The September 2025 quarter results present a nuanced picture of CSB Bank's performance trajectory. While the bank delivered impressive bottom-line growth, driven by a sharp 13.43% sequential increase in total income to ₹1,458.36 crores, underlying operational metrics reveal mounting pressure on the bank's deposit franchise and margin sustainability. The quarter witnessed a significant 232 basis points decline in the CASA ratio to 21.17%, falling below the critical 25% threshold that typically signals deposit quality concerns in the private banking sector.
The bank's total income for Q2 FY26 reached ₹1,458.36 crores, up from ₹1,285.65 crores in the previous quarter, representing a 13.43% sequential jump and a remarkable 37.03% year-on-year surge. Interest earned stood at ₹1,109.16 crores, whilst other income contributed ₹349.20 crores, reflecting a 42.71% quarter-on-quarter increase. This substantial boost in non-interest income, however, raises questions about the sustainability of earnings quality and the bank's reliance on treasury operations versus core banking activities.
| Quarter | Interest Earned (₹ Cr) | Net Profit (₹ Cr) | NIM (%) | CASA (%) |
|---|---|---|---|---|
| Sep'25 | 1,109.16 | 160.33 | 3.81% | 21.17% |
| Jun'25 | 1,040.94 | 118.60 | 3.54% | 23.49% |
| Mar'25 | 980.89 | 190.44 | 3.75% | 24.19% |
| Dec'24 | 919.38 | 151.63 | 4.11% | 24.07% |
| Sep'24 | 864.85 | 138.41 | 4.30% | 24.09% |
| Jun'24 | 832.02 | 113.32 | 4.36% | 24.90% |
| Mar'24 | 794.87 | 151.46 | 5.04% | 27.20% |
Financial Performance: Profitability Surge Amid Margin Compression
CSB Bank's Q2 FY26 financial performance demonstrates a tale of two narratives. On the surface, the 35.19% quarter-on-quarter profit growth to ₹160.33 crores appears impressive, recovering strongly from the previous quarter's subdued ₹118.60 crores. Year-on-year, the net profit advanced 15.84% from ₹138.41 crores in September 2024, indicating sustained momentum in earnings generation.
Net interest income for Q2 FY26 stood at ₹423.56 crores, registering an 11.64% sequential increase and a 15.26% year-on-year growth. The net interest margin improved to 3.81% from 3.54% in the preceding quarter, marking a 27 basis points sequential expansion. However, this remains significantly below the bank's historical NIM levels of over 5% recorded in March 2024, highlighting the structural pressure on spreads in an increasingly competitive deposit market.
Interest expended climbed to ₹685.60 crores in Q2 FY26, up from ₹661.53 crores in the previous quarter, reflecting the higher cost of funds as the bank competes aggressively for deposits. The advance-to-deposit ratio stood at 78.38%, indicating healthy credit deployment, whilst the bank's loan book showed consistent growth with interest on advances reaching ₹914.37 crores, up 8.19% quarter-on-quarter.
Operating profit before provisions and contingencies surged 26.77% sequentially to ₹279.30 crores, whilst provisions increased marginally to ₹63.65 crores from ₹60.79 crores. The profit before tax reached ₹215.65 crores, up 35.19% quarter-on-quarter, with the tax outgo at ₹55.32 crores, maintaining an effective tax rate of approximately 25.65%.
Asset Quality: Stable NPAs But CASA Erosion Raises Concerns
Asset quality metrics remained broadly stable during Q2 FY26, with gross non-performing assets declining marginally to 1.81% from 1.84% in the previous quarter. Net NPAs improved to 0.52% from 0.66%, indicating effective recovery mechanisms and robust provisioning discipline. The provision coverage ratio stood at a healthy 84.14%, up from 80.46% in June 2025, providing a strong buffer against potential credit losses.
However, the most concerning development in the quarter was the sharp deterioration in the CASA ratio, which plummeted 232 basis points to 21.17% from 23.49% in Q1 FY26. This marks a continuation of a worrying trend, with the CASA ratio having declined from 27.20% in March 2024 to current levels, representing a 600 basis points erosion over five quarters. For a bank targeting sustainable margin expansion, low-cost deposit mobilisation remains the Achilles' heel.
The bank's capital adequacy remained robust with the total CAR at 20.99% and Tier 1 CAR at 19.19%, both comfortably above regulatory requirements. This provides ample headroom for balance sheet expansion and positions the bank well to capitalise on growth opportunities. The advance-to-deposit ratio of 78.38% suggests efficient credit deployment, though it also indicates limited room for further loan growth without corresponding deposit accretion.
