City Union Bank Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Growth restarts from the core, not from retail: Credit growth hit 12% for the second consecutive quarter, driven entirely by traditional MSME and gold loan lines. The new secured retail vertical has yet to contribute a single rupee of incremental growth.
• Asset quality is healing on its own: Slippages fell below recoveries this quarter, and net NPA improved by 25 bps. The bank expects net NPA to reach 1.0–1.25% by year-end without relying on one-off resolutions.
• NIM and fee income lifted operating profit: NIM improved to 3.67% (from 3.54% QoQ), while loan processing charges and income tax refund interest added a combined ₹46 crores to other income, pushing cost-to-income down to 47.06%.
• Gold loans are being rewired for a rate-cut cycle: The bank is converting floating-rate gold loans to fixed-rate, with 25–30% of the portfolio already converted, aiming to lock in yield stability before rates fall.
• What to watch next quarter: Whether the secured retail team is actually on the street in Q3 as promised, the pace of gold loan fixed-rate conversion, and any sign that the operating profit recovery is sustaining beyond one quarter of fee-income tailwinds.

The Core Growth Engine: MSME, Gold Loans & NBFCs

• MSME turnaround time collapsed: 75–80% of MSME loans under ₹7.5 crores are now processed in 3–4 days, down from three weeks, a change management credits to system-driven green/red/amber scoring.
• Automation still has room to run: Only 50–60% of cases currently flow through the automated decision system; further automation is expected in the next six months, subject to portfolio performance monitoring.
• Gold loan growth is deliberate and strategic: Management is leaning into gold loans to (a) avoid unsecured retail consumption exposure, (b) build a fixed-rate short-term book ahead of a reducing rate cycle, and (c) capture visible market demand.
• NBFC book grew over 15% sequentially for two straight quarters, with yields just under the bank's 9.5% average, making it a meaningful contributor without diluting portfolio yield.
• Trade loan reclassification, not contraction: The apparent reduction in retail and wholesale trade loans is an accounting shift: traders who obtain Udyam registration are reclassified as MSME, leaving the combined total broadly unchanged.

Kamakodi: "When we get into the reducing interest rate cycle, you need a portion of your loan book in fixed interest rate on the short term, and this exactly fit into that thing."

The Secured Retail Build-Out

• Technology is ready, people are not: The tech stack for LAP, home loans, affordable and micro LAP is complete, but field-level recruitment is still underway. Management targets feet on the street in Q3 and a soft launch by Q4.
• First target is the bank's own customers: The initial sourcing strategy will convert existing liability customers who already hold ₹7,000-odd crores of these products with other financial institutions.
• Sourcing will be hybrid: Employee and branch sourcing in the South; third-party DSAs for North and West, where the branch network is thinner.
• Co-lending is on the table but not imminent: Technology for co-lending is ready, but the product scope is limited to secured (LAP and some HLA), and management will "fine-tune depending on requirement."
• Profitability timeline is explicit and unchanged: Loss in year one, break-even in year two, ROA accretion from year three. Management says the initiative is on track against that plan.

Kamakodi: "Right from the beginning, when we started, we were very clear about two things. One, we are not entering into the unsecured in a big way. Our entire start in the retail is going to be on the secured retail lending portfolio per se."

Asset Quality: The Self-Healing Cycle

• Slippages are structurally declining: Gross NPA additions fell from ₹1,200 crores two years ago to ₹1,000 crores in FY24, and are expected at ~₹800 crores or less this year.
• Recoveries are outpacing slippages: The trend of recoveries exceeding fresh slippages continued in Q2, driving the 25 bps net NPA improvement without any large one-off resolutions.
• Recovery from written-off accounts is a bonus, not a plan: Management treats recovery efforts identically across live and technically written-off accounts, but written-off recoveries flow to other income rather than reducing provisions, making them unpredictable and non-recurring.
• Provision coverage ratio ambition is vague: Management will "explore possibilities" of increasing PCR this year but declined to give a specific target, and any decision on surplus provision write-back from the restructured book will wait until the annual accounts are finalized.

Margin & Profitability Levers

• Yield on advances is being actively managed: The bank tweaked gold loan portfolio yields over the last 3–4 months and transmitted a portion of the rate increase that could not be passed through during the last rising cycle.
• Deposit cost is expected to hold steady: Management sees the current deposit cost structure continuing through the second half, providing a stable liability-side backdrop.
• Fee income gave cost-to-income a one-off boost: Loan processing charges jumped from ₹23 crores to ₹38 crores sequentially, and interest from income tax refunds rose from ₹9 crores to ~₹40 crores, together compressing CIR by over 200 bps. The sustainability of this level is unstated.
• Operating profit turned positive after six quarters of negative growth, a milestone management frames as the beginning of a cycle where revenue growth converts into improved operating profit.

Kamakodi: "We are able to get into the cycle where we have started seeing both operating profit and the NII started taking a positive tenure."

Guidance & Commitments

Key Metrics