impact is manageable: The draft LCR norms will compress the sector's range to roughly 110-125%, and the bank expects to stabilize within that band. It holds ₹2,900 cr of non-callable deposits eligible for favorable treatment and plans to repatriate overseas deposits at maturity. No material margin impact is expected from LCR-driven treasury redeployment.

The Digital Lending Build-Out

• BCG engagement delivered a working credit factory: The assignment concluded in June 2024, producing a digital workflow that now covers all proposals below ₹7.5 cr (the RBI regulatory retail definition). The system automates KYC, Aadhar, PAN, CIBIL, GST analysis via Perfios, and policy fitment, and makes recommendations on eligibility, risk rating, and pricing.
• Turnaround time collapsed from weeks to days: What previously took 2-3 weeks now takes 2-3 working days; if documents are submitted and data entry is complete, same-day release is possible. Even amber-category cases requiring manual deviation are decided in 2-3 days.
• Mandatory adoption for the existing book: 100% of existing customers with exposure below ₹7.5 cr must now pass through the new software for credit decisions, including renewals, locking in the process change across the MSME franchise.
• Costs are upfront, revenue lags: The bank has already absorbed the technology and team-building expenditure. Management expects the engine to start contributing income toward the end of FY25, break even next year, and add to profit beyond that. Annual increments hit in Q2, so no further sequential decline in other opex is expected.

Kamakodi: "our cost-to-income ratio will be in the same range of 48% to 51% for the next 4 to 6 quarters."

New Retail & Unsecured: Sequencing the Opportunity

• Secured retail is the immediate priority: Under the new Executive Director, the bank will pilot loan against property, home loans, affordable housing, and micro-LAP. The digital process is being readied, a new team is expected by August-September, and pilot disbursals are targeted for the second or third week of September, with fresh volumes in Q3 and Q4.
• Unsecured is a proof of concept, not a product: A tiny pilot (₹3-4 cr book, 13-14% yield) was run for existing salary account customers with 2,000 sampled and a 10% acceptance rate. After 2-3 repayment cycles with zero DPD, the funnel was closed. Management was emphatic that unsecured lending is 3-5 years away and will not scale fast.
• Competitive intensity in MSME has cooled: Pricing sanity has been restored over the last year after a period of irrational pricing 4-5 quarters ago. Management sees no major change in the competitive landscape, which it describes as consistently intense for over a decade.

Kamakodi: "Our focus will be more on the secured lending... don't expect much for unsecured lending. It is only the proof of concept and we are a very long way from building that going forward. Be very clear about it."

Profitability & Capital: The Steady-State Thesis

• ROA anchored at 1.5% with an upward bias: Pre-COVID ROA reached 1.6-1.7%; the bank has now recovered to 1.5% and expects expansion beyond that once the new growth engines deliver productivity. The current favorable credit cost environment is seen persisting for at least 6-7 more quarters.
• PAT growth to come from provision reduction: With slippages trending down and recoveries stable, the provision charge should moderate considerably this year versus last year, supporting profit growth even as operating profit faces cost headwinds for 2-3 more quarters.
• No capital raise needed if ROE covers growth: The bank has not raised capital since its QIP a decade ago and has navigated Y2K, the 2008 crisis, AQR, and COVID without fresh equity. Management's framework is simple: if ROE matches the growth rate, no external capital is required.
• Growth philosophy is deliberately unexciting: The bank targets steady growth a few percentage points above the industry, not extraordinary expansion that forces a cleanup later. Over 15 years, this approach doubled market share from 0.2% to 0.4%. Post-COVID, growth has lagged the industry, and management is working to close that gap without abandoning its risk framework.

Kamakodi: "We don't believe in having extra natural growth much beyond the industry level growth and paying the price later. So, we take steady path, growing maybe few percentage points over and above that of the industry."

Guidance & Commitments

Key Metrics