City Union Bank Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Growth returns to industry-plus levels: Credit growth hit ~15% YoY in Q3, recovering from near-zero in CY23, and management expects to stay 1-2% above the industry rate.
• Asset quality is a structural strength: Recoveries continue to exceed slippages, producing negative net slippages; the deliberate avoidance of unsecured retail is keeping SMA 2 and slippage numbers low.
• NIMs are boringly predictable: The bank has kept NIMs in a 3.4% to 3.7% band for 90% of the last 50-60 quarters, and guides for 3.60% ± 10 bps going forward, with no upward bias expected.
• Retail build-out is a slow, margin-dilutive bet: New LAP and housing loans were piloted in Q3, but the blended yield will compress overall yields, and the cost-to-income ratio will stay elevated at 48-50% until retail scales.
• What to watch next quarter: Whether the 15% growth run-rate holds as rate cuts begin, the pace of retail loan book build-up, and any movement in the CD ratio toward the 85% target.

Growth Recovery & Trajectory

• From stall to sprint: Growth was eluding the bank through CY23, dropping from 12-13% to near zero. It restarted in January 2024, hit double digits by June, and reached 12% in Q1, 10% in Q2, and around 15% in Q3.
• Where the growth is coming from: 62% of the INR 6,392 crores in credit growth over the last year came from core advances, with the rest from gold loans. The entire growth is from conventional MSME, commercial trading, agriculture, and gold loans; retail contribution is still minuscule.
• Growth ambition: Management targets 12-14% credit growth over the next 2-3 years, aiming to be 1-2% above the industry rate.
• Deposit side focus: The bank will focus on deposit growth in Q4, targeting a CD ratio of around 85%. LCR is comfortable at around 119.

Kamakodi: "The Q3 has been a wonderful quarter. We are able to get back the growth, which was eluding us for quite some time."

Asset Quality & Slippages

• Negative net slippages: The trend of recoveries exceeding slippages continued in Q3, producing negative slippages. Management expects slippages to remain below recoveries for the next two quarters, through H1 next year.
• Slippage guidance: Slippages are expected at INR 800 crores or less for the current year, and around INR 700 crores for next year.
• SMA improvement: SMA numbers have come down substantially to INR 4,596.75 as of December 2024.
• Unsecured retail avoidance pays off: Management explicitly credits the strategy of staying away from unsecured retail for better asset quality in both slippages and SMA 2 numbers.
• Provisioning trajectory: Incremental credit provisioning is being done to increase PCR and decrease net NPA. Once net NPA falls below 1% and PCR crosses 60%, incremental provisioning requirements may come down.
• Write-off recoveries: The bank recovers INR 60-80 crores per quarter on average from the written-off pool.

Vijay Anandh: "It appears that our strategy of not getting into unsecured retail is helping us in a big way to have a better asset quality, both in slippages as well as on SMA 2 numbers."

Margin & Yield Dynamics

• NIM stability as a feature: Over the last 50-60 quarters, NIMs have been in the 3.4% to 3.7% range for more than 90% of quarters. Guidance is 3.60% ± 10 bps, with no upward bias expected.
• Rate-cut mechanics: In a rate-cut scenario, assets get repriced immediately while liabilities take 3-4 quarters to reprice. For the full year, margins will stabilize because of both effects, but there is no expectation of margin expansion.
• Yield compression ahead: Yield on advances was stable at 9.81% in Q2 and Q3, but is expected to drop to around 9.7% as rate cuts flow through.
• Retail loans will compress blended yields: New retail products like LAP and housing loans carry lower yields than the existing book, so their introduction will pull the blended yield down, not up.
• Cost of funds vs cost of deposits: Cost of funds at 4.88% is lower than cost of deposits at 5.88%, mainly because of the capital reserve of around INR 8,000 crores available at free cost. The lower CASA share explains the rise in cost of deposits.

Vijay Anandh: "We don't expect as we mentioned before the margin to go up for sure because assets get repriced quickly. So if the rate cut happens the asset gets repriced quickly and it takes at least three, four quarters for the liabilities to get that benefit for the bank."

Retail Strategy & Execution

• Pilot launched, delayed but on track: Retail products (LAP, housing) were commercially launched with a decent pilot in Q3, in Delhi and Bombay. The launch is on track with a one-quarter delay.
• Sourcing model: The bank has tied up with a couple of DSAs for LAP sourcing and with a BC in Jaipur for affordable home loans. It does not want to use DSAs or third-party sourcing for home loans.
• Contribution targets: Retail is expected to contribute 2% to 2.5% of the overall book for FY26, scaling to 8-9% over the next 3-4 years. The portfolio is expected to add another 1-2% in incremental growth next financial year.
• MSME focus unchanged: Management was explicit that the focus on MSME continues and there is no change in portfolio composition.
• Cost drag from retail build-out: The cost-to-income ratio will stay in the 48-50% range as retail expenses take off, and is expected to come down only once the retail business starts delivering results.

Vijay Anandh: "We will do retail, but our focus on MSME continues. As we mentioned earlier, 2% to 2.5% would be the retail contribution in the overall for the year. So our focus on MSME continues. We don't have any change in our portfolio composition."

Operating Performance & Costs

• Operating profit jump: Operating profit grew almost 20% QoQ from Q2 to Q3.
• Opex flat sequentially: Establishment expenses decreased due to lower actuarial valuation in Q3 versus Q2, a difference of around INR 5-6 crores. The run-rate for Q4 is expected around INR 185 crores.
• Credit cost stability: Credit cost is expected to remain flat at 60-65 bps, depending on the economic cycle and slippages.
• Fee income steady: Fee income is stable, with an average jump of INR 5-10 crores per quarter. The fee-to-assets ratio will remain around 1.2.
• Capex easing: Next year's capex is expected to be lower than the current year.

Strategic Initiatives & Regulatory

• CSK co-branded credit card: The bank signed an agreement with Chennai Super Kings on January 31, 2025, for co-branded credit cards, aimed at creating brand awareness. It is in advanced discussions with another franchisee. Product features and branding details were pending a press release within a week of the signing.
• Branch expansion: The bank expects to finish the financial year with around 850-875 branches by March 31, with expansion focused on North and West, not only Tamil Nadu.
• RBI gold loan circular: The bank was already fully compliant with the RBI's gold loan circular in terms of process, LTV, and data capture for the last 24 months. The only change needed was adding one column for end-use of the loan. The non-agri portion of gold loans was moved from EBLR to fixed rate in Q3.
• IBA awards: The bank won seven awards at the IBA Annual Technology Conference in January 2025, spanning digital sales, IT risk management, fintech adoption, financial inclusion, and AI/ML adoption.

Guidance & Commitments

Key Metrics