EQUITY RESEARCH: CSB Bank Ltd

CSB Bank Ltd presents numerous banking products and services for small and medium organizations, retail, and NRI clients in India. It operates through 4 segments: Treasury, Corporate/Wholesale Banking, Retail Banking, and Other Banking Operations. The agency accepts various deposits merchandise that comprises savings Ac, NR Ac, fixed deposits, recurring deposits, corporate salary, and current Ac, as well as products for NRI customers; personal and enterprise loans, including loans in opposition to gold jewelry, two wheeler and motor car loans, housing loans, mortgage in opposition to assets and overdrafts on mortgage/hypothecation/pledge, small commercial enterprise loans, and agricultural loans; and microfinance. It additionally gives demat services; and banking offerings to monetary establishments, together with non-banking monetary agencies, banks, insurance businesses, mutual funds, agents, and many others.; cash control and exchange finance services; digital banking services; statutory reserves and asset liability control, liquidity management, funding and securities buying and selling, and money market and foreign exchange services; sovereign debt gadgets funding services; commercial papers, mutual funds, certificates of deposits, bonds, and debentures; remittance services; life and non-life insurances; and payment services, in addition to debit cards. In addition, it provides agri-banking services; and corporate lending services. As of March 31, 2021, the agency operated 518 branches, which have 3 service branches, three- asset recovery branches, and 318 ATMs. The company was previously known as The Catholic Syrian Bank Ltd and changed its name to CSB Bank Ltd in June 2019. CSB Bank Ltd changed was established in 1920 in Thrissur, India.

ABOUT

• CSB Bank Ltd (Formerly The Catholic Syrian Bank Limited), which was founded in 1920, is one of India's fastest-growing private sector banks. It has a sizable branch presence in the South and a constantly expanding network throughout the country, with a focus on the Northern and Western regions.
• SME Banking, Retail Banking, Wholesale Banking, and Treasury Operations are the four segment verticals of the bank.
• The Bank has been transforming into a modern, profitable bank with cutting-edge leadership, product development, digital banking technology, and risk management capabilities over the past few years.
• It distributes the goods and services via a number of channels, including 528 ATMs/CRMs located across the nation, 703 branches (excluding three service branches and three asset recovery branches), and micro ATMs, debit cards, internet banking, mobile banking, point of sale services, and UPI.
• Branch Distribution and other information:

SHAREHOLDING PATTERN

In October 2018, FIHM (Fairfax India Holdings Mauritius) purchased a 51% interest in CSB Bank. Since that time, the bank has been undergoing transition. In the past two to three years, several top-level managers have been hired as a result. A new long-term growth strategy called SBS 2030 has been unveiled by the new leadership team. Mr. Pralay Mondal arrived in September 2020 as President of Retail, SME, Operations, and IT. In March 2022, he received a promotion to MD & CEO. Axis Bank, Yes Bank, HDFC Bank, and Standard Chartered are just a few of the banks he has worked for throughout the course of his 33 years of employment. He holds an IIT Kharagpur degree in engineering and an IIM Calcutta management degree. Mr. Shyam Mani began working as Head of SME & NRI Banking in November 2020. Prior to that, he worked for Yes Bank as a Global Indian Banking (NRI Banking). Mr. Runa Das came in March 2021 as Head of wholesale, while Mr. Narendra Dixit joined in November 2020 as Head of Retail Banking.

KEY POINTS:

• SustainedHealthy Capital Buffers

CSB’s common equity tier 1 (CET1) remained comfortable at 24.8% in 1QFY24 (FY23: 25.9%; FY22: 24.4%) on the back of adequate profitability with return on assets at 1.8% (2.06%, 1.90%, FY21:1%). Its risk weight optimization (RWA) to advances stood at 54% in FY23 (FY22: 60%), against 69% in FY19. The healthy capital levels are substantially aided by gold loans that typically have low-risk weights and the fact that about 70% of the advances in the corporate segment are rated above the ‘A’ category. The bank plans to maintain over 45% of its advances in gold loan products over the near-to-medium term, and hence, a substantial portion of this capital benefit could continue. However, Ind-Ra believes the newer products introduced recently and expected to be introduced in the near term could witness material traction from FY25 onwards. The equity/advances was 15.5% in FY23 (FYE22: 16.8%; FYE21: 15%). In Ind-Ra’s opinion, the bank has a reasonable ability to raise additional equity from the market, if needed.

