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Our Take:

CSB Bank is a century old private sector bank in India having a strong base in Southern India. After being taken over by new promoters (Toronto-based Fairfax group), the real transformation had started. Changes like creating new brand image, funding the capital for growth, strengthening top management by bringing in new experienced people, product based lending approach etc. were done. And now after achieving critical transformation, the bank has started focusing on growth. Aggressive branch expansion, digitization & technology on boarding, improving CASA ratio to lower cost of funds, strengthening retail segment by launching new product suite are a few key focused areas.

The bank is well capitalized to fund growth without raising capital for next 12-18 months. However, we will remain watchful on collection efficiencies front and asset quality trend going ahead. Over dependence on gold loans and South India being a key market place brings concentration risk. The possibility of third wave and fresh lock downs could hurt the business. We had issued Initiating Report on CSB Bank on 5th March, 2021 and recommended Buy at LTP of Rs.237 and add further at Rs.212, for base case target of Rs.257 and bull case target of Rs.278 over the next two quarters. The bull case target of Rs.278 was achieved on 8th March, 2021 yielding return of 17.4%.

Valuation & Recommendation:

We have envisaged 18.5% CAGR for NII and 29% CAGR for Adjusted Net Profit over FY21-23E, while the loan book is estimated to grow at ~19.5% CAGR over same time frame. The bank has strong provision coverage ratio. We feel that operating cost will remain elevated due to aggressive branch expansion. Management expects that worst in terms of asset quality is over and expects strong recovery especially in gold loans as unlocking progresses.

The target is to reach to GNPA below 2% and NNPA below 1% by FY24 with PCR ~80%, while cost to income ratio is targeted below 50% and CASA ratio above 40%. We believe that investors can buy CSB Bank at LTP of Rs.303 (2.05xFY23E ABV) and add more at Rs.267 (1.8xFY23E ABV) for the base case fair value of Rs.333 (2.25xFY23E ABV and for the bull case fair value of Rs.355 (2.4xFY22E ABV) over the next two quarters.

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