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Result Highlights

* Asset quality: Gross slippages were under control atRs 350mn (annualized slippage ratio of 0.8%) and recoveries and upgrades were healthy at Rs 390mn
* Margin picture: NIM was down -42bps QoQ to 5.38%, due to cost of deposits moving up more than than yield on advances
* Asset growth: Advances grew 11.1%/28.4% QoQ/YoY driven on sequential basis by Retail loans
* Opex control: Total opex rose 10.8%/21.1% QoQ/YoY, employee expenses rose 2.6%/8.5% QoQ/YoY and other expenses rose 24%/43% QoQ/YoY
* Fee income: Fee income rose 48.5%/145% QoQ/YoY where the sequential rise was driven by processing fees, up 49.5%/305% QoQ/YoY

Our view – CSB articulates pan-Indian growth ambition

The intention for CSB management is to open at least 100 branches in FY24: The strategy is to become a truly pan-Indian bank and hence, more than 60% of the incremental branches would be opened in the North and West regions. The CASA franchise will not be built on gold loan branches and hence, the incremental branches will not necessarily be gold loan branches. The bank will continue to invest heavily in technology, distribution, people and channels. The byproduct of this is that the cost to assets of 3.5% for FY23 will remain sticky in the medium term.

The bank is ready to sacrifice margin in pursuit of growth and is focused on building a large franchise: Management stated that they would be able to maintain margin at 5% plus. Cost of deposits has jumped 55 bps QoQ to 4.85% as the bank has allowed the cost of deposits to rise as it wanted enough dry powder to grow the asset book. However, the bank is not irresponsible and has a strategy of matching the rates of the 3 large private banks or, else, not do the deposits business. Management stated that the cost of deposits may rise further by a few bps per quarter for 2 quarters.

Management is confident that fee income will grow faster than loan growth: Fee income on treasury and PSLC was lower by about Rs 0.3bn YoY and yet the overall fee income growth was 28% YoY. In FY23, fee income was driven by gold loan business, insurance sales, debit cards, ATM fees and liability fees.In FY24, treasury and PSLC fees would return to growth. Further, there will be good traction for processing fees and businesses like credit card fees, transaction banking, trade, forex and NRI business will also contribute.

We maintain ‘Buy’ rating on CSB with a revised price target of Rs 340: We value the bank at 1.6x FY24 P/BV for an FY24E/25E RoE profile of 15.7%/15.3%.

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