• Reducing RegionalConcentration Work in Progress

CSB’s deposit profile is regionally concentrated with Kerala, Tamil Nadu, Maharashtra, and Karnataka together contributing 90% to the total deposits, including the non-resident external deposits at end-4QFY23. Among these states, the bank is majorly dependent on Kerala and Tamil Nadu for deposits as well as advances. Of the 100 newly opened branches in FY23, the majority are outside Kerala and Tamil Nadu. Also, most of the 100 branches will be set up outside Kerala and Tamil Nadu in FY24.

• Asset quality remains stable quarter-on-quarter (QoQ)

CSB reported slippages amounting to INR 33 crore, resulting in a slippage ratio of 0.6%, which is an improvement from the 0.8% reported in the previous quarter. This favorable slippage trend can be attributed to a higher proportion of gold loans within the bank's lending portfolio. In Q1FY24, recoveries and upgrades were slightly lower at INR 23 crore, causing a marginal increase of 1 basis point (bp) in the Gross Non-Performing Asset (GNPA) ratio to 1.27%. On the other hand, the Net Non-Performing Asset (NNPA) ratio decreased by 3 bps QoQ to 0.32%, leading to an improvement of 231 bps in the Provision Coverage Ratio (PCR), which now stands at approximately 75%. The bank maintains a sufficient buffer to sustain a low credit cost trajectory in the upcoming quarters, supported by robust contingency provisions of INR 106 crore, equivalent to 0.48% of the gross loan book. Over the next seven years, the management anticipates that the credit cost will gradually rise to a stable range of 40-50 bps as the proportion of gold loans in the loan mix moderates.

• Robust capital base

Following the infusion of money by the promoters and the following IPO fundraising, the bank has a very strong level of capital adequacy. Additionally, the loan book is skewed towards gold loans, which results in assets with lower risk weights. The Capital Adequacy Ratio (CAR) was 27.1% as of Q4FY23, much exceeding the legal threshold of 12%. Tier I capital for the bank was 25.9%. There are not many banks in India with CAR levels above 25%.

• Significant improvement in asset quality

The bank reported slippages in the quarter of Rs. 35 crores, or 0.8%. Strong recoveries, upgrades, and write-offs of Rs. 44 crores largely offset the negative effects of slippages on the NPA levels. The GNPA was 1.26% as of Q4FY23, down 55/19 bps YoY/QoQ, and the NNPA was 0.35%, down 33/7 bps YoY/QoQ. The bank's provision coverage ratio, including write-offs, is 92.1%, up from 91.9% in Q3FY23 and 89.65% in Q4FY22. Both for the entire FY23 and for Q4FY23, it reported negative credit expenses. The amount of the book's contingency provisions is 1.5 times its NNPA. As of the conclusion of Q4FY23, the bank had contingency provisions totaling Rs. 106 crores. Additionally, it seeks to keep gross and net NPA below 2% and below 1% over the long run. As of FY23, the bank had fully funded its portfolio of Security Receipts (SR). As a result, any future recoveries from this portfolio will be credited to the P&L Account. As of Q4 FY23, its restructured book was 0.16% of its gross advances, compared to 0.2% in Q3 FY23 and 0.53% in Q4 FY22.

