Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificate of deposit programme of City Union Bank Ltd (CUB).

 

The rating continues to reflect the comfortable capitalisation, stable resource profile, as indicated by high retail deposits and stable earnings profile. These rating strengths are partially offset by the improving, albeit modest, asset quality and the small scale of operations, marked by a concentrated geographical reach.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of CUB.

Key Rating Drivers & Detailed Description

Strengths:

• Comfortable capital position: Capitalisation metrics were comfortable, as reflected in networth and networth to net non-performing assets (NPA) ratio of Rs 8,880 crore and 11.5 times, respectively, as on September 30, 2024 (Rs 8,401 crore and 9.3 times, respectively, as on March 31, 2024). Capital cushion is adequate for the current scale of operations. As on September 30, 2024, the common equity tier I ratio and overall capital adequacy ratio (CAR) of the bank stood at 22.0% and 23.0%, respectively.

 

The capital position also remains supported by healthy internal accruals. CRISIL Ratings expects the capital position of the bank to continue to remain comfortable over the medium term.

 

• Stable resource profile, as indicated by high retail deposits: Retail deposits (term deposits less than Rs 2 crore and savings deposits) accounted for 75.2% of the total deposit base as on September 30, 2024. Overall deposits grew 8.8% year-on-year to Rs 57,369 crore as on September 30, 2024, as compared to Rs 52,714 crore as on September 30, 2023 (Rs 55,657 crore as on March 31, 2024). Cost of deposits rose to 5.73% for half year ending September 30, 2024 from 5.59% in fiscal 2024.

 

The share of current account and savings account (CASA) deposits was stable at 29.4% as on September 30, 2024, compared to 30.6% as on March 31, 2024 (29.6% as on September 30, 2023). The bank deposit base includes pure retail liability franchise with no reliance on corporate bulk deposits and certificate of deposits. Retail deposits have accounted for 75-85% of the total deposits in the past few years, thus lending stability to the overall resource profile. Increase in share of CASA deposits remains a key factor in improving the overall deposit profile.

 

• Stable earnings profile: The return on assets has remained stable at 1.52% in fiscal 2024 as compared to 1.46 % for fiscal 2023, because of compression of net interest margin (NIM) which were compensated by reduced provisioning cost. The NIM had narrowed by 29 basis points to 3.09% in fiscal 2024 (3.38% in fiscal 2023) and provisioning cost reduced to 0.42% for fiscal 2024 reducing from 1.00% for fiscal 2023. The drop in provisioning was primarily on account of higher recoveries coupled with lower slippages and resultant reduction in incremental provisioning.

 

Furthermore, during the six-months ending September 30, 2024, the bank reported an annualized RoA of 1.55%, supported by lower provisioning cost of 0.31% (annualized) and improvement in NIM by 8 bps to 3.17% (annualized) during the same period.

 

Going forward, CRISIL Ratings expects the bank’s operating margin to sustain, supported by its steady net interest income and fee income. Any significant impact on the earnings profile due to unanticipated slippages and therefore, credit cost, remains a key monitorable.

 

Weaknesses:

• Improving, albeit modest, asset quality: The asset quality stood modest although it has been on an improving trend with gross NPAs reducing to 3.5% as on September 30, 2024 from 4.7% as on September 30, 2023, and 4.0% as on March 31, 2024. The ratio has gone down, owing to lowered slippages and healthy recoveries. GNPAs in the SME segment stood at 5.4% as on September 30, 2024, reduced from 5.8% as on March 31, 2024 and 6.0% as on March 31, 2023. The reduction in MSME stems from cutting down the ticket size of an average SME loan to Rs 3 crore through digital lending mode in cognizance with software developed by BCG. GNPAs in the agriculture and retail segments stood at 2.2% and 2.4%, respectively, as on September 30, 2024. Additionally, the bank had an outstanding restructured portfolio of Rs 858 crore as on September 30, 2024, which accounted for 1.8% of overall advances as on September 30, 2024. The performance of this portfolio and sustenance of improvement in asset quality remains a key monitorable.

