City Union Bank Ltd Q4 FY2025 Concall Summary

Key Takeaways

• Credit growth back to double digits: Loan book grew 14% YoY in Q4, the fourth straight quarter of double-digit growth, driven by MSME and gold loans even as the bank shed ~₹1,250 cr of low-yielding assets.
• Asset quality improved across the board: Gross NPA fell 90 bps to 3.09%, net NPA fell 72 bps to 1.25%, and recoveries exceeded slippages in Q4. SMA-2 halved to 1.10%.
• Margins held firm despite rate cuts: NIM stayed at 3.60% and even expanded 4-5 bps through the cycle, helped by a well-timed shift of gold loans to fixed rates and deposit cost actions now beginning to flow.
• Retail build-out is the big investment story: Cost-to-income will stay elevated at 48-50% in FY26 as the bank invests in home loans, LAP, and branch expansion, with a retail exit target of ₹3,000 cr.
• What to watch next quarter: Whether the deposit cost benefits from the SB and TD rate cuts actually lift NIM, the pace of retail disbursements, and any slippage surprises as the bank works toward its ₹650-700 cr FY26 target.

Credit Growth & Composition

• MSME-led growth: The MSME book contributed ~₹4,000 cr of the ~₹6,500 cr total credit growth, accelerated by the Newgen digital lending system which now drives largely system-driven decisions for loans below ₹7.5 cr.
• Gold loan momentum: The bank is comfortable growing the gold loan book at the current rate and moved the portfolio from floating to fixed rate in July, insulating yields from the rate-cut cycle.
• Low-yielding loan exit: The bank deliberately shed ~₹1,250 cr of low-yielding assets (₹1,200 cr IBPC at 6-6.5%, ₹150 cr NBFC advances at 8-8.5%), with ₹750 cr of that exit concentrated in Q4 alone. No further exits are anticipated.
• Personal loan book is secured: The ₹1,200 cr personal loan portfolio is extended only to existing borrowers with collateral, not unsecured.
• Growth ambition: Management expects to stay 2-3% above systemic credit growth in FY26, targeting 14% or higher if the economic environment remains supportive.

Vijay Anandh: "2%-3% over and above the systemic growth. That is what we are looking at."

Margins & Rate Sensitivity

• NIM resilience mechanics: Despite two repo rate cuts, NIM expanded 4-5 bps because the bank timed its actions: gold loans were shifted to fixed rate before the cutting cycle, the 25 bps repo cut translated to only high single-digit bps impact on portfolio yield, and deposit cost benefits are now starting to flow.
• Deposit cost lag: The bank cut its SB rate in late February and reduced TD rates in April; the full benefit will only reflect in the next 2-3 quarters. A special 333-day FD scheme launched just before Q4 added 12 bps to the weighted average cost and has since been withdrawn.
• FY26 NIM guidance: 3.5-3.7%, assuming the remaining 50 bps of expected repo rate cuts happen in stages over the next four quarters. If RBI cuts 100 bps cumulatively, the portfolio yield impact could be 50-75 bps with some lag.
• Fixed-rate book at 31%: An analyst flagged that only 31% of the book is fixed-rate, questioning whether the NIM guidance is aggressive; management reiterated the multiple levers at work but did not directly address the concern.

N. Kamakodi: "The margins contract during decreasing rate cycle and whenever we get into the increasing interest rate scenario, margins expand, despite into the rate cycle where you have seen, let us say, 2 rate cuts instead of the margins decreasing it slightly expanded by 4-5 basis point mainly because we timed it well."

Asset Quality

• Slippages within plan: FY25 slippages closed at ₹815 cr against a guidance of ₹800 cr, with management noting it chose to recognize SMA-2 accounts rather than take chances. Q4 alone saw recoveries of ₹291 cr against slippages of ₹229 cr.
• FY26 slippage target: Guided at ₹650-700 cr, with recoveries expected to continue surpassing slippages.
• PCR improvement: PCR with technical write-offs improved to 78% from 72%; PCR without technical write-offs reached the desired 60% from 52%. Management declined to set a 70% PCR target, saying it will proceed in a slow and steady fashion without compromising ROA.
• SMA-2 halved: The SMA-2 book improved substantially to 1.10% from 2.08%, signaling a healthier forward pipeline.

Retail & Fee Income Build-Out

• Retail strategy taking shape: The bank has hired a Sales Head, Zonal Heads, Credit Risk Heads, and feet on street. Home loans will be branch-sourced; LAP will use DSA sourcing in North, West, and parts of South; affordable home loans are a branch-based strategy.
• Retail exit target: Per an analyst's math, the retail portfolio exit target is ₹3,000 cr for FY26, up from the current ~₹1,000 cr. Management confirmed the number.
• Fee income surge: Other income rose 21% YoY, driven by insurance commission (+79% to ₹98 cr, helped by a change in remuneration structure) and loan processing charges (+67% to ₹156 cr, driven by MSME growth and the Newgen-based lending ramp-up). Management sees more juice in insurance income.
• Cost-to-income to stay elevated: FY26 CIR is guided at 48-50% as investments in the retail vertical continue; some expenses planned for FY25 were postponed to FY26. The ratio is expected to reduce once the retail vertical starts showing results.

Deposits & Liability Franchise

• Deposit growth aligned: Deposit growth reached 14% in Q4, now in line with credit growth, supporting a CD ratio of 84%. A dedicated liability structure with new recruits was put in place in Q3-Q4 and yielded strong results.
• LDR target: Management aims to keep the loan-to-deposit ratio at 85%, with credit growth targets built around that ceiling.
• Branch expansion: The bank opened 75 branches in FY25, ending at 875, and targets 50-75 more in FY26 to reach 925-950. New branches take 3-4 years to reach stable business. The geographic mix is shifting: Tamil Nadu expansion is nearly exhausted, and proportionately more new branches will be in non-Tamil Nadu states.

Leadership & Strategic Positioning

• CEO succession on the horizon: FY26 is the 15th and final regulatorily permissible year for the current MD and CEO. The net NPA number to hand over to the successor will be decided as the quarters proceed.
• New Executive Director: V. Ramesh was appointed as Executive Director effective February 21, 2025, giving the bank two Whole-Time Directors apart from the MD and CEO.
• IPL partnerships: Co-branded credit card with Chennai Super Kings and banking partnership with Sunrisers Hyderabad went live in April, with fully digital, paperless, do-it-yourself onboarding.
• Secured strategy intact: The bank will continue its 95-98% secured portfolio strategy with no change.

N. Kamakodi: "The visibility for a better year is there and with this positive note, I hope we should be having a Financial Year '25-26 even better than whatever we saw in the Financial Year '24-25."

Guidance & Commitments

Key Metrics