Key Concern: CASA Ratio Erosion
The 600 basis points decline in CASA ratio from 27.20% in March 2024 to 21.17% in September 2025 represents a structural challenge for CSB Bank's margin sustainability. With CASA now below 22%, the bank faces higher funding costs that could pressure NIMs in subsequent quarters despite the recent 27 bps improvement. Management's ability to reverse this trend will be critical for maintaining profitability momentum.
Return on Equity: Efficiency Metrics Under Pressure
CSB Bank's return on equity stood at 13.32% as of the latest reporting period, reflecting reasonable capital efficiency but trailing several peers in the private banking space. The bank's ROE has remained in the 12-14% range, suggesting moderate profitability relative to shareholder equity. Whilst this is respectable for a small-cap private sector bank, it falls short of the 15-20% ROE levels typically commanded by high-quality banking franchises.
The return on assets averaged 1.61% over recent periods, with the latest ROA at 1.25%, indicating acceptable asset productivity. The bank's ability to generate consistent returns on its growing asset base will be crucial as it expands its geographical footprint beyond its Kerala stronghold into Northern and Western India. The cost-to-income ratio averaged 59.95%, suggesting room for operational efficiency improvements as scale benefits accrue.
Shareholder funds stood at ₹4,497.73 crores as of March 2025, up from ₹3,803.65 crores in the previous year, reflecting retained earnings accretion. The bank's deposit base reached ₹36,861.49 crores, registering strong 24.03% year-on-year growth, whilst advances climbed to ₹31,507.05 crores, up 29.46% annually. This growth trajectory, if sustained with improved CASA mobilisation, could drive ROE expansion in coming quarters.
Industry Context: Competitive Pressures Intensify
The private banking sector in India continues to witness intense competition for deposits, with system liquidity tightening and credit growth outpacing deposit growth across the industry. CSB Bank's challenges with CASA mobilisation mirror broader industry trends, where customers are increasingly gravitating towards higher-yielding fixed deposits amid elevated interest rates. The bank's expansion into Northern and Western markets places it in direct competition with well-established players who command stronger deposit franchises.
CSB Bank's network of 779 branches provides reasonable geographical diversification, though its concentration in Kerala remains significant. The bank's thrust into new markets requires substantial investments in branch infrastructure, technology platforms, and talent acquisition, all of which pressure near-term profitability metrics. The strategic pivot towards SME banking, retail banking, and corporate banking diversification is essential for long-term sustainability but comes with execution risks.
The regulatory environment remains supportive, with the Reserve Bank of India maintaining a stable policy stance. However, potential future rate cuts could compress NIMs further, making CASA accretion even more critical. The bank's ability to cross-sell products, deepen customer relationships, and leverage digital channels will determine its competitive positioning in an increasingly crowded private banking landscape.
| Company | P/E (TTM) | P/BV | ROE (%) | Dividend Yield | Gross NPA (%) |
|---|---|---|---|---|---|
| CSB Bank | 12.08x | 1.61x | 13.32% | NA | 1.84% |
| Bandhan Bank | 20.49x | 1.02x | 5.00% | 0.96% | N/A |
| Karur Vysya Bank | 11.50x | 2.03x | 17.64% | 0.86% | N/A |
| RBL Bank | 41.39x | 1.25x | 3.03% | 0.31% | N/A |
| City Union Bank | 15.86x | 1.93x | 12.17% | 0.77% | N/A |
| J&K Bank | 5.53x | 0.76x | 13.80% | 2.04% | N/A |
CSB Bank trades at a P/E ratio of 12.08x, significantly below peers like Bandhan Bank (20.49x) and RBL Bank (41.39x), suggesting the market is pricing in execution risks around the bank's expansion strategy and CASA challenges. The price-to-book ratio of 1.61x is reasonable given the 13.32% ROE, though it commands a premium to Bandhan Bank (1.02x P/BV) despite lower ROE. The valuation discount appears justified given the structural headwinds around deposit mobilisation and margin sustainability.
Valuation Analysis: Fair Value Amid Mixed Signals
At the current market price of ₹421.60, CSB Bank trades at 12.08 times trailing twelve-month earnings and 1.61 times book value. The valuation has been assessed as "Fair" by market participants, having transitioned from "Expensive" in August 2025. The PEG ratio of 1.29x suggests reasonable valuation relative to growth prospects, though this assumes the bank can maintain its historical profit growth trajectory of 66.55% over five years.
