City Union Bank Q1 earnings beat on NII strength and lower costs

Investment View and Valuation

In its July 29, 2026 Q1 FY27 result update on City Union Bank, Prabhudas Lilladher retained its BUY rating and raised the target price to Rs 250 from Rs 233. The broker described the quarter as decent, with core pre-provision operating profit outperforming its estimate by about 11 per cent, driven by stronger net interest income and lower operating expenses.

The target price is based on maintaining a 1.7 times multiple while rolling the valuation forward to September 2028 adjusted book value.

Q1 FY27 Financial Performance

City Union Bank reported Q1 FY27 net interest income of Rs 8,201 million, up 31.2 per cent year on year and 4.4 per cent above Prabhudas Lilladher's estimate of Rs 7,852 million. Calculated net interest margin was 3.83 per cent, versus the broker's 3.67 per cent estimate, while reported NIM declined 9 basis points quarter on quarter to 3.78 per cent.

Core PPoP was Rs 5,282 million, while operating expenses were 4.2 per cent below the broker's forecast, mainly due to lower other operating expenses. Core PAT was Rs 3,427 million, 8 per cent above estimate, while reported PAT was Rs 3,826 million.

Fee Income and Other Income

The main miss was fee income. Fees were Rs 1,402 million, 17.5 per cent below the broker's estimate, as softer loan offtake reduced processing fees. Other income of Rs 2,436 million was ahead of estimate due to treasury income, although fee income and technical write-off recoveries were lower.

The cost-to-income ratio improved to 45.4 per cent, compared with 46.2 per cent in Q4 FY26.

Business Growth and Portfolio Outlook

Business growth was broadly in line with expectations. Deposits rose 20.7 per cent year on year to Rs 793,423 million, while advances increased 26.1 per cent to Rs 668,809 million. CASA declined by 105 basis points quarter on quarter to 26.6 per cent, and the credit-deposit ratio was 84.3 per cent.

Non-agriculture gold loans grew 56.4 per cent year on year and 6.8 per cent quarter on quarter. Management reiterated that advances should grow 2 to 3 per cent above industry growth, led by MSME, gold and secured retail lending.

Portfolio Mix and Management Commentary

• Gold loans are expected to account for 31 to 32 per cent of the portfolio.
• MSME loans are expected to account for 55 to 60 per cent.
• Secured retail loans are expected to account for about 10 per cent.
• Management expects MSME growth to exceed system growth by 2 to 3 per cent, although utilisation declined from 73 per cent to 70 per cent.
• The EU agreement could support business prospects in regions such as Tirupur.
• ECLGS sanctions stood at Rs 8,000 million and could reach Rs 20,000 million to Rs 25,000 million.

Asset Quality and Credit Costs

Asset quality improved, with gross NPA at 1.73 per cent, better than the broker's 1.81 per cent estimate, helped by lower net slippages. Gross slippages were Rs 1,950 million against the estimate of Rs 2,050 million, while recoveries were Rs 1,800 million versus Rs 1,690 million estimated. Provisions were Rs 780 million.

Prabhudas Lilladher noted that a one-time expected credit loss impact could be 60 to 65 basis points, while the sustainable impact on credit costs may be 4 to 5 basis points.

Margins, Estimates and Key Monitorables

Management guided for deposit costs of around 5.6 to 5.7 per cent and NIM of 3.65 to 3.70 per cent over the next few quarters. A possible 5 basis point rise in deposit costs remains a monitorable.

The broker highlighted that recent NII outperformance was aided by a 20 to 25 basis point year-on-year increase in gold-loan yields. It raised FY27E and FY28E NIM assumptions by 5 basis points to about 3.4 per cent, but cut fee estimates by about 10 per cent. The net effect on core PAT estimates was mildly positive.

Broker Forecasts and Investment Considerations

• Loan CAGR is forecast at 17.5 per cent over FY26 to FY28E.
• FY27E core PAT is forecast at Rs 15,458 million.
• FY28E core PAT is forecast at Rs 18,325 million.
• Margin trajectory, funding costs, CASA performance, fee recovery and the ECL-related credit-cost effect remain important factors for the investment case.