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CSB Bank offers investors an opportunity to participate in a hybrid business model that combines the profitability of gold lending along with growth profile of a new age private bank. CSB’s transformation commenced in 2018 with the entry of Fairfax as promoter with 51% stake. With the strengthening of the management team since then, CSB has cleaned up its balance sheet and is now well positioned for delivering strong credit growth along with improved profitability.

Senior management team has been strengthened; shall catalyze the transformation journey: Erstwhile MD, C.V.Rajendran was responsible for the clean-up of balance sheet as well as for shifting the growth focus on gold loans. He is now succeeded by Pralay Mondal who is backed by an impressive track record in retail banking at institutions like HDFC Bank, Yes Bank and Axis Bank. CSB has made several other recruitments at the senior management level including Shyam Mani (Head – SME & NRI), Narendra Dixit (Head – Retail) and Runa Das (Head – Wholesale).

Focus on Gold loans has driven advances growth & NIMs to top quartile: Gold loans constitute 39% of total advances (FY22) and have been mainly responsible for the uptick in the overall loan growth. The gold loan book has grown at a CAGR of 30% over FY19-FY22. We anticipate gold loans to continue their growth trajectory and grow at 30% CAGR over FY22-25E thereby pulling up the bank’s total advances CAGR to 23% CAGR over the same period. NIMs have expanded significantly from 3.1% in FY19 to 5.3% in FY22. This was mainly led by an increase in mix of gold loans from 26% to 39% over FY19-22. Investment phase until FY25 shall result in non-gold book growing at system level along with elevated cost/income: CSB is adding all suites and products which are prevalent in large pvt. banks to offer customers complete solutions. Retail business will start contributing in a big way only post FY24, while in next couple of years only the existing products will drive growth. We estimate the non-gold AUM to grow at 16% CAGR over FY22-25E. Heavy investments on one hand and moderate nn-gold loan growth on the other, shall lead to elevated cost/income ratio for CSB until FY25E.

Asset Quality woes are behind; superior to mid-sized banks: GNPAs have reduced over FY17-22 from 7.3% to 1.8% mainly due to write-offs of over ~Rs. 1,100 Cr pertaining to the legacy loans. Thus CSB’s asset quality woes are behind now.

Valuation and View: With a long run-way for growth on a low base (Rs. 16,142 Cr book) and above average ROA/ROE on the back of – strong NIM at around 5%, strong AUM CAGR of 23% and stabilization of credit costs at subdued levels of 50 bps over FY22-25E, we believe CSB’s valuations will gravitate towards that of City Union Bank’s fair multiple (10 year average forward P/B) i.e. 1.7x Sep 2024 BVPS. Thus we arrive at a fair value of Rs. 370 for CSB

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