A sturdy franchise City Union Bank (CUB):: Ambit

A sturdy franchise
City Union Bank (CUB) emerges as one of the most robust regional
bank franchises in our analysis of regional banks. Its strong income
generation (NII and fee income to assets of 4.6% vs peer average of
4.2%), controlled cost base and healthy asset quality more than offset
the weakness on the liabilities side. Hence, superior RoAs of 1.5-1.6%
are the best among regional banks and are closer to the new private
sector banks. In the near term, we expect the bank to maintain its
margins in the current tight liquidity environment, given that the
duration of the loan book is lower than the duration of its borrowings.
CUB would deliver net profit CAGR of 20% in FY13-15. The stock is
trading at 1.0x FY14 BV, which is an attractive entry point. We retain
our BUY stance.
Competitive position: MODERATE Changes to this position: STABLE
A robust franchise: City Union Bank emerges as one of the most robust
regional bank franchises in our analysis. Its strong income generation (NII and
fee income to assets of 4.6% vs peer average of 4.2%), controlled cost base
and healthy asset quality more than offset the weakness on the liabilities side.
This has helped CUB to deliver largely stable and high RoAs of 1.6% over the
last eight years along with average asset growth of 27%.
Strong growth to continue: CUB has delivered better loan growth vs its
peers (FY06-13 CAGR of 29%), owing to the relatively better lending
opportunities in its home state, Tamil Nadu (discussed on page 28). We expect
CUB to maintain its loan growth momentum, with a CAGR of 22% in FY13-15,
owing to its continued focus on its core SME franchise and relative insulation
to large corporate loans.
In a better position to manage RoAs: We expect CUB to maintain its RoAs
at 1.45% over the next two years, as: (i) the duration of the loan book at 1.5
years is significantly lower than the 2-3-year duration of its deposits, which
would help the bank to maintain its margins in an environment of tight
liquidity; (ii) income growth keeps pace with cost growth, leading to a stable
cost/income ratio of 42-43% over the next two years; and (iii) credit costs
would peak at 94bps in FY14 (vs 81bps in FY13). Note that CUB’s credit costs
have been relatively high (FY08-13 average of 81bps) due to CUB’s market
positioning as a SME lender (reflected in high yields), but its asset quality
trends have been among the least volatile (65-85bps in the last three years).
Valuation and stance: We cut our FY14 estimates by 14% due to lower NIM
and higher credit cost estimates. We maintain our BUY stance, as at 0.9x oneyear forward BV, the valuations are reasonable for a strongly profitable
franchise. Our target price of `66/share implies 1.45x FY14 P/B and 7.5x
FY14 P/E. Higher-than-expected deterioration of asset quality is the key risk to
our BUY stance.

Ambit: Regional Banks:The search for a pan-India franchise

The search for a pan-India franchise
Regional banks have differentiated themselves from PSU banks on
asset quality and now trade at a premium to PSU banking stocks. Their
profitability and valuation differential to large private sector banks
has, however, persisted, owing to higher cost of funds, low fee income
generation and higher cost to income. The improvement on all these
three parameters, we find, is related to the quality of the liability
franchise, for which geographical diversification is the only lasting
solution. The evolution of ING Vysya Bank (IVB) also proves the
significance of geographical diversification. Even as Federal Bank (FB),
Karur Vysya Bank (KVB) and South Indian Bank (SIB) manage their
asset quality risks, their operating performance would remain
constrained due to their liability franchise. City Union Bank (CUB), on
the other hand, has done better under similar constraints and looks
likely to outperform its peers on growth and profitability.
Improving the liability franchise is key: A comparison of large private
sector banks and PSU banks with regional banks shows that regional banks
have been able to differentiate themselves from PSU banks on asset quality
(FY13 credit costs of ~60 bps vs PSU banks’ 114bps); however, they continue
to lag large private sector banks on the cost of funds (due to lower CASA), fee
income generation and operational efficiency. Given that primary banking
relationships deliver 2-3x more business than secondary banking relationships
in India and given that the liability relationship (rather than the lending
relationship) is the determinant of a primary banking relationship, the
improvement in the quality of the liability franchise would be a key driver for
regional banks to bridge the profitability gap vis-à-vis large private banks.
Geographical diversification proving to be a necessary evil:
Geographical diversification is crucial for regional banks if they are to improve
their liability franchises. IVB has set a good example in this regard, but the
other regional banks remain laggards on this metric and this affects their
operational performance. Regional banks’ operating profits have recorded
15% CAGR (in FY11-13) vs large private banks’ 22%.
Asset quality is a key near-term risk: The asset quality outlook for these
banks is rather bleak, with rising delinquencies and higher credit costs
looming large. Our scenario analysis shows that IVB and FB are better
cushioned on provision coverage and capital ratios.
Recommend BUY on IVB, FB and CUB, SELL on KVB and SIB: We initiate
coverage with a BUY stance on IVB (due its proven competitive advantages).
We retain our BUY stance on CUB (due to its strong growth and profitability
trends) and FB (as structural concerns on operating performance seem
discounted). We initiate coverage with a SELL stance on KVB and we change
our stance to SELL on SIB due to pressure on their profitability ratios from
deterioration in operating performance as well as due to asset quality risks.

