We had initiated a ‘buy’ on CSB Bank’s stock in bl.portfolio edition dated July 3, 2022, when it was trading at ₹191, with a P/B (price to book value) multiple of 0.9 times (estimated FY23 book value basis). Since then, the stock has made a high of ₹422.2 in late December 2023, before going through a correction to current levels. It now trades at 1.4 times Q1 FY25 book value. Compared with peers (other than small finance banks) with a deposit book around/ below the ₹50,000-crore mark, CSB Bank commands a premium as it fares better in terms of RoE (return on equity), NIM (net interest margin), balance sheet growth and asset quality.
Further, with RBI’s recent diktat on gold financiers to set right process irregularities observed by it, experts assess that it could be positive for seasoned players like CSB, while not so for new-age NBFCs and fintechs, given the nature of the observations. A possibility to capture market share from peers and gold price on the rise are opportunities that the bank can capitalise.
In Q1 FY25, the bank showcased healthy year-on-year growth in advances and deposits at 20 per cent and 25 per cent respectively. But the NIM declined 73 bps versus the NIM in FY24, largely due to a rise in the cost of deposits. This is an industry-wide phenomenon though. The management comments indicate this could be a short-term affair, and the leadership is upbeat about maintaining it between 4.5 per cent and 4.8 per cent for FY25. Further, the negative impact of slippages on the net profit is expected to reduce starting Q2 FY25.
However, the management expects growth in the corporate book to be stagnant in FY25, as it is in the middle of rejigging the portfolio. Given a similar exercise with the SME book a couple of years ago and the good growth that followed, the same is expected to be repeated, although not immediately. Overall given all the moving parts, the risk-reward appears balanced and existing investors can continue to hold the stock.
Progress on display
The bank was fresh out of a balance sheet clean-up in mid-2022. As a result of the clean-up, growth became a casualty. Deposits and advances grew at CAGRs of 7.5 per cent and 10 per cent respectively between FY19 and FY22, well below the industry growth rate. But between FY22 and FY24, deposits and advances have grown at good CAGRs of 21 per cent each. In the same period, the deposits and advances of private banks, expanded 17 per cent and 23 per cent respectively. The bank stuck to its strengths and grew its gold loan portfolio from 31 per cent in FY20 to 39 per cent in FY22 to 50 per cent as of Q1 FY25. With a yield of above 11 per cent and the advantage of low-cost deposits, the bank is better placed vis-à-vis NBFC gold financiers.
The bank ran a significant risk of concentration in the State of Kerala. In FY20, 63 per cent of the branches were in Kerala. Ever since, the bank has aggressively diversified out of the State, with new branches opened in Andhra Pradesh, Maharashtra and Tamil Nadu among others. As of Q1 FY25, the branch concentration stands as: Kerala - 34 per cent, Tamil Nadu - 17 per cent, Maharashtra - 11 per cent, Andhra Pradesh - 12 per cent, other States - 26 per cent. In terms of total business (advances + deposits), the concentration is as follows: Kerala, Tamil Nadu, Maharashtra, Andhra Pradesh, other States – 36 per cent, 20 per cent, 19 per cent, 4 per cent, 21 per cent respectively. This apart, asset-quality improvement in the corporate segment has been aided by a higher portion of borrowers rated A and above - at 79 per cent as of FY24 versus 64 per cent as of FY22.
Way forward
In Q1 FY25, the NIM was down to 4.4 per cent compared with 5.1 per cent in FY24. Apart from a rise in the cost of deposits from 5.4 per cent in FY24 to 6 per cent in Q1 FY25, a couple of factors led to the drop in NIM. First, as per regulatory requirements (w.e.f. April 1, 2024), penal interest which was part of interest earned was accounted under other income. The management estimate the impact of this at 40 basis points (bps). Second, due to higher slippages in the SME and corporate segments, interest earned had to be reversed. This meant higher credit cost too, of 22 bps denting the net profit. Gross NPA ratio also rose an equal 22 bps to 1.69 per cent.
Despite this, the management has guided for a NIM range between 4.5 per cent and 4.8 per cent for FY25, made possible by the following. First, it expects to pass on the rise in cost of deposits by repricing loans. The short-tenor nature of the gold loan portfolio and the kind of loans present in the retail segment (commercial vehicle loans, credit cards and inventory funding) will enable this. Second, credit cost is expected to moderate, come Q2. Third, the bank has a large pool of written-down accounts for which recoveries are expected to pick up from Q2.
Further, while in general, the growth is expected to be robust in FY25, the management has indicated that there will be a complete rejig of the corporate banking portfolio and has guided for growth to be flat in this counter. Though this might have implications in the short term, in the long term this is positive for the bank, drawing inference from a similar rejig in the SME portfolio, two years ago. Per the management, ever since the exercise was done for SME, the segment has seen good growth in the last two-three quarters. In Q1 FY25, the sequential growth was 17.6 per cent, with 35 per cent growth expected for the full fiscal over FY24.