Stock Fundamentals

CSB Bank IPO: Should you subscribe?

Radhika Merwin | Updated on November 21, 2019 Published on November 21, 2019

Amid the ongoing challenges in the banking sector, the initial public offering (IPO) of CSB Bank (formerly known as Catholic Syrian Bank) lends little comfort. Kerala-based CSB Bank is one of the oldest private sector banks, with a focus on SME, gold loans and an NRI client base.

The bank moved into the black in the first half of the current fiscal, and its capital position got a boost in FY19 and this fiscal from the ₹1,200-crore investment by FIH Mauritius Investments (FIHM) — a wholly owned subsidiary of Fairfax India Holdings Corporation— at ₹140 per share.

The bank transforming into a new age bank under the aegis of its new investor (Fairfax), streamlining its high cost structure and re-aligning business strategy can pay off over the long run, but it may still be early days to bet on a sustainable turnaround story. Weak operational performance over the past three fiscals (net losses) and high regional concentration remain key dampeners.

Also, while the bank’s earnings may get a fillip due to moderation in provisioning (the bank has made accelerated provisioning in the past, according to the management), additional investments in technology, branding etc, could keep costs high, weighing on earnings. Besides, as of September 2019, about 57 per cent of SME exposure is BBB and below rated, which needs a watch. The bank also has a notable exposure to the NBFC/HFC sector.

The asking price of the issue diminishes the appeal further. The IPO is a combination of fresh issue of up to ₹24 crore and offer for sale of 1.978 crore shares. At the upper band of the issue price of ₹193-195, CSB Bank is valued at about 2.1 times its September 2019 book value (post-issue), which is expensive. Large private sector banks ICICI Bank and Axis Bank trade at 2.7-2.8 times. Other smaller players such as Federal Bank trades at about 1.2 times, while South Indian Bank and Karnataka Bank trade at about 0.5 times their book.

Investors can, therefore, give the issue a miss.

Business mix

The growth and performance of CSB Bank was impacted in the past owing to low capital and higher operating costs. The bank reduced its focus on the SME segment to conserve capital and instead increased exposure to gold loans and larger corporates with high credit ratings. Hence, from about 43 per cent in FY17, the share of SME loans in the bank’s total gross loans fell to around 32 per cent in FY19 and further to 29 per cent as of September 2019. The share of wholesale loans moved up to 24 per cent as of September 2019 from just 13 per cent in FY17.

Within retail, while the bank offers a range of products, gold loans constitute about 71 per cent of retail loans (up from 55.7 per cent in FY17). Between FY17 and FY19, the bank’s overall gross loans grew by about 15 per cent CAGR — led by growth in gold loans (28 per cent CAGR) and wholesale (52 per cent) loans. SME, retail and wholesale loans contribute about 30 per cent, 46 per cent and 24 per cent, respectively, to the bank’s overall loans as of September 2019.

Weak past performance

High operating costs, shift to low-yielding loans and bad loan provisioning had led to losses during the past three fiscals. The bank’s cost-to- income ratio had increased from 74.5 per cent in FY17 to 97 per cent in FY19; as of September 2019, the ratio stood at 71.5 per cent. To bring down costs and improve productivity, the bank has been revamping its employee base and streamlining people cost structure. It has also reduced its term deposit rates and increased focus on low-cost CASA (current and savings account) deposits.

While this has led to a fall in cost of funds, whether the bank is able to draw significant benefits hereon needs to be seen, given the industry-wide challenge on garnering CASA deposits. NRI deposits (constituting 24.5 per cent of the total deposits), which have been a stable source of funding, have also grown by a modest 3 per cent CAGR over the past three fiscals. The transformation under way, involving re-alignment in business strategy, investment in digital/technology and expansion of reach, among others, could entail higher costs, even as employee cost moderates.

CSB Bank’s capital ratios had deteriorated in the past, which impacted its ability to grow. The bank’s total CRAR (capital- to-risk- asset ratio) stood at 8.33 per cent as of March 2018 (including capital conservation buffer), compared with the mandated requirement of 10.875 per cent. With FIHM investing into the bank — infusing ₹720 crore in FY19 and about ₹487 crore in the second quarter of FY20 — the CRAR improved substantially to 16.7 per cent and 22.7 per cent in FY19 and as of September 2019, respectively.

This should aid growth. However, high operating costs and possible weakness in asset quality could keep earnings under pressure. CSB Bank’s gross NPAs stood at 7.3 per cent in FY17, which came down sharply to 4.9 per cent in FY19 and further to 2.9 per cent in September. Provision cover, too, is healthy at about 79 per cent.

But the bank’s bad loan book at ₹326 crore and slippages at ₹85 crore in 1HFY20 are still notable. Importantly, the bank had taken a huge write-off of ₹300 crore in FY19 and another ₹215 crore in H1FY20, which led to lower bad loan book. Going ahead, slippages and write-offs will need a close watch.

CSB Bank carries a high regional concentration risk. Of its 412 branches, 267 are located in Kerala and 56 are in Tamil Nadu. About 67 per cent of deposits are from Kerala and 12 per cent from Tamil Nadu. In terms of advances, 29 per cent and 25 per cent are from Kerala and Tamil Nadu, respectively.

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Published on November 21, 2019
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