City Union Bank : SEP 2021

"City Union Bank 2QFY22Results Conference Call"

November 12, 2021

MANAGEMENT: MR. N. KAMAKODI - MD& CEO, CITY UNION BANK MR. V. RAMESH - CFO, CITY UNION BANK

MODERATOR: MR. AJIT KUMAR - AMBIT CAPITAL

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	City Union Bank
	November 12, 2021
Moderator:	Ladies and gentlemen, good day and welcome to City Union Bank2QFY22 Results
	Conference Call hosted by Ambit Capital. As a reminder, all participant lines will be in the
	listen only mode and there will be an opportunity for you to ask questions after the
	presentation concludes. Should you need assistance during the conference call, please signal an
	operator by pressing * then 0 on your touchtone phone. Please note that this conference is
	being recorded.
	I now hand the conference over to Mr. Ajit Kumar from Ambit Capital.Thank you and over to
	you, sir.
Ajit Kumar:	Good evening, everyone. Welcome to Q2FY22 earnings call of City Union Bank. On this call,
	we have Dr. N. Kamakodi - MD& CEO of the Bank and Mr. V. Ramesh - the CFO. Thank
	you, sir for the opportunity of hosting you on this call. I will now request Dr. N. Kamakodi sir
	to take us through the opening remark and then we will open the floor for Q&A. Over to you,
	sir.
N. Kamakodi:	Good evening, everyone. Hearty welcome to all of you for this concall to discuss the reviewed
	financial results for second quarter and half year ended 30th September 2021. Belated Diwali
	wishes to you all and your family members. Hope all of you and your family members are safe
	and following the COVID safety norms. As you may know, bank celebrated its 118th
	Foundation Day on 31st October 2021. The board approved the unaudited results today and
	hopes you all have the copies of the results and the presentation.
	We shared with you all the following expectations for the current financial year 21-22 during
	our fourth quarter 2021 concall on 28th May 2021 and first quarter financial year 21-22
	concall on 6th August 2021. We expected the credit growth to be at mid to high single digit if
	the economic environment and the COVID second wave behave like last year for the year as a
	whole. Overall slippages to closing advances for FY 21-22 to be slightly better than that of FY
	20-21. Slippages may be more frontloaded with increased slippages in Q1 and Q2 for financial
	year 22. Recoveries to be impacted because of the lockdown and non-functioning of
	government registration departments and courts are more sympathetic towards defaulters
	rather than the banks. The gross and net NPA for the financial year 2022 to be slightly lower
	than that of financial year 2021 with a few quarterly spikes. ROA to reach the level of 1.5% i.e
	pre-COVID level towards the second half of the next financial year 22-23 and the impact of
	the second wave on the growth and the slippages may not be as bad as the first wave for the
	financial year 2021. These are all the points which we discussed and shared with you all during
	the beginning of the current year and despite the COVID second wave, performance during the
	period is in tune with the expectations whatever we shared during the earlier two conference
	calls.
	The highlight of financial performance for Q2 financial year 22 and the first half of financial
	year 22 are as follows. Deposits recorded a growth of 12% to 46,316 crores from 41,421
	crores. Credit grew by 7% to 38,012 crores from 35,437 crores. Thus, business grew by 10%

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City Union Bank

November 12, 2021

and presently stands at 84,328 crores. CASA recorded a growth of 26% to 13,411 crores from 10,646 crores and percentage CASA to total deposits improved to 29% in Q2 financial year 22 against 26% in Q2 financial year 21. The growth in operating profit to 405 crores and 788 crores for Q2 financial year 22 and H1 financial year 22 respectively, registering a growth of 5% and 6% respectively to corresponding earlier periods. Net profit improved by 15% and 14% in Q2 financial year 22 and first half financial year 22 and in absolute terms, both stands at 182 crores and 355 crores respectively as against 158 crores and 312 crores for Q1 financial year 21 and first half financial year 21 respectively. ROA for the Q2 financial year 22 stands at 1.32% compared to 1.23% in Q2 financial year 21. Net interest income marginally improved from 475 crores in Q2 financial year 21 to 478 crores in Q2 financial year 22 and for 6 months period from 912 crores in H1 financial year 21 to 926 crores in H1 financial year 22.

