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Buy This Midcap Private Sector Banking Stock, Shares Likely To Jump Up To 29%: LKP Research

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LKP Research is optimistic about the stock of CSB Bank, a private sector small-cap bank. It has assigned ₹ 313 apiece target price to the stock for 12 month investing period. With the given target price, it claims a 29% upside in the share price from the current level.

 

CSB Bank has been reporting strong performance since listing. A strong loan growth driven by Gold loans and comfortable CDR is evident. The credit quality recovery (1.7% in 2QFY23 v/s 7.9% in FY18) was meaningful driven by lower delinquencies and quicker recoveries. A healthy capital position (CAR: 25%), post-IPO is likely to keep the momentum going. Factoring double digit advance growth, stable NIMs and lower credit cost; the bank may post 22% PAT growth in the current fiscal year. Attractive valuation (1.2xFY24E Adj. BVPS) makes the stock rewarding factoring FY23E/FY24E ROA of 2.1%.

Stock Outlook & Returns Over The Years

Stock Outlook & Returns Over The Years

The last traded share price of CSB Bank on NSE is ₹ 243.85 apiece, down 2.96% from the previous close. The stock recorded its 52 week high at ₹ 275.10 apiece and the 52 week low at ₹ 178 apiece, respectively. It has a market capitalisation of ₹ 4,230.45 crore.

The stock made its stock market debut on 4 December 2019. Since its listing date, it has delivered 18.73% negative returns. However, in the past 1 week, it gave a 2.54% positive return and a 9.3% positive return in the past 1 month, respectively. It fell 2.3% in 3 months and 3.86% in 1 year, respectively. In 3 years it has given a maximum of 21.99% positive returns.

 Healthy credit growth trajectory driven by Gold Loans
 

Healthy credit growth trajectory driven by Gold Loans

Post listing, the bank's advance growth remain strong and above the growth rate of banking ecosystem. According to the bank's reported provisional numbers for 3QFY23, the advances grew by 25.7% YoY against ~18% industry growth. Gold loan book (43.7% of loans as on 2QFY23) has witnessed a robust growth of 50.8% YoY and accounted for 74% of the incremental sequential credit growth. The share of Gold loan portfolio has increased from 36% in 2QFY22 to 46% in recent quarters. Additionally, the CDR of 83% provides further room for credit off-take. Moreover, the deposit traction remained strong at 18.9% YoY. Nonetheless, MSME loan growth was tepid, the management maintains its stance of it being the biggest growth driver in the non - gold book during this calendar year.

Retail products in the bank's pipeline are expected to be launched by end of this financial year. We expect the loan book to grow at a rate of around 20% in FY23E and FY24E. The gold loan share is expected to increase to half of the gross loans and then gradually come down as some of the other products start picking up. Management expects the bank's advances to grow at 1.5x the industry growth rate. Furthermore, the management targets 100 branches to be added every year for next five years and simultaneously invest in technology for customer acquisition.

Strong Asset Quality showing

Strong Asset Quality showing

On asset quality front, the bank has done tremendous improvement; the GNPA ratio declined to 1.7% in previous quarter from the peak of 7.9% in FY18. The GNPA reduction was driven by lower delinquencies, attributed to a larger share of gold loans. Owing to the strong asset quality showing, the bank is reporting provision write - backs for previous five quarters. PCR remain broadly stable at 66% with PCR (including TWO) of 90%. We believe the bank has adequate cushion to maintain a low credit cost trajectory in the coming quarters, as they continue to hold strong contingency buffer of ₹1.1bn. We estimate the GNPA to improve further on the back of recoveries and upgrades and expect it be at 1.5% by FY24E with improved PCR to 69%.

High yields, lower credit cost to drive return ratios

High yields, lower credit cost to drive return ratios

The bank is enjoying superior margins (NIMs: 5.6% as on 2QFY23) on the back of higher YOA of 10.8% and moderate COD of 4.14% (SA: 2.79% and TD: 5.18%). Furthermore, credit cost to stay low owing to provision write - backs and additional contingent buffer. At present, investment in technology and distribution is substantial. Cost-to-income is likely to come down as the investments start paying off. Thus, at initial phase, C/I ratio will remain elevated but long term management target is ~45%. We estimate C/I ratio of 52.7% and 49.8% for FY23E and FY24E respectively. Driven by lower credit cost (10bps and 50bps for FY23E and FY24E) and reducing C/I ratio, the bank is likely to deliver a ROA and ROE of 2.1% and 18.7% for FY24E.

Outlook and Valuation

Outlook and Valuation

The bank is well equipped to report superlative return ratios (FY24E ROA/ROE of 2.1%/18.7%) driven by better operating performance, balance sheet growth and improving asset quality. The stock trades at 1.2xFY24E Adj. BVPS of ₹209. We value the bank at 1.5xFY23E Adj. BVPS and arrive at a price target of ₹313; a potential upside of 25%.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of LKP Research. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.

 

Story first published: Friday, January 6, 2023, 17:39 [IST]
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