The quarter's standout achievement was the bank's asset quality improvement, with gross NPA ratio declining to 2.17%—the lowest in multiple quarters—whilst net NPA ratio compressed to just 0.78%. Net interest income surged to ₹752.17 crores, representing a sequential jump of 12.85% and year-on-year expansion of 27.97%, demonstrating the bank's ability to widen spreads in a competitive lending environment. With a market capitalisation of ₹20,953 crores and strong institutional backing of 63.73%, City Union Bank continues to strengthen its position amongst India's mid-sized private sector banks.
Quarterly Performance Trajectory: Consistent Momentum
City Union Bank's quarterly performance over the past seven quarters reveals a bank firing on multiple cylinders. Interest earned has grown consistently from ₹1,388.64 crores in Q2 FY25 to ₹1,755.68 crores in Q3 FY26, representing a sequential increase of 6.18% and year-on-year growth of 18.72%. This acceleration in interest income reflects both volume growth in the loan book and improved pricing power.
| Metric | Dec'25 | Sep'25 | Jun'25 | Mar'25 | Dec'24 |
|---|---|---|---|---|---|
| Interest Earned (₹ Cr) | 1,755.68 | 1,653.13 | 1,605.33 | 1,532.72 | 1,478.74 |
| QoQ Change | +6.18% | +2.98% | +4.74% | +3.65% | — |
| Net Interest Income (₹ Cr) | 752.17 | 666.54 | 625.29 | 600.32 | 587.75 |
| QoQ Change | +12.85% | +6.60% | +4.16% | +2.14% | — |
| Net Profit (₹ Cr) | 332.16 | 328.59 | 305.92 | 287.96 | 286.00 |
| YoY Change | +16.14% | +15.22% | +15.66% | — | — |
| Gross NPA (%) | 2.17 | 2.42 | 2.99 | 3.09 | 3.36 |
| Net NPA (%) | 0.78 | 0.90 | 1.20 | 1.25 | 1.42 |
The bank's total income for Q3 FY26 reached ₹2,001.03 crores, up 4.64% sequentially and 17.22% year-on-year. Other income contributed ₹245.35 crores, though this declined marginally by 5.32% from the previous quarter's ₹259.13 crores. Interest expended rose to ₹1,003.51 crores in Q3 FY26, reflecting the competitive deposit environment, yet the bank managed to expand its net interest margin through superior asset pricing and portfolio mix optimisation.
Financial Performance Analysis: Profitability Gains Momentum
City Union Bank's financial performance in Q3 FY26 demonstrates the bank's ability to drive profitability through operational excellence. Operating profit before provisions and contingencies climbed to ₹513.16 crores, marking a 9.04% sequential increase and establishing a new quarterly high. Provisions and contingencies stood at ₹96.00 crores in Q3 FY26, higher than the ₹57.00 crores in Q2 FY26, indicating a prudent approach towards strengthening the balance sheet despite improving asset quality metrics.
Profit before tax reached ₹417.16 crores in Q3 FY26, representing a modest sequential increase of 0.86% over Q2 FY26's ₹413.59 crores, whilst demonstrating year-on-year growth of 15.55%. Tax expenses remained stable at ₹85.00 crores across both Q3 and Q2 FY26, resulting in an effective tax rate of approximately 20.38%. The consistency in tax outgo suggests efficient tax planning and stable profitability trends.
On an annual basis, the bank's FY2025 performance showed total income of ₹6,732.00 crores, up 12.0% from FY2024's ₹6,012.00 crores. Net profit for FY2025 stood at ₹1,123.00 crores, representing year-on-year growth of 10.6%. The bank's five-year net profit compound annual growth rate of 24.20% underscores its strong long-term trajectory, positioning it favourably amongst peers in the private banking space.
Asset Quality Excellence
City Union Bank's asset quality metrics have reached impressive levels: Gross NPA ratio declined to 2.17% in Q3 FY26 from 2.42% in Q2 FY26, whilst net NPA ratio compressed to 0.78% from 0.90%. This represents a significant improvement from the 3.36% gross NPA and 1.42% net NPA reported in Q3 FY25. The provision coverage ratio stands robust, indicating strong buffer against potential credit losses. The bank's disciplined underwriting standards and proactive recovery efforts are bearing fruit, establishing it as one of the better-managed lenders in its peer group.
