City Union Bank's management expects slippages to remain high in the coming quarters and has revised its full-year FY23 slippage guidance to 2.5-2.8% versus 2.25-2.5%.
Shares of City Union Bank (CUB) fell nearly 16 per cent on Monday. This follows concerns about the asset quality of the bank after it reported a gradual rise in its non-performing assets (NPAs) during the December quarter (Q3FY23). Third quarter results were announced on Saturday. So far, the stock has been able to recover some of its losses.
The management expects slippages to remain high in the coming quarters. CUB's management has revised its full-year FY23 slippage guidance to 2.5-2.8% versus 2.25-2.5% earlier. Slippages are new additions to NPAs. Analysts estimate Q3 slippage to be around 4%.
Krishnan ASV analyst at HDFC Securities said, “Slippages were high in the third quarter, one-time deleveraging identified by RBI, absorbed by the bank, resulting in higher provisions. With 99% secured portfolio, we believe the bank's lending DNA remains intact, which will help maintain high organic recovery potential from the current pool of slippages. % in Q2 The management also directed that additional provisioning may need to be made based on the Expected Credit Loss (ECL) model, if implemented by RBI.
Note that CUB has a high exposure to the MSME segment which constitutes more than 50% of its gross advances. This section is generally considered risky. A February 12 report by ICICI Securities said the bank's asset quality has remained within the guided range over the years, despite risk aversion.
To be sure, slow loan growth, and lack of deposit mobilization are major headwinds on the stock, which may further put pressure on the net interest margin (NIM). At a time when banks are reporting credit growth of 18-19%, CUB growth of 12% year-on-year is not inspiring. This was lower than the management's growth guidance of 15-18%. According to the management, credit growth has slowed due to delay in the MSME investment cycle.
According to Krishnan, “Deceleration in loan growth is likely to be a common theme for most mid-sized banks, including CUBs. Given the sharp rise in deposit pricing and relatively low branch productivity, mid-sized banks may have to adjust their loan growth aspirations. You can choose to adjust."
CUB's deposit growth in Q3 stood at 7% YoY. While deposit mobilization is important for maintaining net interest margin, slow deposit mobilization will not impact credit growth for the next few quarters due to excess liquidity. The management said the bank has surplus liquidity of around Rs 3,000 crore which can be used to fund growth.
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