The figures are not exactly comparable because we did not have recognition of NPA in the corresponding period in the last year because of standstill clause, but roughly we can compare. The net interest margin for the Q2 financial year 22 stands at 4.03% and 3.95% for H2 financial year 22. The progress made so far is slightly even better than whatever we had thought earlier or whatever we had discussed with you earlier. The credit growth was at 7% year-on-year basis and it might end up at high single digit towards the year end as per the expectation we shared with you all during our earlier concalls. The number could slightly be moderated in Q3, but will increase in Q4 because of the base effect. If things stabilize, we will press growth pedal towards the end of the financial year 21-22 and 75% of the growth so far has come from may be gold loan to greater extent particularly in Q2 financial year 22.

I was getting a few calls from investors asking questions about the loan book which got ECLGS or restructuring or both after the first call and also earlier. The concern expressed is that the percentages are higher than that of many other banks, but we feel quite comfortable about the performance of this portfolio and I will explain you what we think. Remember those accounts which are in stressed category on 29th February 2020 were not eligible for ECLGS. MSME accounts with SMA-2 status on 29th February 2020 and other accounts even with SMA-1 status on 29th February 2020 were also not eligible for ECLGS. In other words, ECLGS were given only to those accounts which had satisfactory cash flow and proper track record during pre-COVID days and had temporary cash flow mismatches because of the COVID lockdowns. We have included the table in our investor presentation slides for September 2021 with respect to the performance of accounts which availed ECLGS and their movement over a period of time which clearly shows the reduction in ECLGS amount as well as the overall exposure from the date of availment of ECLGS facility. In June 2020, there were about 3780 borrowers who had availed ECLGS amounting to 675 crores and their total funded exposure was Rs. 4757 crores which got reduced to 4367 crores in September 2021.If you keep the respective slides in your hand and compare these numbers, probably you will be getting a better comfort on what I am talking now.

Likewise, in September 20 quarter, there were about 3927 borrowers who had availed ECLGS amounting to 838 crores and their funded exposure was 5707 crores which got reduced to Rs. 5263 crores in September 2021. Remember, these are all, the two sets of numbers which I

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November 12, 2021

spoke are not cumulative, I am only talking about those accounts which received ECLGS in their respective quarters and how their balance moved in the subsequent quarters and what is their total balance at the September 21 quarter. In the third quarter that is December 2020, there were about 979 borrowers who have availed ECLGS amounting to Rs. 299 crores and their funded exposure was 2168 crores which got reduced to 2035 crores in September 2021. In fourth quarter, there were about 244 borrowers who had availed ECLGS amounting to 192 crores and the total funded exposure was 1583 crores in the quarter of availment which got reduced to 1545 crores in the September 2021. In the current financial year first quarter, there were about 43 borrowers who had availed ECLGS amounting to about 17 crores and their total funded exposure was 144 crores which got reduced to 142 crores in September 21. This clearly shows there is reduction of exposure across all quarters in those accounts which got ECLGS borrowing who availed ECLGS, but remember all these accounts which got ECLGS they had two years of moratorium period and they have to make repayment of this ECLGS amount in three years after the moratorium period, but what you can clearly see is that the total exposure of those accounts which received ECLGS is coming down quarter by quarter because the things are getting normalized which once again proves that these accounts which availed basically had proper cash flow and proper track record during pre-COVID period. They availed ECLGS for your temporary cash flow mismatches and their cash flows are improving and they are making and overall exposure is getting reduced subsequently.

