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CSB close to delivering another year of near zero credit cost

Result Highlights

* Asset quality: Gross slippages were under control atRs 260mn (annualized slippage ratio of 0.6%) and recoveries and upgrades were healthy at Rs 420mn

* Margin picture: NIM was up 20bps QoQ to 5.80%, due to yield on advances moving up faster than cost of deposits

* Asset growth: Advances grew 5.3%/23.9% QoQ/YoY driven on sequential basis by Gold loans

* Opex control: Total opex rose 15.8%/18.4% QoQ/YoY, employee expenses rose 17.6%/24.2% QoQ/YoY and other expenses rose 13.1%/10.1% QoQ/YoY

* Fee income: Fee income rose14.3%/62.8% QoQ/YoYwhere the sequential risewas driven by processing fees, up 26.8%/147% QoQ/YoY

Our view – CSB close to delivering another year of near zero credit cost

Low slippages and write-back combined to deliver another quarter of negative credit cost: Provisions were written back and stood at -Rs 150mn as against provisions write back of -Rs 37mn in 2QFY23 and -Rs 506mn in Q3FY22. It may be noted that last year, in the same quarter, there was very high recovery on gold loan book. The Security Receipts book was fully provided for with an incremental provision of Rs 120mn during the quarter. Management guided that credit costs would be about 40 bps from a 3-year perspective. For FY24, it would be lower than 40 bps.

While loan growth was all about gold loans, management flagged that the underlying driver was tonnage growth: Overall loan growth of 26% YoY was mainly driven by gold loans, which were up 51% YoY. Gold loan growth has not been driven by gold price rise but by tonnage increase, which was 49% YoY. Gold loan customer count has risen by 36% YoY, which implies that that the gold loan per customer has also risen.

Management reiterates that margin would moderate lower but CSB is currently sitting at the highest margin for our coverage universe for 3Q so far: Yield on advances has risen by 21 bps QoQ to 11.02%. Management stated that they would be focusing on enhancing yield to protect margin. The credit deposit ratio declined sequentially from about 83% to about 81% but management regards the decline as transient. Management is willing to take CD ratio to 90%.

We maintain ‘Buy’ rating on CSB with a revised price target of Rs 315: We value the bank at 1.4x FY24 P/BV for an FY23E/24E/25E RoE profile of 18.6/16.9%/16.0%.

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