98-year-old CSB Bank’s ride to D-Street

The initial public offering (IPO) of CSB Bank, formerly Catholic Syrian Bank, opened for subscription on Friday. The Kerala-based bank hopes to raise ₹410 crore from the listing. The offer, which will be open until November 26, includes a fresh issue of shares to mop up close to ₹24 crore, and an offer for sale of 19.7 million shares to raise Rs 385 crore. The price band has been fixed at ₹193- ₹195.

The well-capitalised CSB Bank is listing its shares mainly to comply with regulatory norms. The Reserve Bank of India (RBI) requires the promoter group to reduce its stake to 40% in five years, to 30% in 10 years, and to 15% in 15 years. Fairfax India, strategic investor and promoter, owns 50.1% stake in the private lender and will not tender shares in the IPO. However, Fairfax would be required to dilute its stake to 15% over 15 years to meet the RBI regulations.

CSB Bank, one of India’s oldest private banks, has four core business areas: SME banking, retail banking, wholesale banking, and treasury operations. Analysts say the bank has a strong channel network, and is a trusted brand in South India. Thanks to Fairfax’s investment, the lender has a strong capital base and its capital to risky asset ratio (CRAR) in September 2019 stood at 22.77%, one of the best in the banking industry.

Deval Shah of Kotak Securities notes that the bank has a well established SME business, and its retail loans are driven by a strong gold loans portfolio. Shah adds that a professional management, coupled with an independent board, will allow CSB Bank to streamline risk management controls for its credit exposures for long-term sustainable business development.

One key aspect of CSB Bank’s strategy will be its ability to convince investors of its transformation as a new-age private bank. Analysts point out that the lender has set up a specialised SME team to ramp up its assets business and focus on SME, agriculture, and retail loan growth. Also, recovery of bad loans to improve asset quality is also a key focus area for the lender.

“The bank has done reasonably well in the first phase of transformation over the past two-three years,” says Anand Dama of Emkay Global. “However, we believe that the second phase of the transformational journey to take the bank to a new growth phase will be challenging, particularly given the current stressed scenario and rising competitive intensity,” he adds.

Dama notes at the upper end of the price band of ₹195 a share, the IPO is priced at 2.4x compared to some of its close peers like South Indian Bank and Federal Bank, which are currently trading between 0.6x and 1.4x. Also, while better margins helped CSB Bank return to profitability in the first six months of the current financial year, its return ratios have been sub-par, according to analysts.

Sneha Poddar, research analyst at Motilal Oswal, highlights regional concentration in southern India—at 67% of deposits and 32% of advances—as a concern, as adverse economic and political changes can impact the business. Poddar also says the bank’s high exposure to gold loans is a key risk factor. “As of September 2019, gold loans contributed 33% to CSB’s total loans. Hence, any sharp volatility in gold prices can impact the financials or cash flows of the company,” she says.

Several analysts recommend investors to wait for price discovery before taking an investment decision. “At the upper end of the price band, CSB Bank demands adjusted PB [price-to-book] multiple of 2.4x of Q2, FY20 adjusted book value, which we believe is expensive, considering the investment concerns. Similar banks are trading at a lower valuation than CSB, and have better return ratio,” says Angel Broking in a note to investors.

However, some analysts are betting on the new promoter and strong management. “CSB’s performance has not been encouraging in the past with a rise in NPA (non-performing assets) level. However, new promoter and strong management bring capital and execution strength to the table, which bodes well for future growth as well as earnings. Therefore, we assign a ’subscribe’ recommendation to the stock. Further, at a price band of ₹193-195, the stock is available at a price-to-book value of about 2.2 times at the upper band on H1, FY20 basis,” notes an ICICI Securities report.

“In recent years, its growth was constrained by low capital adequacy and higher operating costs, which adversely impacted its financial performance. However, in the last three fiscals—from fiscal 2017 to fiscal 2019—CSB Bank has improved its growth by focussing on better yield loan products with low risk. Therefore, the surplus funds parked in investments were redeployed to advances with particular focus on gold loans and corporate advances to entities with high credit ratings which have low-risk weights to minimise capital consumption,” HDFC Securities said.