• Gold loans driven loan book growth

At the conclusion of Q4FY23, the bank's total gross advances had increased by 28/11% YoY/QoQ and totaled Rs. 21,489 Cr. Gold loans, which made up 45% of the bank's loan book and increased by 48/10% YoY/QoQ, helped to boost the rise. Furthermore, 66% of the incremental YoY credit growth was driven by the gold loan book. The increase in gold loans was driven by tonnage growth from both current and new customers. With a 73% loan-to-value ratio and 24.41 tonnes of gold as collateral, which is an increase of 30% year over year. With 0.19% NPAs, the book has generated 11.44% for the bank. The bank generally charges a fixed rate of interest on the gold loans it extends.

RISK & CONCERNS

• The Bank's expected earnings are susceptible to being negatively impacted by any unfavorable changes to regulations and laws.
• Future management strategy implementation poses a significant risk to the stock. Its violation or delay could have an effect on financial results, which would reduce value for shareholders.
• To be able to secure CASA deposits and retail and wholesale loans, the bank is making significant investments in both staff and technology. Additionally, it has a bold ambition to add 100 new branches per year in the future. Its opex and capex are increasing as a result. These will affect the costs of the bank, along with rising interest rates. In this case, the bank must control the yield on advances carefully to avoid negatively affecting its profit margins.
• A rise in G-sec yields could cause the Bank to incur MTM losses. Additionally, it might have an effect on the expansion of loans because high-interest rates have a negative influence on demand.
• The company's financial situation, cash flows, and profitability could all be negatively impacted by a sudden drop in the price of gold since it might not be able to realize the full value of the gold it has committed, thereby exposing it to a loss.
• If we take the gold loans out, the loan book has only experienced a 16% YoY growth. Since the management believes that the risk-adjusted returns in this industry are unattractive, the growth of SME loans has been stagnant. The bank is making significant investments in the creation of new technology, goods, and procedures for the retail and wholesale markets. On the basis of this, it sets a 15% growth goal for these industries in the upcoming quarters. The NIMs and hence the valuation may be directly impacted if this challenging goal is not achieved.

CONCALL HIGHLIGHTS:

• The bank is investing in significant technology projects, for which capex is anticipated to be distributed over the following three to five years.
• It intends to open more than 100 branches in FY24, 60% of which will be in the North and West areas, advancing its objectives for geographic diversification. By extending to these regions, it also hopes to access CASA balances.
• For the upcoming three to four years, the credit costs are predicted to be under 40bps.
• The bank anticipates rising operating expenses as a result of growing its physical and digital footprint, which will result in cost-to-income ratios that are initially in the range of 55–60% and ultimately drop to 40–45% by FY30.
• To meet the demand for its lending products, the bank is prepared to see a greater credit-deposit ratio.
• The bank hired about 2,200 people in H2FY23, and it plans to keep hiring in order to meet the target it set for itself as part of the SBS 2030 strategy.

FINANCIALS:

• Profit after Tax is at Rs 132.23 Cr in Q 1 FY 24 as against Rs 114.52 Cr in Q 1 FY 23. Net profit increased by 15% YoY basis. We continue to maintain the accelerated provisioning policy during this quarter as well. Return on Assets improved from 1.75% in Q1FY23 to 1.79% in Q1 FY24. NIM could be sustained above 5% at 5.40% up by 23 bps YoY.
• The operating Profit of the bank is at Rs 181.43 Cr whereas it was Rs 154.72 Cr in Q1 FY 23 i.e., up by 17%.
• Net Interest Income (NII) earned for the first quarter is Rs 364.01 Cr with a Y-o-Y increase of 17% (Rs 310.69 Cr for Q1 FY 23). 
• Non-interest income for Q1 FY 24 is at Rs 121.55 Cr as against Rs 54.85 Cr for the same period last year up by 122%. While Treasury income grew by 23%, other income excluding treasury income increased by Rs 64.40 Crs or by 143% on a YoY basis. 
• Cost Income Ratio is at 62.63% as at the end of Q1 FY 24; whereas it was 57.67% as of 30.06.2022. The increase is mainly on account of significant investments made in people, distribution, systems & processes in the build phase aimed at creating a strong foundation for the scale that we aspire to achieve as part of SBS 2030.
• Healthy Asset Quality & Provisioning: Compared to 30.06.22, we have lower GNPA and NNPA ratios of 1.27% and 0.32% at the end of Q1FY 24; with an improvement of 52 bps and 28 bps respectively. 

