City Union Bank’s gold loan and MSME momentum supports resilient RoA outlook

Investment View and Key Drivers

Anand Rathi Research’s July 29, 2026 report retains a BUY view on City Union Bank, supported by sustained balance-sheet growth ahead of the system, healthy momentum in its core MSME franchise and gold-loan portfolio, stable operating performance and improving asset quality. The broker expects earnings resilience through FY27E and FY28E, with return on assets sustained above 1.5 per cent.

Anand Rathi expects City Union Bank to deliver credit growth 200-250 basis points above the system over the medium term, supported by continued momentum in MSME and gold loans.

Q1FY27 Business Growth

City Union Bank reported another strong quarter in Q1FY27. Advances increased 26.1 per cent year-on-year, unchanged from Q4FY26 growth, while deposits grew 20.7 per cent year-on-year. Both metrics outperformed the system and peers, according to the broker.

Credit growth was led by gold loans, which rose about 37.6 per cent year-on-year. Core loan growth excluding gold loans was also healthy at about 20.5 per cent year-on-year. Gold loans, including agricultural gold loans, represented about 31 per cent of the loan book, and management expects this proportion to remain within 31-32 per cent.

Liability growth remained healthy, with CASA deposits increasing 17.5 per cent year-on-year.

Operating Performance and Margins

The faster growth in NII, PPoP and PAT relative to the balance sheet underpins the broker’s positive assessment. However, net interest margin declined 9 basis points quarter-on-quarter to 3.78 per cent because the cost of funds increased 14 basis points, largely owing to higher borrowings. Management expects deposit costs to remain elevated over the next few quarters and retained medium-term NIM guidance of 3.65-3.7 per cent.

Fee income rose 14.4 per cent year-on-year, trailing balance-sheet growth, although management expects an improvement in the second half of the fiscal year. Operating-expense growth remained below balance-sheet growth, and the operating-expense-to-assets ratio improved by 24 basis points quarter-on-quarter to 1.98 per cent. Anand Rathi expects stable operating performance and moderate credit costs to support profitability.

Asset Quality Improvement

Asset quality improved materially in Q1FY27. Gross slippages fell to 118 basis points from 131 basis points in Q4FY26 and 151 basis points in Q1FY26. Net slippages moderated to 8 basis points from 30 basis points sequentially and 41 basis points a year earlier.

The overall SMA book improved sharply to 2.85 per cent from 7.1 per cent in Q1FY26. Management expects gross slippages to remain in the 1.2-1.3 per cent range and medium-term credit cost to be about 40 basis points.

Earnings Estimates and Valuation

Anand Rathi has raised its FY27E and FY28E estimates modestly. FY27E NII, PPoP and PAT estimates are Rs 34,280 million, Rs 24,110 million and Rs 15,558 million respectively. FY28E PAT is estimated at Rs 17,836 million.

At the report CMP of Rs 238, the stock traded at 1.7 times FY28E price-to-adjusted-book value. The target price of Rs 298 is based on 2.2 times FY28E P/ABV.

Key Risks

• Higher-than-expected slippages.
• Lower-than-anticipated loan growth.