CUB leaps forward
29 June 2006
Venkatachari Jagannathan

Chennai: The City Union Bank Limited (CUB) has reported stronger performance last fiscal than the seven other old private banks.

The Kumbakonam-based CUB compares favourably top in terms of net interest income growth with the other old private banks. During FY 2006 the bank's net interest income was Rs139.79 crore — a growth of 26.13 per cent over FY 2005 while its operating expenses as a percentage of net interest income was 56.85 per cent, making it the lowest amongst several old private banks. CUB also posted the highest growth percentage in the operating profit over many others.

In bancassurance, CUB has done commendably well last fiscal. The bank earned a first year commission income of Rs11 crore selling 1,600 policies of the country's premier life insurer, the Life Insurance Corporation of India (LIC). The total premium brought in by the bank for the insurer is Rs39.36 crore.

During FY 2006, CUB posted a total income of Rs184.14 crore and an after tax profit of Rs56.37 crore. The operating profit showed a steep increase to Rs109.15 crore. For FY 2005 the figures were Rs144.27 crore, Rs46.32 crore and Rs81.67 crore respectively.

The bank's advances portfolio grew by 26.68 per cent to Rs2,550 crore and the deposits by 13.67 per cent to Rs3,518 crore. The year also saw the bank strengthening its Tier II debt by raising Rs30 crore unsecured loan of 10-year tenure.

The bank has drawn up ambitious growth plans. Says S Balasubramanian, chairman and CEO, "Our total business (advances plus deposits) target for this fiscal is Rs10,000 crore. We will be increasing our branches to 170 by adding 24 new ones." A predominantly Tamil Nadu-based bank, CUB is now branching out to other parts of the country. Nearly two-thirds of the new branches will be in the Western region (Maharashtra and Gujarat) and the remaining in the four Southern states and Punjab.

The huge business target for this fiscal requires funds and the avenue for deployment. Addressing the first issue, Balasubramanian says that the bank has tied up with the Integrated Enterprises (India) Limited to market fixed deposit schemes. Integrated Enterprises is one of the major shareholders of CUB.

"With 106 branches, Integrated Enterprises would be able to bring in deposits even from locations where we don't have a branch."

The tie-up will also help the bank to increase its non-interest income, as Integrated Enterprises will have counters at the select CUB branches to sell other financial products. And for a fee of Rs300, the bank would enable its customers to file their income tax returns.

Agreeing that the average cost of funds would see an increase from the FY 2006 levels of 4.82 per cent due to the focus on fixed deposits, general manager N Kamakodi feels that the bank won't feel the pinch. "Last year the yield on advances stood at 10.85 per cent and the yield on interest earning assets was 9.84 per cent. The net interest margin increased to 3.61 per cent from 3.19 per cent during FY 2005."

Currently the low cost deposits accounts for nearly 24 per cent of the total deposits. Citing the Rs537 crore growth in the advances last fiscal he adds, "The credit off take is good and there is more demand. So deployment is not an issue," he adds.

Since 2001 the bank has been experiencing consistent growth in advances and during the last three years there has been a spurt. According to him, the bank will have a marketing officer in each branch to grow the advances portfolio.

According to Balasubramanian, CUB reduced its non-performing assets (NPA) drastically last fiscal. "The percentage of net NPA to net advances came down to 1.95 per cent from 3.37 per cent."

In order to facilitate the mobilisation of deposits and deployment of funds, CUB has jacked up its promotional budget by Rs1 crore to Rs2 crore this fiscal.

On the technology side CUB has brought 105 branches under the core banking solution. While the remaining branches will be brought under the core banking solution shortly, he bank is planning to invest around Rs5 crore to upgrade its IT hardware.

"The number of users is now 1,600. The additional investment would increase the number of users to 3,000," explains Balasubramanian. The bank will also go for other software packages to manage credit, asset liability management and others.

While CUB does roaring business for LIC, the bank has been forced to rethink its non life insurance tie-up. Currently a corporate agent for the National Insurance Company Limited, the bank is toying with the idea of opting for a referral arrangement, which yield a higher commission income for the bank

"The revenue from a referral arrangement is higher than an agency commission. Further, we can have referral tie-ups with several insurers but as a corporate agent we are married to only one insurer," Kamakodi explains.