City Union Bank – A good buy despite 112 years of existence!

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.

2 Responses to “City Union Bank – A good buy despite 112 years of existence!”

  1. MS Says:

    Thanks for the note. (Personal connection: Kumbakonam was my hometown. A few family members were senior managers of the bank in olden days). Some interesting info for you:

    Hope you know that it was known as KCUB for a long time but dropped the Kumbakonam discereetly – the obvious reason was the brand relevance during geographic expansion. But the more subliminal (and funny) reason is the low trust and integrity associated with the “Kumbakonam” name in Tamilnadu public perception – much like “Ulhas Nagar” items.

    And it all started with the failure of a regional British bank in early 20th century. The Arbuthnot Bank was started by British businessmen in Tanjore district, and some rich Indian Zamindars in Kumbakonam became directors and investors, canvassing huge deposits from friends and public. The bank collapsed after few years due to bad business dealings and the Kumbakonam based directors couldn’t repay anything to their circles.

    The name has stuck till now!! In TN everyone knows that a “Kumbakonam job” is an act of fraud and cheating. Quite unfortunate for a town of amazing temples and art, with recorded history of at least 1500 years and it’s most famous son being the mathematician Ramanujan !

    • Amol Agrawal Says:

      Wow ms. Thanks for sharing both personal connections and other useful info. I knew the name was kcub but not the other details. The bank’s ability to survive despite all odds is what makes it fascinating. If it was somewhere in west there would have been papers written. But such a tragedy that nothing at all on kcub and other such banks.

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