Stock Tales - CSB Bank - ICICI Direct

CSB Bank is a south based private sector bank with Kerala contributing ~50% of business. Gold & SME are key lending segments forming ~40% & 15% of loan mix. Post a substantial deterioration in asset quality and resultant weak business performances, Fairfax India Holding was permitted to acquire ~51% stake in FY19. The bank then changed its strategy in various aspects leading to an organisational transformation that led to an improved performance, which is expected to continue ahead.

Investment rationale

Meticulous choice of lending segments: CSB increased focus on gold loans and exited a few risky SME segments leading to proportion of gold loan increasing from 26% in FY19 to 40% in FY21; enabling generation of higher yield. Improvement in CD ratio, low market share in gold loan and selective SME lending is seen aiding business growth as well as yields.

Liability franchisee supporting margins: Healthy liability franchise with granular retail deposits, loyal customer base (~25% of NRI deposits) enabled growth in CASA to ~32% in FY21. Continued focus on NRI deposit, re-orientation of branches to focus on liabilities rather than asset & branch expansion would keep cost of fund in check, thereby aiding margins.

Strengthening top management: The bank hired industry veterans like, Pralay Mondal (ex-Axis Bank), Neeraj Dhawan (ex-Yes Bank), Shyam Mani (ex-Yes Bank) thereby strengthening its executive team. Further, addressing the perennial human resource issue, the bank has reduced the number of IBA employees from ~60% pre-IPO to 41% now (~1600 IBA employee out of ~3900). It is expected to further decline to ~33% in FY22E, FY23E.

Historical NPA cleaned; Covid impact limited: Elevated provisioning and high write-offs undertaken in FY17-20, led to a decline in GNPA from 7.2% in FY17 to 2.7% in FY21. In FY21, slippages rose amid pandemic though GNPA at 2.7% and restructuring at ~45 bps remains relatively better. Substantial proportion of secured book, selective SME lending & lower LGD in gold loan provide comfort on asset quality and earnings trajectory ahead.

For details, click on the link below: Link to the report

Source : Equity Bulls

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