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CSB Bank could turn out to be a compounder: Siddharth Purohit, SMC Global Securities

CSB Bank being listed at 22% capital adequacy, leaves enough scope for growth in the next 2-3 years.

ET Now|
Dec 04, 2019, 01.54 PM IST
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This is an IPO from a pure commercial bank after a very long time. We have seen a lot of other NBFCs or MFIs getting listed, but not banks, says Siddharth Purohit, research analyst, Institutional Equities, SMC Global Securities. Excerpts from an interview with ETNOW.

What are your initial comments on CSB Bank listing?
The listing has been phenomenal and very strong, as we expected. In fact, we expected the listing price to be somewhere close to Rs 250, but it has been better than that. Let me tell you why we had given a subscribe rating to the issue. No doubt the bank is pretty small compared with other commercial banks which are listed now, even compared to the south-based banks.

But CSB Bank is starting at a point where it is very well capitalised. Capital is one of the biggest issues for small sized banks and this is one area where they really score very high compared to other smaller banks and that is what has probably attracted a lot of investors to this issue and that’s why we are seeing a very strong listing. Also, this is probably an IPO from a pure commercial bank after a very long time. We have seen a lot of other NBFCs or MFIs getting listed, but not banks.

Normally primary markets attract lot of investors and that’s what has happened. Now when you talk about the interest level, at the issue price of Rs 193, the issue was valued at 2.2 times the trailing book value. But if one extrapolates the growth numbers which is visible to me, based on the management’s capability,the issue price is below two times, so around 1.8 times on FY21 basis. That was something very attractive, given that they are starting at a point that they do not have a lot of legacy issues. Already they have cleaned up their books. It is a very good start for the bank and that is why the stock is reacting very positively.

Where does it go from here? Can this be a compounder from here?
Yes since the listing has been so strong, possibly some amount of money will be taken out by probably the retail and HNI segment. But my sense is that institutional investors would stick because it can be a compounding story. Let us understand that their loan book is still at around Rs 11,000 crore right now, which is very small. Now the business model that they have adopted is that they do not want to compete with the large banks initially and they have clearly identified certain segments like gold loans to grow.

Gold loan by nature is a very low risk, low NPA business with high yield in nature. If you are differentiating a business model, then market will certainly like it and that is what is happening. So while retail investors might take some of the money out, institutional investors would still end up accumulating this stock because compared to some of the other small banks which are still struggling to either grow or are going through some legacy issues in terms of recognising their past assets and that is eating up a lot of their capital.
My suggestion would be one should hold on to the stock partially for a longer period of time.

-Siddhartha Purohit

But CSB Bank is being listed at 22% capital adequacy which leaves enough scope for growth in the next two-three years. There is visibility that growth and capital is there. It would not be much of a dilution and it is a niche business. So I am very positive that they will possibly be in a position to deliver mid-teens ROE by next two years.

On the forward basis also, at the current price, the valuation looks very stiff at 2.5-2.6 times on adjusted book basis. But if you look at the growth they had indicated, it could be a compounding story. My suggestion would be one should hold on to the stock partially for a longer period of time.

Differentiated proposition of the bank is gold loan. So, why should one not buy Manappuram or Muthoot?
Yes, that is a good question. In fact, similar NBFCs with gold loans are also trading at 2.5 times around price to book. But the key differentiating factor what I feel is that a gold loan company cannot get into all the business that a bank can do.

Also, the cost of funds will be a big differentiating factor in case of CSB. Any NBFC will have to raise money at a higher rate. While CSB’s cost of fund also is still on higher side, there is still a scope that they can increase their CASA ratio. It is not very high as compared to other banks. Naturally, they will have a cost advantage compared to NBFCs.

Now when you talk about other gold loans, other gold loan companies will have to possibly form a subsidiary to get into other business like home finance or maybe commercial loans. But as a commercial bank, that option is already ready with you. While I am saying that the management is highlighting that they intend to scale up their business in gold loan, initially that does not restrict them from getting into other businesses. My understanding is that once the base becomes strong and the book grows a little higher, then they can get into corporate on a selective basis.

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