After a 43 percent decline in the last 1 year, brokerage house Edelweiss expects private sector lender CSB Bank to surge nearly 90 percent in the next 12 months. The brokerage has a 'buy' call on the stock with a target price of ₹340, implying a 90 percent upside from its current market price of ₹179.
Edelweiss is bullish on the lender on the back of its industry-leading margins, strong return ratios and robust asset quality.
"CSB is generating its highest net interest margin in the banking system, largely due to the high share of gold loans in its asset mix, while the cost of funds also moderated substantially compared to peers. Cost of funds declined 386 bps over the past six years as the bank improved its CASA ratio from 20 percent in FY16 to 34 percent currently. The management expects margins to normalize as the focus is likely to shift to other lower-yielding products. In the short term, we expect lower margins and higher opex to weigh on the return ratios of the bank," Edelweiss explained.
With anticipated credit growth of nearly 20 percent during FY22–24E, the brokerage expects a re-rating for the lender soon.
Headquartered in Thrissur, Kerala, CSB Bank is a private sector lender with around 609 branches and 468 ATMs across 18 states and two union territories.
According to the brokerage, the bank management is targeting to grow the asset book at 1.5x of industry growth. It has projected banking credit growth of 14–16 percent for the next three years, with GDP growth projection of 7–8 percent, it said, adding that the MSME growth and return of corporate growth in the next 2–3 quarters are likely to boost credit growth in the near term.
"The management believes that Services, Consumption, EPC, Housing, CV&CE and Infrastructure will drive growth in the advances book. In addition, the management is expecting the corporate borrowing book to shift from overseas to the domestic banking system as the overseas borrowing rate is inching up," Edelweiss noted in its report.
It also pointed out that the management is internally targeting over 20 percent credit growth for the next three years, but this will accelerate after FY27 as the bank will have robust technology in place and a strong liability franchise to support the credit growth. Moreover, the management is planning to get into the credit card business through a partnership and introduce more retail products in due course, the brokerage further said.
The bank also seeks to enter into robust partnerships that would help generate a sustainable stream of fee income, noted Edelweiss.
"At present, the bank has about 1.5 million customers; of this, two-thirds of the base is not adding value on the wealth-income front. In addition, CSB intends to acquire quality customers through multiple tie-ups, which would result in increased cross-selling opportunities," Edelweiss highlighted.
Another major reason for Edelweiss' positive view is that investments in technology are likely to remain high for the next few quarters. This, coupled with aggressive branch opening and hiring (employee count is expected to almost double over the next 2–3 years), is expected to keep operating expenditure elevated in the near term, said the brokerage.
However, it added that a general weakening of the macroeconomic scenario over the next couple of years could impact CSB’s ability to scale up its loan book. Also, the anticipated rapid credit growth is contingent on the retention of the current top management team over the medium to long-term and any substantial exit in the key management may impact its projection and target, said Edelweiss.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
