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City Union Bank reported 3QFY16 net profit growth of 10% to Rs1,131mn (7% above our and consensus estimates). Overall RoA was stable at 1.5%, supported by 8bps QoQ expansion in NIM to 3.82% and decline in the cost-to-income ratio (42%). Loan book growth was at 14%, driven by core MSME/trade loans (54% of total loans). Though NPA addition picked up in 3Q taking gross NPAs to 2.35%, improvement in operating profitability offset the credit cost and supported stable profitability. The bank is likely to remain conservative on near-term growth outlook; however, is well placed to accelerate growth, if the economic climate turns favourable, due to strong capitalisation, better loan demand in core MSME/trade segments and steady profitability. We expect the bank to deliver an EPS CAGR of ~15% over FY16-18E with average RoA of 1.5% and RoE of 16%. We remain BUYers with an unchanged TP of Rs115/share, implying a valuation of ~2.0x FY17E BV.
