Partnership With Chennai Super Kings And Digital Initiatives Will Strengthen Brand And Drive Future Success

Key Takeaways

• Digital initiatives and management strength could restore credit growth and enhance revenue streams above industry levels.
  
• Strategic expansions and alliances could improve asset quality, loan growth, brand awareness, and operating profit.
  
• Increased deposit costs and cautious lending may pressure margins, while expansion strategies and competitive pressures challenge future revenue and profitability.

Catalysts

Engages in the provision of various banking products and services to personal and corporate clients in India.

• The bank's ongoing digital initiatives and strengthened management team are poised to restore credit growth, potentially exceeding industry levels, which could enhance revenue streams.
  
• Increasing recovery trends and reduced slippages could improve asset quality and lead to lower credit costs, positively impacting net margins.
  
• Strategic focus on expanding the secured loan portfolio, including MSME, affordable home loans, and loans against property, could drive future loan growth, thereby supporting earnings.
  
• Expansion into northern and western regions and branch network growth to 850-875 by year-end could further support deposit collection and credit growth, positively impacting net interest income.
  
• The strategic alliance with Chennai Super Kings for co-branded credit cards aims to boost brand awareness and customer engagement, which could result in revenue diversification and support operating profit.

City Union Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming City Union Bank's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.0% today to 46.3% in 3 years time.
• Analysts expect earnings to reach ₹15.4 billion (and earnings per share of ₹20.88) by about February 2028, up from ₹10.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the IN Banks industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.22%, as per the Simply Wall St company report.

City Union Bank Future Earnings Per Share Growth

Risks

• A deceleration in credit growth was noted in 2023, which could signal potential future challenges in maintaining consistent revenue growth.
  
• The bank's cost of deposits has increased, which, if it continues without a corresponding increase in interest income, could pressure net margins.
  
• The bank is cautious about unsecured lending, suggesting potential risk aversion that may limit expansion into more profitable but riskier loans, affecting future earnings growth.
  
• Competitive pressures in deposit acquisition were highlighted, suggesting a potential struggle to maintain profitability and a stable cost-to-income ratio.
  
• The strategy to expand branch networks primarily in the North and West relies on accurate market analysis; errors could result in unproductive expenditures, impacting operating profits.

Valuation

• The analysts have a consensus price target of ₹200.4 for City Union Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹220.0, and the most bearish reporting a price target of just ₹165.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹33.4 billion, earnings will come to ₹15.4 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹171.4, the analyst's price target of ₹200.4 is 14.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.