NPA divergence report upsets apple basket for City Union Bank

The Reserve Bank of India (RBI) annual supervisory test results have soured sentiment in City Union Bank Ltd stock. In the past two days, the bank’s shares have fallen nearly 7%. Note that prior to that, the stock has rallied with a 40% gain so far in CY22.

Analysts from Macquarie Capital Securities (India) said that the difference in bad loans is never a good thing for a quality franchise bank like City Union Bank. “So to that extent, this development is a bit negative. However, the magnitude of the impact on profit and loss in this case is small and one must also take into account that 2022 is a hit year for SMEs,” the analysts said. in a report on December 21.

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RBI found a difference in the bank’s reported total non-performing assets (NPA) and provisioning for fiscal year 22 to the tune of $259 cores and $40 cores, respectively. According to City Union Bank, $61 cores have been classified as NPA by the bank in H1FY23. Moreover, other $13 accounts worth millions of dollars were closed on this day.

“Surplus $Analysts at Investec Capital Services (India) said in a report on December 20 that 185 crore will flow into NPA in the 12th quarter (Q3FY23).

The development could affect the bank’s re-rating outlook.

“Although the difference in provisioning is to a lesser extent than the reported NPA, it raises questions about the historically healthy underwriting culture of the bank. This case should prevent the stock from re-ranking significantly in the medium term relative to its pre-covid multiple,” Investec analysts added.

They believe a 15% return on equity will largely remain intact over the medium term.

Going forward, investors will have to keep a close eye on any divergence. Another very important development for the stock is the pending RBI decision to re-appoint CEO N Kamakodi in April 2023.

Despite losses over the past two days, shares of City Union Bank have gained about 30%, beating the nearly 20% return of the Nifty Bank industry index. In Q2, the bank reported excellent earnings performance based on key metrics of net interest income and net profit margin. The bank was able to perform well in terms of profitability even with heavy exposure to the SME segment during the covid period. “However, the divergence event has affected investor perception of the bank’s stock,” said one analyst who requested anonymity.

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