NPA divergence report upsets the apple cart for City Union Bank

Divergences in non-performing loans are never a good thing for a quality franchise like City Union Bank, said analysts from Macquarie Capital Securities (India). “So, to that extent, this development comes as a slight negative. However, the magnitude of the impact on the profit & loss is small in this case and one must also factor in that FY22 was a covid affected year for SMEs,” said the analysts in a report on 21 December.

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The RBI has found divergence in bank’s reported gross non-performing assets (NPAs) and provisioning for FY22 to the tune of ₹259 crore and ₹40 crore, respectively. According to City Union Bank, ₹61 crore was already classified as NPA by the bank in H1FY23. Further, another ₹13 crore worth of accounts have been closed as on date.

“The residual ₹185 crore would flow into NPAs in the December quarter (Q3FY23) which would have to be recognized and provide for during the next few quarters,” said analysts of Investec Capital Services (India) in a report on 20 December.

The development could weigh on the bank’s re-rating prospects.

“Although the divergence in provisioning is to a lower extent than the reported NPAs, it does call the bank’s historically sound underwriting culture into question. This instance should prevent the stock from re-rating significantly in the medium term to its pre-covid multiples,” added Investec’s analysts.

They believe the return on equity outcomes of 15% are largely intact in the medium term.

Going ahead, investors would have to closely track for any divergences. Another development that is crucial for the stock is the pending RBI decision on CEO N Kamakodi’s reappointment due in April 2023.

Notwithstanding the loss in the past two days, the City Union Bank stock has risen by about 30%, beating the sector index Nifty Bank’s nearly 20% returns. In Q2, the bank reported stellar earnings performance on crucial parameters of net interest income and net interest margin. The bank has been able to perform well on profitability even with a large exposure to the SME segment during covid. “However, the divergence event has weighed on investors’ perception towards the bank’s stock,” said an analyst requesting anonymity.