During Q2, we have sanctioned ECLGS of 56 crores to 90 borrowing having an exposure of Rs. 536 crores, taking the total exposure of all accounts which availed ECLGS currently to Rs. 13,889 crores who have received ECLGS to the tune of about 1938 crores through ECLGS 1, 2, 3, etc., and remember the ECLGS and all were availed in multiple stages of 1, 2, 3 and all, that is why the amount of ECLGS, whatever that was given, it slightly increased compared to our earlier expectation because the eligibility increased as we moved subsequent to the COVID lockdown. Of course, borrowers with an exposure of about 588 crores have their account restructured and availed ECLGS of about 83 crores of this total funded exposure of 13,889 crores, only 2% or 249 crores alone is in SMA-2 and about 198 crores has already turned into NPA, not very much different from the other regular exposures. The borrowers with an exposure of 11,553 crores who have availed ECLGS where not restructured and they continued to pay their regular advances.

So, when I say the SMA-1 number and SMA-2 number, remember, all these accounts not availed any restructuring, all accounts are making the repayments of their other term loans and interest of their other cash credit limit regularly and they will find the place in SMA-1 and SMA-2 if they are not able to repay their other repayment obligations. So, the overall SMA-2 number and NPA number, whatever I have expressed that is SMA-2 number of only 2% in this portfolio almost similar to the overall portfolio percentage which gives the enough comfort that the cash flows of these accounts have by and large stabilized and we don't see much problem going forward if things don't deteriorate from whatever we are seeing at this point of time which we are fairly confident.And enough discussions have happened about the restructured assets and I have spoken about our earlier restructuring experience of 2008 in our

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December 2020 quarter concall and discussed that about 20% of the restructured book which was about 10% of the total advances in 2008 slipped into NPA in the subsequent 2-3 quarters and we expect the similar behavior from the restructured portfolio based on the current trend.

So, once again our expectation is that out of the restructured portfolio, our estimate and our confidence tells that there could be about say 20-25% of them becoming bad over a period of next 2-3 years and you may ask why then we restructured remaining 75%. The point is, we don't know which 25% will become bad and we have to see how things will go forward. So, we are confident that based on the data available at this point of time, about 20% to 25% of the restructured portfolio may slip, but that also over a period of next 2-3 years and we are seeing reasonable cash flow and performance things and all coming back to the normalcy to greater extent at this point of time and in the June quarter earning call, we clearly discussed that there could be another 400 to 500 crores of restructuring because of,wherein borrowers likely to utilize COVID-2 facilities after the COVID second wave based on 5th May 2021 RBI circular which extended the restructuring deadline up to September 2021 and also raised the threshold limit of restructuring to 50 crores from 25 crores.

In Q2 financial year 22, we have restructured an exposure of 322 crores against the expectation of about 400 to 500 crores and the total restructured quantum currently stands at about 2248 crores comprising of MSME portion of about 1540 crores and COVID-19 resolution framework of about 686 crores which works out about 5.9% of the loan book by and large the restructuring window is over and RBI deadline is also over. Including all these, the ECLGS restructured and all other account put together, overall SMA-2 on 30th September 2021 is 1048 crores which is only 2.75% of the overall advances compared to about 1216 crores in Q1 of financial year 22 that is 3.35% of the advances.As we discussed in the earlier concall, our pre-COVIDSMA-2 numbers used to be in the range of 5 to 7% and things on asset quality getting reflected from the SMA-2 is very much improving that is what the data shows at this point of time.

The RBI guidelines of daily marking of NPA started on 1st June 2021 and we are clearly able to see the SMA-1 numbers moderating. Earlier, the identification of NPA used to happen on a daily basis, but the marking and freezing of account used to happen on the quarterly basis, but since the NPA marking also happens, the accounts are getting frozen for operations by the NPA borrowers and hence the borrowers are more conscious about keeping their assets very much within the permissible norms. NPA slippage during Q2 financial year 22 is about 298 crores compared to 482 crores in financial year 22, a reduction of 38% or more than 180 crores sequentially showing a declining trend. We believe that quarterly reduction will show decreasing trend henceforth and reaching pre-COVID level may be by Q4 or Q1 onwards, which will be inclusive of all slippages from the regular accounts, restructured accounts, nonrestructured accounts, ECLGS portfolio, everything put together this is what we feel going forward and finally probably we see some light at the end of the tunnel and whatever asset quality pressures are showing, much of release compared to whatever we saw in the earlier quarter. Hopefully, that situation stabilizes and improves going forward.

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