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Evolution of margin, asset quality and growth all heartening

Result Highlights

* Asset quality: Gross slippage amounted to Rs 0.81bn, implying annualized slippage ratio of 2.4% in a continued normalization of stress scenario

* Margin picture: NIM expanded 24 bps QoQ to 5.46% as as yield on advances expanded while cost of deposits declined QoQ

* Asset growth: Advances grew 3.4%/11.1% QoQ/YoY driven on sequential basis by bread-and-butter gold loans

* Opex control: Total opex rose 10.1%/12.1% QoQ/YoY, employee expenses rose/fell 2.5%/-4.5% QoQ/YoY and other expenses rose 23.3%/49.0% QoQ/YoY

* Fee income: Fees and commissions rose 1.8%/29.1% QoQ/YoY as business activity improved on sequential basis

Our view – Evolution of margin, asset quality and growth all heartening

While NIM has already reached an industry-leading level, management flagged further scope for NIM expansion: Interest income due to recoveries on gold loan book amounted to Rs 0.11bn for 3QFY22. Overall average CD ratio improved from 72% to 75%. Management stated that there were several incremental levers for further NIM expansion. There is still Rs 26.59bn deployed in treasury bills yielding ~3.5%, which can be redeployed at ~7%. Secondly, CD ratio, which is 78% currently, would reach 82-85% by March. Thirdly, there is scope to increase yield on gold loan book as there is still a product on which the bank earns just 7%. Lastly, there is scope to increase the share of shorter-term deposits in the term deposits book, in which the share of deposits with less than 1-year horizon is just 7%.

As flagged earlier, CSB has now demonstrated that the asset quality issues emanating from the gold loan book were more an optical issue rather than an underlying problem: The outstanding gold loan NPA book used to be Rs 3.53bn as of 1QFY22 but now stands at Rs 1.12bn as of 1QFY22. Due to further recoveries, this book has already declined to Rs 0.85bn in the first 21 days of January 2022. In terms of losses, a mere Rs 0.09bn has been fully provided for but even these have a fair chance of recovery. Upgrades and recoveries for 3QFY22 amounted to Rs 0.72bn and Rs 2.06bn, respectively, implying there were net deletions of NPA worth Rs 1.97bn for the quarter. Provisions were written back in the quarter and the net provisions for the quarter were -Rs 506mn. Management stated that, for a few quarters, negative or near zero credit costs would be a sustainable phenomenon whereas, from a long-term perspective, credit costs are expected to be below 1%. We maintain ‘Buy’ rating on CSB with a revised price target of Rs 332: We value the bank at 2.0x FY23 P/BV for an FY22E/23E/24E RoE profile of 13.0/14.9/15.9%.

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