Operational Excellence: Capital Efficiency and Balance Sheet Strength
City Union Bank's return on equity of 12.17% reflects efficient capital deployment and strong profitability relative to shareholder funds. This metric positions the bank favourably within its peer group, demonstrating management's ability to generate attractive returns whilst maintaining conservative risk parameters. The bank's return on assets of 1.43% similarly indicates healthy asset productivity, with the lender extracting superior returns from its loan book compared to many peers.
The bank's balance sheet expanded meaningfully during FY2025, with deposits growing to ₹63,525.95 crores from ₹55,656.64 crores in FY2024, representing growth of 14.14%. Advances climbed to ₹52,081.25 crores from ₹45,525.72 crores, marking expansion of 14.40%. The advance-to-deposit ratio stood at 81.99%, indicating efficient deployment of mobilised funds whilst maintaining adequate liquidity buffers. Investments increased to ₹17,336.14 crores from ₹15,664.11 crores, providing both income stability and regulatory compliance.
Shareholder funds strengthened to ₹9,466.62 crores as of March 2025, up from ₹8,401.43 crores in March 2024, driven by retained earnings and reserve accumulation. The bank's borrowings declined sharply to ₹2,169.41 crores from ₹4,724.16 crores, reflecting reduced reliance on wholesale funding and improved deposit franchise. This deleveraging enhances financial flexibility and reduces interest rate risk exposure.
Capital Adequacy: Fortress Balance Sheet
City Union Bank maintains robust capital buffers well above regulatory requirements. The total capital adequacy ratio stood at 20.13% in Q3 FY26, though down from 21.68% in Q2 FY26 and 23.10% in Q1 FY26, reflecting deployment of capital towards business growth. Tier 1 capital ratio remains strong at 22.09% as of Q1 FY26, providing substantial cushion for unexpected losses and supporting future growth ambitions. The bank's zero promoter holding structure and professional management ensure governance standards remain high, whilst the strong capital position enables opportunistic growth without equity dilution concerns.
Lending Practices and Credit Discipline: The NPA Story
The most impressive aspect of City Union Bank's Q3 FY26 performance lies in its asset quality transformation. Gross NPA ratio of 2.17% represents the lowest level achieved in recent quarters, declining from 2.42% in Q2 FY26, 2.99% in Q1 FY26, and 3.09% in Q4 FY25. This 92 basis point improvement over four quarters demonstrates effective resolution mechanisms and conservative lending practices. Net NPA ratio of 0.78% similarly marks a multi-quarter low, down from 0.90% in Q2 FY26 and 1.42% in Q3 FY25.
The bank's interest on advances grew to ₹1,434.62 crores in Q3 FY26 from ₹1,331.75 crores in Q2 FY26, indicating healthy loan book growth and pricing power. Interest on investments contributed ₹293.73 crores, up from ₹287.56 crores sequentially, whilst interest on balances with RBI declined to ₹25.68 crores from ₹28.66 crores, reflecting deployment of excess liquidity towards higher-yielding assets.
| Asset Quality Metric | Dec'25 | Sep'25 | Jun'25 | Mar'25 | Dec'24 |
|---|---|---|---|---|---|
| Gross NPA (%) | 2.17 | 2.42 | 2.99 | 3.09 | 3.36 |
| Sequential Change (bps) | -25 bps | -57 bps | -10 bps | -27 bps | — |
| Net NPA (%) | 0.78 | 0.90 | 1.20 | 1.25 | 1.42 |
| Sequential Change (bps) | -12 bps | -30 bps | -5 bps | -17 bps | — |
| Capital Adequacy (%) | 20.13 | 21.68 | 23.10 | 23.75 | 22.26 |
The bank's average gross NPA ratio over recent years stood at 4.11%, indicating the current 2.17% level represents substantial improvement from historical averages. This disciplined approach to credit underwriting, combined with proactive recovery efforts and selective portfolio pruning, positions City Union Bank amongst the better-managed private sector banks in terms of asset quality. The provision coverage ratio of 79% as of Q1 FY26 provides adequate buffer against potential slippages.
