City Union Bank: Residual Income Approach to Valuation

Abstract

The case study is about the valuation of one of the profitable banks in southern India, City Union Bank Ltd (CUB). The bank was adjudged as the ‘best small bank’ by BusinessWorld’s Best Banks Survey 2016. The bank has seen a meteoric rise in its stock price during the period 2013–2017 and outperformed other banks in the industry in terms of non-performing assets (NPA), return on assets, capital adequacy ratio (CAR) and so on. The stock has been attracting the attention of the investing fraternity. An analyst is assigned the job of valuing CUB’s stock. Residual income valuation method is employed for valuation and facilitates in decision-making. The valuation exercise involves projection of financials and estimation of cost of equity, terminal growth rate and residual income. The case also considers other key parameters associated with the banking sector in decision-making.