I had been waiting to write about this for a long time but just didn't had the time. I bought this stock in the first week of January @174/- levels before the stock split was announced. Finally after a lot of hectic traveling I am getting time to write something about it. The moment you see the financials of this stock it jumps out as one of those that is screaming to be bought. Everybody knows about the general prospects of banking industry in India. It is a long term secular growth story. Hence in this post I am going to talk very specifically about the reasons to buy this stock and some of the risks associated with this stock.
1) Private bank with origins in rural TamilNadu. Was previously called as The Kumbakonam City Union Bank.
2) More than 100 years old.
3) Operates in agriculturally most progressive states like Gujarat, Maharashtra, Karnataka, TamilNadu, Andhra Pradesh, etc
4) Focuses primarily on tier 2 or tier 3 cities to open branches. A lot of initial business came from lending in Agriculture sector. Govt of India's recent focus on agriculture growth is a positive for this bank which has strong presence in rural areas of agriculturally preogrssive states
5) Will be operating more than 150 branches in India by the end of Dec-07 and all of them are connected by core banking solution (CBS) from TCS. Heavy focus on technology means lower operating costs.
6) Focus on generating fee based business from bancassurance (distributor of LIC policies) . Also tied - up with ICICI Bank for its online money remittance service for its clients. Reduced dependence on interest income in future will make it somewhat immune to interest rate fluctuation.
7) Return on assets (ROA) for FY2007 is approx 1.57 %. Not many banks in India can boast of such ROAs. This indicates higher operating efficiency which will help to sustain profits in lean times.
8) Agressive reduction in net NPAs
9)The banks deposit growth has been more than loan disbursements. This means to me that the bank is doing a better job than most of its competitors in generating low cost funds and also that it is probably lending responsibly. I maybe wrong on this but I have a feeling in today's credit environment where most of the banks are running short of cash to lend; this bank has more cash than it can lend. This could only be because the bank employs sound lending principles.
10) Enjoys a net interest margin of 3.74% in latest quarter. With possible reduction in lending rate from RBI in near future the NIM would go further up which means more profits for the bank.
11) Achieved a balance sheet growth of more than 29% in recent quarter. Impressive performance !!!!
Negative Factors Affecting Growth
1) If growth in Tier 2 and Tier 3 cities comes below expectations it can affect the profitability of the bank.
2) In recent past the bank had been opening a new branch practically every week. This can mean upfront cost in operationalizing these branches which could depress profits in near future.
3) Inability to get permission from RBI for opening more branches can affect the growth of this bank
4) Push from major banks like ICICI into tier 2 and tier 3 cities and rural India means increased competition for CUB.
5) Too much reliance on customers from agrarian background can be negative if there is a drop in agricultural activity
6) Inability to manage rapid expansion can dampen prospects of this stock
7) Quality of loans is not clear to me. If the quality of loans are not good it can affect the bank's balance sheet if there is softening in Indian economy
8) Lack of a diversified revenue stream is a big issue for CUB if there is softening in Indian economy
9) I have saved this one for the last as I believe it will have the biggest impact on the valuation of the bank. The bank is trying to raise additional capital to increase its net worth by dilluting the equity base. This will have a negative effect on the EPS which will affect the valuation of stock. Currently the bank is planning to sell approx 68 lacs shares to various investors to raise capital. This will dillute its equity base by 25% which means the EPS has to be adjusted accordingly and hence the share price. This is the biggest risk to existing shareholders.
1) Private bank with origins in rural TamilNadu. Was previously called as The Kumbakonam City Union Bank.
2) More than 100 years old.
3) Operates in agriculturally most progressive states like Gujarat, Maharashtra, Karnataka, TamilNadu, Andhra Pradesh, etc
4) Focuses primarily on tier 2 or tier 3 cities to open branches. A lot of initial business came from lending in Agriculture sector. Govt of India's recent focus on agriculture growth is a positive for this bank which has strong presence in rural areas of agriculturally preogrssive states
5) Will be operating more than 150 branches in India by the end of Dec-07 and all of them are connected by core banking solution (CBS) from TCS. Heavy focus on technology means lower operating costs.
6) Focus on generating fee based business from bancassurance (distributor of LIC policies) . Also tied - up with ICICI Bank for its online money remittance service for its clients. Reduced dependence on interest income in future will make it somewhat immune to interest rate fluctuation.
7) Return on assets (ROA) for FY2007 is approx 1.57 %. Not many banks in India can boast of such ROAs. This indicates higher operating efficiency which will help to sustain profits in lean times.
8) Agressive reduction in net NPAs
9)The banks deposit growth has been more than loan disbursements. This means to me that the bank is doing a better job than most of its competitors in generating low cost funds and also that it is probably lending responsibly. I maybe wrong on this but I have a feeling in today's credit environment where most of the banks are running short of cash to lend; this bank has more cash than it can lend. This could only be because the bank employs sound lending principles.
10) Enjoys a net interest margin of 3.74% in latest quarter. With possible reduction in lending rate from RBI in near future the NIM would go further up which means more profits for the bank.
11) Achieved a balance sheet growth of more than 29% in recent quarter. Impressive performance !!!!
Negative Factors Affecting Growth
1) If growth in Tier 2 and Tier 3 cities comes below expectations it can affect the profitability of the bank.
2) In recent past the bank had been opening a new branch practically every week. This can mean upfront cost in operationalizing these branches which could depress profits in near future.
3) Inability to get permission from RBI for opening more branches can affect the growth of this bank
4) Push from major banks like ICICI into tier 2 and tier 3 cities and rural India means increased competition for CUB.
5) Too much reliance on customers from agrarian background can be negative if there is a drop in agricultural activity
6) Inability to manage rapid expansion can dampen prospects of this stock
7) Quality of loans is not clear to me. If the quality of loans are not good it can affect the bank's balance sheet if there is softening in Indian economy
8) Lack of a diversified revenue stream is a big issue for CUB if there is softening in Indian economy
9) I have saved this one for the last as I believe it will have the biggest impact on the valuation of the bank. The bank is trying to raise additional capital to increase its net worth by dilluting the equity base. This will have a negative effect on the EPS which will affect the valuation of stock. Currently the bank is planning to sell approx 68 lacs shares to various investors to raise capital. This will dillute its equity base by 25% which means the EPS has to be adjusted accordingly and hence the share price. This is the biggest risk to existing shareholders.
If you are interested enough by now, please do your own analysis and decide whether you want to buy City Union Bank. If you are not convinced then give it a pass. There will be lot more opportunities in future.
For details on City Union Bank please visit their website on http://www.cityunionbank.com/
For questions or comments please email me at secmoney@gmail.com
Regards,
Bargain Hunter
FULL DISCLOSURE: I may have this stock in my personal portfolio before writing this blog or may plan to add it to my portfolio in future
DISCLAIMER: Investing in stocks is very risky. It may very well happen that you may loose all the money that you invest in stocks. Please consult your financial advisor before investing in any stocks
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