The stock trades 5.26% below its 52-week high of ₹445.00 and 58.47% above its 52-week low of ₹266.05, indicating it has captured significant gains over the past year but remains off peak levels. The year-to-date return of 34.40% substantially outperforms the Sensex's 6.75% gain, delivering an alpha of 27.65 percentage points. However, the three-month performance shows a 3.14% decline versus the Sensex's 3.56% gain, suggesting recent momentum has stalled.
The bank's market capitalisation of ₹7,373 crores positions it as a small-cap player in the private banking sector, ranking sixth among its peer group. This size constraint limits institutional participation and creates higher volatility, as evidenced by the stock's beta of 1.35. The absence of dividend yield further reduces the investment case for income-focused investors, making the stock purely a growth play dependent on operational execution.
Shareholding Pattern: Institutional Confidence Remains Mixed
The shareholding pattern for Q2 FY26 reveals stable promoter holding at 40.00%, unchanged over the past five quarters. This consistent stake provides governance stability but limits free float available for institutional investors. Foreign institutional investors held 14.23% as of September 2025, down from 15.37% in the previous quarter, indicating some profit-booking by overseas investors following the stock's strong run.
Mutual fund holdings increased to 13.82% from 13.29%, suggesting domestic institutional investors are accumulating shares despite near-term operational challenges. Insurance company holdings rose to 0.08% from nil in the previous quarter, whilst other domestic institutional investors increased their stake to 2.20% from 1.34%. The combined institutional holding of 30.33% provides reasonable liquidity and institutional validation of the bank's long-term prospects.
Non-institutional holdings, primarily retail investors, stood at 29.67%, down marginally from 30.00% in the previous quarter. The presence of 95 foreign institutional investors and 16 mutual funds indicates broad-based institutional participation, though the relatively modest absolute holdings suggest cautious positioning. Encouragingly, there is no promoter pledging, eliminating a key governance risk factor.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 40.00% | 40.00% | 40.00% | 0.00% |
| FII | 14.23% | 15.37% | 13.07% | -1.14% |
| Mutual Funds | 13.82% | 13.29% | 15.93% | +0.53% |
| Insurance | 0.08% | 0.00% | 0.00% | +0.08% |
| Other DII | 2.20% | 1.34% | 0.96% | +0.86% |
| Non-Institutional | 29.67% | 30.00% | 30.04% | -0.33% |
Stock Performance: Strong Long-Term Gains, Recent Consolidation
CSB Bank's stock has delivered impressive returns across most timeframes, significantly outperforming the broader market. Over the past year, the stock generated a 35.35% return versus the Sensex's 3.78%, delivering an alpha of 31.57 percentage points. The three-year return stands at a remarkable 84.55% compared to the Sensex's 36.85%, highlighting the stock's strong wealth creation potential for patient investors.
However, recent performance has been mixed. The stock declined 3.14% over the past three months whilst the Sensex gained 3.56%, resulting in a negative alpha of 6.70 percentage points. This underperformance coincides with concerns about CASA erosion and margin sustainability. Conversely, the six-month return of 21.46% versus the Sensex's 3.44% demonstrates resilience, with the stock delivering 18.02 percentage points of alpha.
The stock trades above all key moving averages—5-day (₹412.63), 20-day (₹403.68), 50-day (₹381.84), 100-day (₹395.50), and 200-day (₹359.49)—indicating a technically bullish setup. The current trend is classified as "Bullish" as of October 16, 2025, with MACD, RSI, and Bollinger Bands all showing bullish signals on weekly and monthly timeframes. The stock's beta of 1.35 suggests higher volatility than the market, making it suitable for risk-tolerant investors.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +2.60% | -1.18% | +3.78% |
| 1 Month | +8.72% | +1.98% | +6.74% |
| 3 Months | -3.14% | +3.56% | -6.70% |
| 6 Months | +21.46% | +3.44% | +18.02% |
| YTD | +34.40% | +6.75% | +27.65% |
| 1 Year | +35.35% | +3.78% | +31.57% |
| 3 Years | +84.55% | +36.85% | +47.70% |
Investment Thesis: Growth Potential Tempered by Execution Risks
CSB Bank presents a compelling growth story underpinned by its geographical expansion strategy, improving asset quality, and strong capital adequacy. The bank's five-year net profit growth of 66.55% and net interest income CAGR of 22.75% demonstrate its ability to scale operations effectively. With 779 branches and a growing presence outside Kerala, the bank is well-positioned to capture market share in underpenetrated geographies.