BofAML: India: Growth at the crossroads

India: growth at the crossroads
India's growth is heavily dependent on how soon the RBI can stabilize the rupee
and roll back its July 15/23 tightening. We expect June quarter growth to come in
at 4.7% (consensus 4.6%) on Friday, in line with the 4.8% recorded for the March
quarter. If the RBI persists with tightening into the October-March busy industrial
season, we estimate FY14 growth could drop to 4.8% from 5.3% earlier.
Growth turns on RBI FX policy
India's growth depends on RBI's FX policy. If the RBI is able to rescind its July
15/23 tightening before the October-March busy season, we estimate FY14
growth could recover to 5.3%, on good rains, from 5% last year. We peg the
FY15 growth at 6.3% in that case.
If it persists with tightening into the busy season, we estimate growth could drop
to 4.8% as bank lending rate hikes would eat away the benefits of a better
autumn crop on good rains. We estimate FY15 growth would also be lower at
5.5%. Hence we welcome the RBI’s decision to partially dilute the 15 July
tightening measures by resuming OMO purchases of Rs80bn of gilt. Do read our
last growth report here.
We have broken down India's recent growth slowdown into 4 factors: global
factors (150bp); RBI tightening (75bp); capex slowdown (50bp); and poor rains
(25bp). We do not expect global growth or even India's capex cycle to turn
around. In case lending rates go up rather than coming off, growth should slip
below the 5% level.
June quarter to clock 4.7% on Friday
We expect June quarter growth to come in at 4.7% (consensus 4.6%) on Friday,
in line with the 4.8% growth seen in the March quarter (Chart 1). The benefit of a
good crop will likely largely be offset by industrial contraction on high lending
rates. The only consolation is that India's growth path is no worse than Brazil's or
Russia's.

India: How bad can things get? „Murphy’s Law at work in India! :: BofA Merrill Lynch

India: How bad can things get?
„Murphy’s Law at work in India!
Geo-political tensions in Syria have led to a spike in oil and gold prices
compounding India’s weak rupee (down 8.6% this week). While we think this will
be short-lived, in this report, we look at a stress case scenario for India.
Markets: worst case lower; but watch for policy action
Our base case for the Sensex is that it will be range-bound between 18,500 to
20,500. However, as we mentioned in our earlier report (see report), the market
would stay below this range if the currency does not stabilize.
So where can the market go now on a worst case? The market is trading
slightly below the long term average forward PE of 14.1x. However, at its low, the
market tends to go to 10x whenever there is a global crisis. Given that the
developed world is recovering, we are assuming current valuations for the export
companies and 1SD below mean for the rest of the universe. Based on this we
get a stress case index level of 16,000 for the Sensex.
Equity investors have not yet panicked in India: One key risk for markets is
that FII holding at 21% (45% of free float) is close to all time highs. India remains
vulnerable to any GEM sell-off.
History tells us to be wary of sharp recovery: Looking at past instances of
sharp rupee depreciation of over 15%, the market has fallen in all the 3 instances
on an average 21.5% (ranging from 4.5% to 47%). Interestingly, markets
recovered practically the entire loss 3 months later on all the 3 occasions.
Markets will stop panicking when policy makers start panicking: Any policy
measures to shore up the rupee by say quasi sovereign bonds/NRI bonds is the
key and could lead to a spike in the rupee and help markets.
What do we think of other macro variables?
1. Currency: Our Fx strategist thinks a likely scenario is that the rupee
stabilizes in the Rs63-69 band due to likely policy action. However, any hike
in rates could see the rupee at Rs75/US$ by year-end. (see report).
2. Growth: We continue to expect downgrades to GDP and earnings growth. In
a stress case scenario, we could see GDP growth at 4% (vs current 4.8%)
and earnings growth at 0% (vs current 7-8%).
3. Bank NPLs: In a stress case, we could see Delinquency levels rising to ~4%
from 2.8% and gross NPL’s rising to 5.8% v/s 3.4% now (see report).
Sector & Stocks
In a stress case of continued rupee depreciation, we would stick to consensus,
out-performing sectors like IT (TCS, Infy, HCL); pharma (Sun, Lupin), Cairn, Tata
Motors. We would be sellers of stocks like HUL, Adani Power, NTPC, . Our
current mirror some of these – TCS, Lupin, Idea and Hero Motors.

Technicals- SBI, Reliance Industries, Tata Steel, Infosys :: Business Line

Index Outlook: Poised on the brink :: Business Line

Technicals - Adani Enterprises, LIC Housing, Andhra Bank, NMDC, Jaiprakash Associates, Gruh Finance :: Business Line