• Robust Capital Structure - The Capital Adequacy Ratio is at 25.99%, which is well above the regulatory requirement; with an improvement of 53 bps as of 30.06.23.
• Total Deposits grew by 21 % YoY. Correspondingly, CASA book grew by 6% from Rs 7121.88 Crs to Rs 7548.08 Crs YoY. The CASA ratio stood at 30.84 % as of 30.06.2023.
• Advances (Net) grew by 31% YoY to Rs 21103.55 Crs as of 30.06.2023 supported by a robust growth of 42% in gold loans on a YOY basis. Gold loan portfolio crossed the Rs 10000 Cr mark.
• After Q2FY24, the cost of funds will flatten or start to taper down. Thus, NII will remain soft in Q2FY24 but will gather pace thereafter.
• Fee income in Q2 will be better than that in Q1FY24, led by an increase in core fee income. Besides the core fee, the bank is also holding a large PSLC book that will be monetized at some point.
• Insurance distribution is the largest source of core fee income.
• Employee expenses had a couple of one-offs in Q1FY24, including actuarial expenses. The rate of increase in employee expenses will slow down as the fiscal progresses.
• Credit costs will likely be in the single digits in FY24.
• The heavy investment phase will continue till FY25-end.
• Steady-state RoA will be in the 1.5–1.8% range, with the possibility of it going up to 2% in some quarters. 
• Earlier, the management expected the bank to grow 30–50% faster than the system. It is now confident of growing at least 50% faster than the industry.
• It will add 100 branches in FY24.
• Net CD ratio will stay in the 85–90% range.
• The management will hold off on pushing the retail growth pedal for the next two years as they assess the risk environment and focus on building the appropriate infrastructure and product suite.
• The bank is significantly expanding the SME segment in North and West India.
• The SME approval rate is well below 50%. The book is fully secured.
• Around 58% of the bank’s branches are in semi-urban and rural regions. These are being leveraged to scale up the agri book, which is mostly secured.
• It is not sourcing loans via fintech partnerships as full clarity on how the regulator views such pacts is awaited.
• The bank has no plans to invest in an in-house card business over the next few years.

VALUATION:

• An established presence in Southern India, CSB Bank is a century-old private sector bank in India. The true makeover began after being taken over by new promoters (the Toronto-based Fairfax company) in October 2018. Changes including developing a new brand image, investing cash for expansion, bolstering top management by hiring fresh, experienced candidates, adopting a product-based lending strategy, etc., were put into practice.

• Following a significant surge in the fourth quarter of FY23, the bank's non-gold loan portfolio exhibited minimal activity in the first quarter of FY24. This subdued performance was primarily attributed to early repayments made by several prominent SME and wholesale clients. Notably, there was a 4% quarter-over-quarter growth in gold loans, a 6% increase in retail loans, and a marginal 1% rise in SME loans, whereas the corporate loan portfolio experienced a 2% decline. It is anticipated that SME loans will gather momentum in the upcoming quarters, bolstered by improved pricing. However, the resurgence in the retail loan segment may take a longer period to materialize. As of now, gold loans constitute 46% of the bank's total loan portfolio, marking a notable increase from the 42% share they held a year ago.

• CSB continues to have an industry-leading margin, strong return ratios, and robust asset quality. We like the management’s laser-sharp long-term focus on building a sustainable lending engine. With expectations of over 20% credit growth, driven by multiple segments, and stable asset quality, we expect a re-rating. We expect the target price to be Rs 380.

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