CSB: Life Beyond Gold Customers

YOU NEED TO BUILD PILLARS before you construct a strong edifice, says CSB Bank MD & CEO Pralay Mondal, who is in the middle of turning around the bank. CSB turned profitable in FY20 after years of losses; one big reason was infusion of ₹1,200 crore by Canadian billionaire Prem Watsa's Fairfax Financial Holdings in phases starting 2018.

"I have seen how businesses are built. We are focussing on building blocks first. Once that happens, scale-up gets much easier. If you aim at aggressive growth without building blocks, one of the pillars may shake and you will lose," says Mondal. The bank — born in 1920 as Catholic Syrian Bank at Thrissur in Kerala — is focusing on granularities over aggressive growth. Net profit jumped from ₹13 crore in FY20 to ₹547 crore in FY23.

Prep to Scale Up

The bank has put in place a new leadership team, including CXO-level talent, for different verticals. It wants to on-board people with experience of handling large operations who can take it on path to scalability.

The first step in the journey is customer acquisition and expanding relationships. "Most of our customers are gold-loan customers. They are important but we cannot cross-sell to them. The future of banks is a good liability franchise. It helps in asset liability management. We are adding non-gold loan customers. In parallel, we need right processes and products. We have created a separate vertical whose job is to look after branch service quality," says Mondal.

How does the bank plan to acquire customers? "Branch service is not the best at most banks. There is always space to acquire customers who are unhappy with their banks. Our bank branches are less crowded, so it gives us an advantage," says Mondal.

A key focus area will be SMEs where the bank is adopting the tried and tested model of connecting with trade associations, exchanges and communities. "Trust and word of mouth work with SME customers. We have identified top 20 branches and next 40 branches for acquiring SME customers. One plus with SMEs is that their hubs are well-defined. You get one customer right and he will recommend you to others," says Mondal. The bank plans to open at least 100 branches in FY24.

Technology is another focus area. CSB Bank has invested heavily in technology that will enable it to roll out APIs in 24 hours to expedite fintech partnerships. API (application programming interface) allows fintech players to plug into the bank's system and offer digital services. CSB says it has invested in technology enhancements, lending systems, liability systems, payments, channels and core systems. "This year our major investments will be on technology, distribution, people and channels. We plan to become a pan-India bank. More than 60% of our new branches will open in North and West regions." The bank is digitising most operations and converting branches into sales and service rather than operation outlets. "Cash and lockers will continue at physical branches. The rest will get digitised," says Mondal.

These investments may increase operating and capital expenditure, say some analysts. "CSB's opex and capex are rising. These, along with rising interest rates, will impact costs. In such a situation, yield on advances becomes very important; else, profit margins would be impacted," HDFC Securities has cautioned in its report on the bank.

Gold Is Not All That Glitters

Gold loans comprise a major chunk of the bank's portfolio. This makes the bank vulnerable to concentration risk. Hence, it is making efforts to grow its non-gold portfolio. Strong growth in non-gold loan portfolio was the highlight of Q4FY23 earnings, says Nuvama Wealth, a brokerage. Non-gold portfolio grew 16% YoY and 12% QoQ. "It was the fastest sequential growth in at least last four fiscals. For the first time in past five quarters, these loans accounted for over 50% of incremental sequential credit. Corporate, retail and SME grew 10%, 18% and 9%, respectively, QoQ," says Nuvama.

CSB wants to reduce the percentage of gold in overall portfolio. Gold loans recorded 48% growth YoY and 10% QoQ in Q4 of FY23. "Right now our portfolio mix is 40% gold, 12-13% SME and 30% wholesale. We aim to achieve 20% gold, 30% retail, 20% SME and 30% wholesale and other products by FY25-30. This will be achieved without losing momentum on gold," says CSB Bank. Nuvama notes that slippages remain benign due to higher share of gold loans in the lending mix. "The impact of slippages on NPAs was more than offset by recoveries and upgrades of ₹39 crore and write-offs of ₹4 crore, resulting in 19 bps/7bps QoQ improvement in GNPA/NNPA ratio to 1.26%/0.35% in Q4FY23," it has said in a report. The bank's other income to total income ratio improved significantly, thanks to wealth management and fee-based businesses.

Stake Sale

Fairfax Group had acquired a 50.09% stake at ₹140 per share in 2018. The bank came out with its IPO in 2019, in which the promoter group's stake was reduced to 49.7%. As per RBI regulations, the holding has to come down to 26% over a period of 15 years starting 2018. "The period (during which Fairfax cannot sell its stake) is supposed to end in 2023. However, we do not expect promoters to sell their stake in the near future. Instead, based on growth in advances, the bank could go for an FPO, bringing down Fairfax's stake. We do not rule out the possibility of partial exit for Fairfax in secondary market over medium term," says HDFC Securities.

There are reports that Fairfax (promoter) is interested in buying a majority stake in IDBI Bank. "If that is the case, Fairfax must either sell a stake in CSB Bank or merge both entities. The bids for disinvestment in IDBI would open shortly. This remains an overhang on the stock price," says HDFC Securities.

Mondal is not concerned. "Ownership matters are between Fairfax and RBI. We are focused on our job. Our real story will play out from FY25-26, when our consistent efforts to build pillars will compound into a long-term growth story. It will make us stronger," says Mondal.