Industry Leadership: Peer Comparison and Competitive Positioning
City Union Bank's competitive positioning within the private banking sector reveals a lender punching above its weight in several key metrics. With a market capitalisation of ₹20,953 crores, the bank ranks sixth amongst its peer group, yet delivers return on equity of 12.17%—higher than the peer average of approximately 7% and significantly ahead of larger players like Yes Bank (6.27%) and Bandhan Bank (4.10%).
| Bank | P/E Ratio (TTM) | P/BV Ratio | ROE (%) | Div Yield (%) | Market Cap (₹ Cr) |
|---|---|---|---|---|---|
| City Union Bank | 17.35 | 2.11 | 12.17 | 0.71 | 20,953 |
| IndusInd Bank | NA (Loss Making) | 1.09 | -2.84 | NA | — |
| Federal Bank | 17.87 | 1.98 | 11.09 | 0.42 | — |
| Yes Bank | 21.13 | 1.33 | 6.27 | NA | — |
| Karur Vysya Bank | 12.45 | 2.24 | 17.96 | 0.73 | — |
| Bandhan Bank | 23.80 | 0.98 | 4.10 | 1.01 | — |
The bank's price-to-earnings ratio of 17.35x appears reasonable compared to peers, trading at a discount to Yes Bank (21.13x) and Bandhan Bank (23.80x), whilst commanding a modest premium to Karur Vysya Bank (12.45x). However, the price-to-book value ratio of 2.11x sits at the higher end of the peer spectrum, exceeded only by Karur Vysya Bank's 2.24x. This valuation premium reflects market recognition of City Union Bank's superior asset quality, consistent profitability, and strong capital position.
The bank's dividend yield of 0.71% aligns with Karur Vysya Bank but trails Bandhan Bank's 1.01%. The latest dividend of ₹2.00 per share, with ex-dividend date of August 01, 2025, demonstrates management's commitment to returning capital to shareholders whilst retaining sufficient earnings for growth. The debt-to-equity ratio of zero across the peer group reflects the regulatory framework governing banks, where leverage manifests through deposits rather than traditional debt instruments.
Valuation Analysis: Premium Pricing for Quality Delivery
Trading at ₹282.50 as of February 02, 2026, City Union Bank's shares command a price-to-earnings ratio of 17.35x based on trailing twelve-month earnings. This valuation sits comfortably within the 12-24x range observed across private sector banking peers, suggesting neither extreme overvaluation nor compelling undervaluation. The price-to-book value multiple of 2.11x, however, indicates investors are willing to pay a premium for the bank's improving fundamentals and consistent execution.
The bank's PEG ratio of 1.23x provides context for growth-adjusted valuation. With a five-year net profit compound annual growth rate of 24.20%, the PEG ratio below 1.5x suggests the stock isn't excessively expensive relative to its growth trajectory. However, the current valuation grade of "EXPENSIVE" reflects the stock's journey from ₹144.00 (52-week low) to near ₹304.45 (52-week high), with the current price sitting 7.21% below the peak but 96.18% above the trough.
The valuation grade history reveals frequent oscillation between "Fair" and "Expensive" categories since July 2025, reflecting market sensitivity to the stock's sharp price appreciation. The most recent change to "Expensive" from "Fair" occurred on September 05, 2025. This volatility in valuation assessment suggests the stock trades within a narrow fair value range, with periodic overshoots and corrections creating tactical opportunities for nimble investors.
Shareholding Dynamics: Institutional Conviction Strengthens
City Union Bank's shareholding pattern reveals a professionally managed institution with zero promoter holding—a structure that ensures governance remains aligned with shareholder interests and management accountability stays paramount. The institutional holding of 63.73% as of December 2025 demonstrates strong conviction from sophisticated investors who conduct rigorous due diligence before committing capital.
| Shareholder Category | Dec'25 | Sep'25 | Jun'25 | QoQ Change |
|---|---|---|---|---|
| Promoter Holding | 0.00% | 0.00% | 0.00% | — |
| FII Holding | 23.49% | 25.96% | 27.38% | -2.47% |
| Mutual Fund Holding | 31.19% | 28.74% | 28.77% | +2.45% |
| Insurance Holdings | 7.52% | 6.48% | 5.18% | +1.04% |
| Other DII Holdings | 1.52% | 1.53% | 1.28% | -0.01% |
| Non-Institutional | 36.27% | 37.29% | 37.39% | -1.02% |
The most significant development in Q3 FY26 shareholding was the 2.45 percentage point increase in mutual fund holdings to 31.19%, making domestic mutual funds the largest shareholder category. This represents a vote of confidence from Indian asset managers, with 35 mutual fund schemes holding positions in the bank. Simultaneously, foreign institutional investors reduced their stake by 2.47 percentage points to 23.49%, continuing a trend observed over the past three quarters where FII holding declined from 28.03% in March 2025.
