The shares of CSB Bank Ltd (CSB), formerly Catholic Syrian Bank Ltd, have been given a buy rating by brokerage company Edelweiss Broking Ltd. The brokerage has set a target price of Rs. 344, implying a 35 percent growth from the market price of Rs. 255. The stock was trading at a market price of Rs. 255 at the time of the brokerage's buy call, but it is currently trading at a market price of Rs. 259.25 as of 7 Jan, 3:27 pm IST.
Investment rationale according to the brokerage
- CSB's advances are expected to increase at a compound annual growth rate (CAGR) of 21% over FY21-24E, driven by its renewed focus on SME and agricultural loans as well as the anticipated addition of products in the retail segment over the next three to four quarters.
- The bank's net revenue, operating profit and net profit are estimated to expand at a CAGR of 15%, 18% and 29%, respectively, over the same period, considering the increase in operating efficiencies and moderation of credit cost.
- Consequently, RoA and RoE are expected to improve to 1.4% and 15.5%, respectively, in FY24E (vs 1.1% and 10.5% in FY21).
- CSB's net interest margin (NIM) is expected to tone down to 4.2% in FY24E from 4.7% in FY21, given that the interest rate cycle is bottoming out.
- We believe that changes in the HR policy will help rein in operating expenses, while prudent lending would keep a lid on slippages, lowering the overall credit cost.
- Return ratios (RoA and RoE) are expected to improve to 1.4% and 15.5%, respectively, in FY24E (vs 1.1% and 10.5% in FY21), largely driven by operating efficiencies.
Buy with a target price of INR344
Edelweiss Broking Ltd has said in its research report that we believe capital infusion has provided CSB the cushion to pursue growth. Additionally, changes implemented by the new management are bearing results-the bank reported a record-high profit after tax (PAT) in FY21. Aggressive branch expansion is underway, which will help the bank in mobilizing low-cost deposits. Also, the new top management, with rich experience in large private banks, can leverage their expertise to ensure efficient deployment of funds.
According to the brokerage, in addition, employee restructuring would help the bank realise operating efficiency. Lastly, the bank's commitment to keeping non-performing assets (NPAs) low through a prudent shift in the loan book mix would help rein in credit costs. Thus, we expect RoA to expand to 1.3% and 1.4% in FY23E and FY24E, respectively, and PAT for FY24E to be about 2.1 times higher than that in FY21. At the current market price, the stock is trading at 1.6x FY23E P/adjusted book value (ABV). We value CSB at 2.2x FY23E P/ABV and initiate coverage on the stock with a 'BUY' rating and target price of INR344, implying an upside.
Key risks according to Edelweiss
- If there are strict lockdowns implemented in response to a potential wave-3 of Covid, then our growth, as well as asset quality forecasts for the near term, could be impacted.
- A general weakening of the macroeconomic scenario over the next couple of years could impact CSB's ability to scale up its loan book.
The above stock has been picked from the brokerage report of Edelweiss Broking ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.