However, the investment case is complicated by structural challenges around deposit mobilisation. The 600 basis points erosion in CASA ratio over five quarters represents a significant headwind to margin sustainability. Whilst NIMs improved to 3.81% in Q2 FY26, this remains well below historical levels and could face further pressure if deposit competition intensifies. The bank's ability to reverse the CASA decline will be the single most important factor determining its future profitability trajectory.
The current Mojo score of 68/100 reflects this mixed outlook, with the advisory rating at "HOLD". The score incorporates positive factors such as healthy long-term growth, low gross NPAs of 1.84%, and high institutional holdings of 30.33%. However, concerns about flat results in June 2025 and the ongoing CASA challenges limit the upside potential. The valuation at 12.08x P/E appears fair but not compelling enough to warrant aggressive accumulation.
"CSB Bank's strong profit growth masks deeper concerns about deposit franchise quality and margin sustainability—a classic case where headline numbers don't tell the complete story."
Key Strengths & Risk Factors
KEY STRENGTHS
- Robust net profit growth of 66.55% over five years demonstrates strong earnings momentum and operational scaling
- Healthy asset quality with gross NPA at 1.84% and provision coverage ratio at 84.14%, well below industry averages
- Strong capital adequacy at 20.99% total CAR and 19.19% Tier 1 CAR provides ample buffer for growth
- High institutional holdings of 30.33% with no promoter pledging indicates governance comfort and investor confidence
- Geographical diversification strategy with 779 branches expanding beyond Kerala stronghold into Northern and Western markets
- Consistent net interest income growth of 22.75% CAGR over five years reflects core banking strength
- Reasonable valuation at 12.08x P/E compared to peer group average, providing margin of safety
KEY CONCERNS
- Sharp CASA ratio decline from 27.20% to 21.17% over five quarters indicates deteriorating deposit franchise quality
- Net interest margin compression from 5.04% to 3.81% over seven quarters raises sustainability concerns
- Return on equity of 13.32% lags behind high-quality banking franchises, limiting valuation re-rating potential
- Heavy reliance on other income (₹349.20 crores in Q2 FY26) raises questions about earnings quality and sustainability
- Small market capitalisation of ₹7,373 crores limits institutional participation and increases volatility
- Execution risks around geographical expansion into competitive Northern and Western markets
- High beta of 1.35 indicates greater volatility than broader market, unsuitable for conservative investors
Outlook: What to Watch in Coming Quarters
POSITIVE CATALYSTS
- Reversal in CASA ratio trend through enhanced retail deposit mobilisation and customer acquisition initiatives
- Sustained NIM improvement beyond 3.81% through better pricing discipline and liability management
- Acceleration in branch network expansion in high-growth Northern and Western markets driving loan book growth
- Further improvement in asset quality metrics with gross NPA declining below 1.50% and provision coverage exceeding 85%
- Enhanced cross-selling success driving fee income growth and reducing reliance on treasury operations
RED FLAGS TO MONITOR
- Further CASA ratio decline below 20% would signal severe deposit franchise deterioration and margin pressure
- Net interest margin compression below 3.50% indicating unsustainable funding cost structure
- Gross NPA ratio rising above 2.00% suggesting asset quality stress in new geographical markets
- Sequential decline in net profit growth indicating business model challenges or competitive pressures
- Foreign institutional investor stake falling below 12% signalling loss of overseas investor confidence
Investment Verdict: Hold with Cautious Monitoring
Score: 68/100
For Fresh Investors: Not recommended for fresh accumulation at current levels. Wait for either a 10-15% correction to ₹360-380 levels or clear evidence of CASA ratio stabilisation and sustained margin improvement before initiating positions. The stock offers reasonable long-term potential but near-term execution risks warrant caution.
For Existing Holders: Continue to hold with a stop-loss at ₹380 (10% downside). Monitor quarterly CASA trends closely—any decline below 20% should trigger profit-booking. Maintain position if the bank demonstrates ability to reverse deposit franchise erosion and sustain NIMs above 3.75% for two consecutive quarters.
Fair Value Estimate: ₹440-460 (4-9% upside from current levels), contingent on CASA stabilisation and NIM sustainability. The stock is fairly valued at current levels with limited margin of safety, making risk-reward unattractive for aggressive buying.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Stock prices are subject to market risks and volatility.
