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CSB Bank has been reporting strong performance since listing. A strong loan growth driven by Gold loans and comfortable CDR is evident. The credit quality recovery (1.7% in 2QFY23 v/s 7.9% in FY18) was meaningful driven by lower delinquencies and quicker recoveries. A healthy capital position (CAR: 25%), post IPO is likely to keep the momentum going. Factoring double digit advance growth, stable NIMs and lower credit cost; the bank may post 22% PAT growth in current fiscal year. Attractive valuation (1.2xFY24E Adj. BVPS) makes the stock rewarding factoring FY23E/FY24E ROA of 2.1%.

Healthy credit growth trajectory driven by Gold Loans: Post listing, the bank’s advance growth remain strong and above the growth rate of banking ecosystem. According to the bank’s reported provisional numbers for 3QFY23, the advances grew by 25.7% YoY against ~18% industry growth. Gold loan book (43.7% of loans as on 2QFY23) has witnessed a robust growth of 50.8% YoY and accounted for 74% of the incremental sequential credit growth. The share of Gold loan portfolio has increased from 36% in 2QFY22 to 46% in recent quarters. Additionally, the CDR of 83% provides further room for credit off-take. Moreover, the deposit traction remained strong at 18.9% YoY. Nonetheless, MSME loan growth was tepid, the management maintains its stance of it being the biggest growth driver in the non – gold book during this calendar year.

Retail products in the bank’s pipeline are expected to be launched by end of this financial year. We expect the loan book to grow at a rate of around 20% 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. 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 next five years and simultaneously invest in technology for customer acquisition.

Strong Asset Quality showing: On asset quality front, the bank has done tremendous improvement; the GNPA ratio declined to 1.7% in previous quarter from the peak of 7.9% in FY18. The GNPA reduction was driven by lower delinquencies, attributed to a larger share of gold loans. Owing to the strong asset quality showing, the bank is reporting provision write – backs for previous five quarters. PCR remain broadly stable at 66% with PCR (including TWO) of 90%. We believe the bank has adequate cushion to maintain a low credit cost trajectory in the coming quarters, as they continue to hold strong contingency buffer of ?1.1bn. We estimate the GNPA to improve further on the back of recoveries and upgrades and expect it be at 1.5% by FY24E with improved PCR to 69%.

High yields, lower credit cost to drive return ratios: The bank is enjoying superior margins (NIMs: 5.6% as on 2QFY23) on the back of higher YOA of 10.8% and moderate COD of 4.14% (SA: 2.79% and TD: 5.18%). Furthermore, credit cost to stay low owing to provision write – backs and additional contingent buffer. At present, investment in technology and distribution is substantial. Cost-to-income is likely to come down as the investments start paying off. Thus, at initial phase, C/I ratio will remain elevated but long term management target is ~45%. We estimate C/I ratio of 52.7% and 49.8% for FY23E and FY24E respectively. Driven by lower credit cost (10bps and 50bps for FY23E and FY24E) and reducing C/I ratio, the bank is likely to deliver a ROA and ROE of 2.1% and 18.7% for FY24E.

Outlook and Valuation The bank is well equipped to report superlative return ratios (FY24E ROA/ROE of 2.1%/18.7%) driven by better operating performance, balance sheet growth and improving asset quality. The stock trades at 1.2xFY24E Adj. BVPS of ?209. We value the bank at 1.5xFY23E Adj. BVPS and arrive at a price target of ?313; a potential upside of 25%.

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