Insurance company holdings jumped by 1.04 percentage points to 7.52% in Q3 FY26, marking the fourth consecutive quarter of increases from 3.80% in December 2024. This steady accumulation by insurance companies—typically long-term oriented investors—signals positive sentiment regarding the bank's risk-return profile and growth prospects. The non-institutional shareholding declined marginally to 36.27%, reflecting the increasing institutionalisation of the shareholder base.
Stock Performance: Stellar Returns Across Timeframes
City Union Bank's stock has delivered exceptional returns across multiple timeframes, significantly outperforming both the benchmark Sensex and its sectoral peers. The one-year return of 65.50% dwarfs the Sensex's 5.37% gain, generating alpha of 60.13 percentage points. This outperformance extends across longer periods, with the two-year return of 105.98% crushing the Sensex's 13.29% gain by 92.69 percentage points.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +2.47% | +0.16% | +2.31% |
| 1 Month | -2.18% | -4.78% | +2.60% |
| 3 Months | +23.31% | -2.71% | +26.02% |
| 6 Months | +32.26% | +1.32% | +30.94% |
| 1 Year | +65.50% | +5.37% | +60.13% |
| 2 Years | +105.98% | +13.29% | +92.69% |
| 3 Years | +80.57% | +36.26% | +44.31% |
The stock's three-month return of 23.31% against the Sensex's decline of 2.71% demonstrates the market's recognition of improving fundamentals, particularly the asset quality transformation. Six-month returns of 32.26% further validate the re-rating story, with the bank's share price climbing from approximately ₹213 in early August 2025 to the current ₹282.50.
Sector comparison reveals City Union Bank's 65.50% one-year return substantially outpaced the private sector bank index return of 13.30%, generating outperformance of 52.20 percentage points. This dramatic divergence reflects both the bank's operational improvements and the broader private banking sector's challenges during the period. The stock's volatility of 33.57% classifies it as "HIGH RISK HIGH RETURN," with a beta of 1.35 indicating 35% greater volatility than the broader market.
Technical Outlook: Bullish Momentum Intact
City Union Bank's technical indicators paint a constructive picture: The stock turned Bullish from Mildly Bullish on January 27, 2026, at ₹283.10, and currently trades above its 5-day (₹291.34), 20-day (₹282.45), 50-day (₹279.21), 100-day (₹252.74), and 200-day (₹226.50) moving averages. The MACD shows Bullish signals on the monthly timeframe, whilst Bollinger Bands indicate Mildly Bullish conditions. Immediate support lies at the 52-week low of ₹144.00, whilst resistance emerges near the 20-day moving average area of ₹282.45 and the 52-week high of ₹304.45. Delivery volumes have surged, with the one-day delivery percentage of 60.60% significantly exceeding the five-day average of 54.33%, suggesting genuine investor accumulation rather than speculative trading.
Investment Thesis: Quality Meets Momentum
City Union Bank's investment case rests on four pillars captured in the Mojo 4 Dots framework. First, near-term drivers remain positive, with quarterly financial trends showing sustained improvement and technical indicators flashing bullish signals. The bank's Q3 FY26 results demonstrated acceleration across key metrics, whilst the stock's price action suggests continued investor interest.
Second, quality assessment grades the bank as "GOOD," reflecting strong long-term financial performance and disciplined operations. The bank's average net debt-to-equity ratio of zero indicates conservative leverage, whilst the ROE of 12.17% demonstrates efficient capital deployment. The five-year net profit growth rate of 24.20% validates management's ability to compound shareholder value consistently.
Third, valuation presents a mixed picture. The "EXPENSIVE" grade reflects the stock's substantial appreciation from 52-week lows, yet the P/E ratio of 17.35x and PEG ratio of 1.23x suggest valuations aren't stretched beyond reason. The price-to-book value of 2.11x commands a premium, justified by superior asset quality and profitability metrics compared to peers.
Fourth, the overall Mojo Score of 72/100 places the stock firmly in "BUY" territory, upgraded from "HOLD" on October 27, 2025. This score reflects the balance between positive operational momentum, good fundamental quality, and reasonable valuations despite the recent run-up. The high institutional holding of 63.73% provides validation of the investment thesis from sophisticated market participants.
