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Buy CSB Bank Ltd For Target Rs.380

Gold loan slippages remain only an optical problem with minimal underlying damage

Result Highlights

* Asset quality: Gross slippage amounted to Rs 2.05bn (annualized slippage ratio of 5.9%) but most of the slippages came from the gold loan book, where LGD is 0.1%

* Margin picture: NIM expanded 18 bps QoQ to 5.22% as interest reversals declined sequentially and so did cost of deposits

* Asset growth: Advances grew 1.6%/12.6% QoQ/YoY driven on sequential basis by corporate loans, SME loans, two-wheeler loans and agri loans

* Opex control: Total opex rose 14.9%/22.6% QoQ/YoY, employee expenses rose 22.6%/14.8% QoQ/YoY and other expenses rose 3.9%/38.5% QoQ/YoY

* Fee income: Fees and commissions rose 62.7%/17.2% QoQ/YoY as business activity improved on sequential basis

Our view –

Gold loan slippages remain only an optical problem with minimal underlying damage

Upgrades (Rs 0.96bn) and recoveries (Rs 1.9bn) for the quarter totaled Rs 2.86bn and exceeded gross slippages:

Gold loans dominated both slippages and recoveries at Rs 1.7bn and Rs 1.31bn, respectively. Gold loan NPA book declined from Rs 3.53bn to Rs 2.88bn and management sees this book declining further to Rs 1-15b by December before a fully normalized gold loan book emerges in 4QFY22. Incremental restructuring during the quarter amounted to Rs 0.53bn and total outstanding restructured book amounted to Rs 1.13bn.

Interest reversals on the gold loan book during the quarter amounted to Rs 22.1mn compared with Rs 0.23bn during 1QFY22: Consequently, yield on the gold loan book rose to 13.08% for the quarter compared with 12.81% in 1QFY22.Cost of deposits declined 18 bps QoQ to 4.30%. Management, however, regards the decline in cost of deposits to be temporary in nature.

Corporate loans, SME loans, two-wheeler loans and agri/MFI loans have grown 2.1%, 0.8%, 2.3% and 24.7% QoQ, respectively: Management has guided for a 10-15% overall growth for full year FY22. They further opined that corporate loans, SME loans and gold loans would be the driver for overall loan growth for the remainder of the year.

We maintain ‘Buy’ rating on CSB with a revised price target of Rs 380: We value the bank at 2.3x FY23 P/BV for an FY22E/23E/24E RoE profile of 12.9/14.5/15.5%

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