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Asset quality concerns negated, CSB plans ahead

Result Highlights

Asset quality: Gross slippages were under control atRs 380mn (annualized slippage ratio of 1.0%) and recoveries and upgrades were healthy at Rs 360mn

Margin picture: NIM was up 1 bps QoQ to 5.42%, as higher loan-to-deposit ratio offset the impact from decline in spread

Asset growth: Advances grew 7.3%/8.8% QoQ/YoY driven on sequential basis by Gold Loan and Agri & MFI Loans

Opex control: Total opex rose/fell 8.4%/-13% QoQ/YoY, employee expenses rose/fell 17.5%/-19.7% QoQ/YoY and other exp. fell/rose -4.5%/1.9% QoQ/YoY

Fee income: Fees and commissions fell -1.2%/-8.1% QoQ/YoY with sharp fall in Processing Fees by -9%/-44% QoQ/YoY

Our view – Asset quality concerns negated, CSB plans ahead

CSB demonstrates that the asset quality problem that arose in 1QFY22 was more of an optical issue with little underlying impact: The outstanding total GNPA was Rs 2.90bn of which gold loan GNPA now stood at Rs 0.28bn. The peak for gold loan NPA outstanding had been Rs 2.88bn as of June 2021, with reduction driven by recovery. During the quarter, provisions worth Rs 341mn were written back as against a write back of Rs 506mn in Q3FY22. CSB, thus, closed the full year with a net writeback of Rs 5.1mn, which nullifies the narrative that it had suffered a major asset quality setback

Industry-leading NIM of 5.42% should remain largely protected: Management stated that the share of gold loans in total loan book should remain broadly stable at current levels of 39%. Furthermore, they also pointed out that the pricing of SME and mid-corporate loans should be on an improving trend. For the quarter, the yield on advances declined 40 bps QoQ to 11.19%, while cost of deposits declined 3 bps to 4.21%, implying some spread compression. However, loan-to-deposit ratio rose 153 bps QoQ to 78.3%, indicative of unwinding excess liquidity

CSB is preparing for the future as it plans to run pilots on various loan segments: The bank will run various retail segments on pilot basis and after 12-18 months, if the pilots are successful, the bank will push for growth. The bank will then aspire to grow at 1.5x of the market. For the quarter, the 7.3% QoQ growth was driven by gold loan growth of 12.8% QoQ and Agri & MFI loan growth of 26.5% QoQ.

Management stated that, from an opex perspective, it will continue to invest upfront to garner business in the future: They explained that technology investments will play out over the next 18 months and the benefit of operating leverage would be seen in FY25. We maintain ‘Buy’ rating on CSB with a revised price target of Rs 316: We value the bank at 1.8x FY23 P/BV for an FY23E/24E RoE profile of 14.3/15.5%.

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