Key Strengths & Risk Factors
KEY STRENGTHS
- Asset Quality Leadership: Gross NPA of 2.17% and Net NPA of 0.78% represent multi-quarter lows and position the bank amongst the cleanest in its peer group.
- Profitability Momentum: Net profit growth of 16.14% YoY in Q3 FY26, with five-year CAGR of 24.20% demonstrating consistent earnings power.
- Capital Efficiency: ROE of 12.17% and ROA of 1.43% reflect superior returns on shareholder equity and deployed assets.
- Strong Capital Base: Total capital adequacy ratio of 20.13% and Tier 1 ratio of 22.09% provide substantial buffer for growth and unexpected losses.
- Institutional Backing: 63.73% institutional ownership with increasing mutual fund and insurance company stakes signals professional investor confidence.
- Balance Sheet Strength: Advance-to-deposit ratio of 81.99% indicates efficient fund deployment, whilst reduced borrowings enhance financial flexibility.
- Consistent Dividend: Regular dividend payments with latest payout of ₹2.00 per share demonstrates commitment to shareholder returns.
KEY CONCERNS
- Valuation Premium: Price-to-book value of 2.11x trades at the higher end of the peer spectrum, limiting margin of safety.
- High Stock Volatility: Beta of 1.35 and volatility of 33.57% indicate significant price swings, unsuitable for conservative investors.
- FII Stake Reduction: Foreign institutional investors have reduced holdings from 28.03% to 23.49% over three quarters, potentially signalling concerns.
- Limited Geographic Diversification: Major presence concentrated in South India exposes the bank to regional economic cycles.
- Size Constraints: Market capitalisation of ₹20,953 crores limits institutional allocation potential and liquidity for large investors.
- Declining Capital Ratios: Total CAR declined from 23.75% to 20.13% over four quarters, reflecting growth-driven capital consumption.
- Modest Dividend Yield: Yield of 0.71% trails some peers and provides limited income for yield-focused investors.
Outlook: What to Watch Going Forward
POSITIVE CATALYSTS
- Continued NPA Improvement: Further decline in gross NPA below 2% would reinforce asset quality leadership and potentially drive re-rating.
- Margin Expansion: Sustained growth in net interest income and margin improvement would boost profitability and earnings trajectory.
- Market Share Gains: Outpacing sector growth in advances and deposits would validate competitive positioning and franchise strength.
- Institutional Accumulation: Continued increase in mutual fund and insurance holdings would provide price support and reduce volatility.
- Valuation Correction: Any pullback towards ₹250-260 levels would create attractive entry points for long-term investors.
RED FLAGS TO MONITOR
- NPA Reversal: Any uptick in gross or net NPA ratios would undermine the asset quality narrative and trigger selling pressure.
- Margin Compression: Deterioration in net interest margins due to competitive pressures or funding cost increases would impact profitability.
- Capital Adequacy Pressure: Further decline in CAR below 20% without corresponding equity raise would constrain growth ambitions.
- FII Exit Acceleration: Continued reduction in foreign institutional holdings could create supply overhang and price weakness.
- Sectoral Headwinds: Broader private banking sector challenges or regulatory tightening could weigh on valuations across the board.
The Verdict: Attractive Growth Story with Premium Valuation
Score: 72/100
For Fresh Investors: City Union Bank represents a compelling opportunity to participate in a well-managed private sector bank demonstrating consistent operational improvement. The asset quality transformation from 3.36% gross NPA a year ago to 2.17% today, combined with strong profitability growth and robust capital buffers, justifies accumulation on any dips towards ₹260-270 levels. The current price of ₹282.50 sits slightly above ideal entry points, but long-term investors with a 2-3 year horizon can initiate positions in tranches.
For Existing Holders: Continue holding with confidence. The bank's improving fundamentals, institutional backing, and technical momentum support the current valuation premium. The Mojo Score upgrade to 72/100 and "BUY" rating validates the hold thesis. Consider partial profit booking only if the stock approaches ₹320-330 levels without corresponding fundamental improvement, otherwise maintain core positions for long-term wealth creation.
Fair Value Estimate: ₹310-320 (9.7%-13.3% upside from current levels), based on 18-19x FY2027 estimated earnings and sustained ROE above 12%.
Note: ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results. Stock market investments are subject to market risks, and investors may lose part or all of their invested capital.
