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Nearly a century-old private lender CSB Bank, Incorporated in 1920, Kerala based CSB Bank Ltd, formerly known as Catholic Syrian Bank, is one of the oldest private sector banks in India. The bank has a significant presence in Kerala, Karnataka, Tamil Nadu and Maharashtra. the Kerala-based lender has presence in Maharashtra, Tamil Nadu, and Karnataka. With a customer base of nearly 1.3 million people (as on March 31, 2019), it’s credit portfolio includes sector like agriculture, MSMEs, education, and housing.

About company - As on September 30, 2019, CSB had a network of 412 branches (excluding 3 service and 3 asset recovery branches) and 290 ATMs. In 2018, the Reserve Bank of India (RBI) allowed Fairfax India (via FIH Mauritius Investments Ltd) to acquire a controlling 51 per cent stake in the bank. Apart from Fairfax, ICICI Lombard General Insurance, HDFC Life Insurance, ICICI Prudential Life Insurance, The Federal Bank, Way2Wealth Securities and Edelweiss Tokio Life Insurance, too, hold a stake in the bank.

Competitive Strengths

1. Strong network and well-known brand in South India,

2. Significant capital base,

3. Established SME business model,/p>

4. Major portion of gold loans in portfolio,

5. Prudent risk management controls, policies, and procedures

Given the bank’s consistent improvement in asset quality and turnaround performance in this financial year, analysts suggest subscribing to the public offer, albeit with riders. “The stock can be a good play from a long-term perspective… Nearly 60 per cent of the bank’s portfolio is made of SME and secured gold ornaments which are safe bets. Going ahead, we expect the bank to report better return on equity (RoE) and consistently improve its performance,” says Yuvraj Choudhary, an analyst at Anand Rathi Shares and Stock Brokers. Gold loans represented 31 per cent of the total loans outstanding as on March 31, 2019, as per the bank’s DRHP. In financial years 2017, 2018, and 2019, defaults in the portfolio constituted 0.25 per cent, 0.40 per cent, and 0.12 per cent, respectively.

Verdict - "Nearly 31 per cent advances of the bank are secured by gold ornaments. A sudden decline in the market price of gold may adversely affect CSB's financial condition, cash flows and earnings," say analysts at ICICI Securities, adding, "The bank may be unable to realise the full value of its pledged gold, which exposes the bank to a potential loss."
They, however, assign a 'subscribe' rating to the stock banking on the new promoter and strong management.
"The new management brings capital and execution strength on the table which bodes well for future growth as well as earnings. Further, at the IPO price band of Rs 193-195, the stock is available at a P/BV of nearly 2.2x at the upper band on H1FY20 basis," they wrote in their IPO note,
“The bank is fairly valued at 1.7x of Price/Book value considering the financial performance,” says Umesh Mehta, head of research at Samco Securities. The bank’s stable management, which is responsible for the turnaround financial performance, especially for asset quality, he says, provides confidence in the bank’s future plans. However, concentrated presence in the southern region could affect expansion plans, he adds.
Analysts at Choice Broking, however, remain cautious on the stock citing concentrated regional presence and higher below 'BBB' rated loans.
"Improvement in business performance has been mainly driven by gold loans while the SME book witnessed contraction. Though gold loan book grew by a CAGR of 28.3 per cent in FY17-FY19, it is difficult to sustain such high growth because of high competition in gold financing segment," wrote Satish Sharma, a research analyst at the brokerage firm, in an IPO note.

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