 

• Modest scale of operations with geographical concentration: CUB operates on a modest scale, as indicated by a market share of around 0.3% (in terms of total advances) as on September 30, 2024, along with high geographical concentration in and around Tamil Nadu. The state alone accounted for 528 branches (of total 812 branches) and 67% of advances as on September 30, 2024. Modest scale and limited geographic reach make operations susceptible to local regulatory concerns, economic environment, and other calamities.

 

The bank has been growing steadily with gross advances increasing to Rs 48,722 crore as on September 30, 2024 (Rs 46,482 crore as on March 31, 2024). The bank continues to remain SME focused with the SME book constituting over 45%. The remaining was constituted primarily by Retail banking (21%) [Non agri-gold loans forming 11%], Agriculture and inclusive banking (18%) [Agri gold loans forming 15%] and Corporate banking (16%). Moreover, CRISIL Ratings has taken note of the RBI’s circular on gold loans dated September 30, 2024. CRISIL Ratings will continue to monitor any further developments in this regard and the implications of the same on credit risk profile of the supervised entities, if any. 

 

CRISIL Ratings believes CUB will continue to operate as a mid-sized bank with high regional concentration over the medium term. Business growth in new geographies, in terms of resources, clientele, size and type of exposure, etc. will continue to be monitored.

Liquidity: Strong

Liquidity is supported by access to systemic liquidity. The bank has positive cumulative mismatches upto 5-year buckets. Liquidity position has been adequate with liquidity coverage ratio of 116% as on September 30, 2024 and is well above regulatory requirement. The bank held 10.8% excess securities under the statutory liquidity ratio bracket as on September 30, 2024.

 

Environment, Social, and Governance (ESG) profile

CRISIL Ratings believes CUB’s ESG profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact given its vast employee and customer base, and thus, can play a key role in promoting financial inclusion. While it does not have any direct adverse impact on the environment, the lending decisions may have a bearing on the same.

 

CUB has an ongoing focus on strengthening various aspects of its ESG profile.

 

Key highlights:

• The bank has been driving energy efficiency across all offices, having installed solar power panels in few branches and now plans to extend the same to all offices subject to feasibility.
• The bank considers ESG related criteria while making its lending decisions wherein projects require environment clearances and borrowers need to comply with all related stipulations.
• ESG disclosures of the bank are evolving and it is in the process of further strengthening these disclosures.
• For social aspects focuses on community development, particularly towards raising the standards of the underprivileged sections.
• 90% of the board members are independent directors, except the MD & CEO who is a whole-time executive director. The bank has a dedicated investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. CUB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

  

Rating Sensitivity Factors

Downward factors:

• Significantly weaker asset quality with GNPAs exceeding 7.0%
• Decline in overall profitability, narrowing the cushion in CET 1 ratio considerably
• Material reduction in deposits

About the bank

CUB is one of the oldest private sector banks in India, incorporated as The Kumbakonam Bank Ltd, by 20 citizens of Kumbakonam, Tamil Nadu, in 1904. In 1957, the bank acquired Common Wealth Bank Ltd. In 1965, two local banks, The City Forward Bank Ltd and The Union Bank Ltd, were amalgamated with it. Consequently, it was renamed The Kumbakonam CUB. In November 1980, CUB started expanding its operations outside Tamil Nadu and in 1987, came to be known by its present name. CUB is listed on the National Stock Exchange and Bombay Stock Exchange. In 1990, the bank computerised its operations and, in 2006, implemented the core-banking-solution process across all its branches.

 

The bank had a network of 812 branches and 1,682 automated teller machines as of September 30, 2024. Gross advances stood at Rs 48,722 crore as on September 30, 2024.

Key Financial Indicators

As on / for the period ended	Unit	Sep-24	Mar-24	Mar-23	Mar-22
Total assets (reported)	Rs crore	71,366	70,826	66,595	61,531
Total income (net of interest expenses)	Rs crore	1,546	2,865	2,973	2,676
Profit after tax	Rs crore	550	1,016	937	760
Gross NPA	%	3.5	4.0	4.4	4.7
Overall capital adequacy ratio (for banks)	%	23.0	23.7	22.3	20.8
Return on assets (RoA)	%	1.5*	1.5	1.5	1.3

   *annualized

Any other information: Not Applicable