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Since hitting an all-time high of ₹373 in July 2021, the shares of CSB Bank, formerly known as Catholic Syrian Bank, have been on a downward trend. The stock has shed 35 percent since then to currently trade around ₹244.
Despite this fall, domestic brokerage house LKP Securities is bullish on this bank stock and sees it rising to ₹313 in the next 12 months, indicating an upside of over 28 percent.
However, it is important to note that the target price is still not above the lender's all-time high price.
The brokerage is bullish on the stock on the back of healthy credit growth driven by gold loans, strong asset quality, high yields, lower credit costs, and robust financial performance.
"CSB Bank has been reporting strong performance since listing. A strong loan growth driven by Gold loans and a comfortable cash deposit ratio (CDR) is evident. The credit quality recovery (1.7 percent in Q2FY23 v/s 7.9 percent in FY18) was meaningfully driven by lower delinquencies and quicker recoveries. A healthy capital position post the IPO is likely to keep the momentum going," said the brokerage.
Stock price trend
The stock was listed on exchanges in December 2019 at a massive 57 percent premium against its issue price ( ₹195) at ₹307. Since listing, the stock is down 20 percent. However, it is still trading around 25 percent above its issue price.
In the last 1 year, the stock has lost 6 percent. However, in January so far, it has gained over 5 percent after a 9 percent rise in December. The recent rise in the stock comes after it released good provisional data for Q3FY23.
The lender posted strong double-digit growth in deposits and advances, as per its latest provisional data. Its gold loan book also witnessed robust growth in Q3.
As per the regulatory filing, CSB Bank posted gross advances of ₹18,643.32 crore, up by 25.74 percent YoY, while total deposits stood at ₹22,664.02 crore, up by 18.93 percent YoY.
In Q3FY23, as per the provisional data, CSB Bank's advances against gold & gold jewellery stood at ₹8,772.48 crore, rising by a whopping 50.81 percent YoY. Under deposits, the bank's CASA and term deposits stood at ₹7,125.74 crore and ₹15,538.27 crore, up by 8.18 percent YoY and 24.62 percent YoY, respectively.
In Q2FY23, the bank reported a 2 percent rise in net profit to ₹120.5 crore and an 8 percent jump in total income to ₹600.12 crore compared to Q2FY22.
Investment rationale
Healthy credit growth: As per the brokerage, post listing, the bank’s advances growth remained strong and above the growth rate of the banking ecosystem. According to the bank’s reported provisional numbers for 3QFY23, the advances grew by 25.7 percent YoY against 18 percent industry growth. Gold loan book has also witnessed robust growth and accounted for 74 percent of the incremental sequential credit growth, noted the brokerage. The share of the gold loan portfolio has increased from 36 percent in Q2FY22 to 46 percent in recent quarters, it informed. Additionally, the CDR of 83 percent provides further room for credit off-take. Moreover, the deposit traction remained strong at 18.9 percent YoY, stated the brokerage. However, LKP added that the MSME loan growth was tepid but the management maintains its stance of it being the biggest growth driver in the non–gold book during this calendar year.
Strong asset quality: On the asset quality front, the bank has done tremendous improvement; the GNPA (gross non-performing assets) ratio declined to 1.7 percent in the previous quarter from the peak of 7.9 percent in FY18. LKP believes the bank has an adequate cushion to maintain a low credit cost trajectory in the coming quarters, as they continue to hold a strong contingency buffer of ₹110 crore. It estimates the GNPA to improve further on the back of recoveries and upgrades and expects it to be at 1.5 percent by FY24E with improved PCR to 69 percent (from 66 percent currently).
High yields, and lower credit cost to drive return ratios: The brokerage further pointed out that the lender is enjoying superior margins on the back of a higher yield on assets of 10.8 percent. Furthermore, credit cost will stay low owing to provision write–backs and additional contingent buffer, it added. At present, investment in technology and distribution is substantial and the cost-to-income is likely to come down as the investments start paying off, noted LKP.
Valuations and outlook
According to the brokerage, the bank is well equipped to report superlative return ratios (FY24E ROA/ROE of 2.1 percent/18.7 percent) driven by better operating performance, balance sheet growth and improving asset quality.
Factoring in double-digit advance growth, stable NIMs and lower credit cost, the bank may post 22 percent PAT growth in the current fiscal year, predicted the brokerage. Attractive valuation (1.2xFY24E Adj. BVPS) makes the stock rewarding factoring FY24E RoA of 2.1 percent and RoE at 18.7 percent.
The brokerage also pointed out that the retail products in the bank’s pipeline are expected to be launched by end of this financial year. It expects the loan book to grow at a rate of around 20 percent in FY23E and FY24E. The gold loan share is expected to increase to half of the gross loans and then gradually come down as some of the other products start picking up, added LKP.
It further noted that the management expects the bank’s advances to grow at 1.5x the industry growth rate. Furthermore, the management targets 100 branches to be added every year for the next five years and simultaneously invest in technology for customer acquisition, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.