Radhika Merwin of Hindu Businessline says City Union Bank is a good stock buy amidst the gloomy Indian banking sector.
Even as public sector banks continue to be weighed by weak credit growth and poor asset quality, a few small regional private banks that continue to deliver healthy growth in loans and earnings offer a good opportunity for investors. City Union Bank that has a strong foothold in South India has been able to deliver healthy traction in loans, driven by the MSME (micro and small and medium enterprises) and wholesale and retail traders segment. These high yielding segments constitute a little over half of the bank’s portfolio. The bank’s focus on secured lending, cautious approach to corporate lending, improving margins and strong capital base are key positives.
Investors with a two to three years time horizon can invest in the stock. It trades at 2.2 times its one year forward book value, higher than its three-year historical average of 1.6 times. However, the valuations of most private banks have gone up sharply in the past year, a typical case of too many investors chasing too few opportunities.
Nonetheless, expected earnings growth of about 20 per cent over the next two years, sound return ratios — return on asset of 1.5 per cent and return on equity of 15-16 per cent — and strong capital position still offer good upside for investors.
City Union Bank’s strong presence in South India, particularly in Tamil Nadu, where more than half its branches are present, has helped it build a strong SME (small and medium enterprises) client base. This along with the traders segment has kept the bank’s loan growth in good stead over the last couple of years.
Assuming her analysis is rightly done, my mind went to the fact that the bank remains a good buy despite 112 years of existence! The bank was established in 1904 as Kumbakonam Bank in the small town of Kumbakonam in Tamil Nadu.
It is amazing it survived the hugely turbulent period of 1904-69 when several big banks closed in bigger cities. Even post 1969, there was enormous pressure on remaining private banks to merge with larger banks. As a result, out of the 50 private banks in 1969 only 12 remain which are badly classified as old private sector banks.
They should instead be called legendary/golden private sector banks given their huge history. It is perhaps only in countries like India where we pay such scant attention to such histories.
I am sure there are interesting lessons from these entities on the buzzwords of today – inclusion, small banking etc.