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CSB Bank IPO: All You Need To Know

CSB Bank will launch its three-day initial public offering tomorrow as the lender looks to meet its regulatory requirements.

CSB Bank Ltd. Managing Director and Chief Executive Officer CV Rajendran at the announcement of the initial public offering of CSB Bank Ltd. (Source: CSB Bank Ltd.)
CSB Bank Ltd. Managing Director and Chief Executive Officer CV Rajendran at the announcement of the initial public offering of CSB Bank Ltd. (Source: CSB Bank Ltd.)

CSB Bank, formerly known as Catholic Syrian Bank, will launch its three-day initial public offering on Friday as the private lender looks to meet its regulatory requirements.

The lender had to list by September, in line with Reserve Bank of India’s regulations, but said earlier this week the process was delayed due to procedural issues.

The Canadian billionaire Prem Watsa-backed bank aims to raise a total of Rs 410 crore through issue of fresh shares worth up to Rs 24 crore and an offer-for-sale of 1.97 crore shares by existing investors at Rs 193-195 apiece. Its existing investors include HDFC Standard Life Insurance Co. Ltd., ICICI Lombard General Insurance Co. Ltd., ICICI Prudential Life Insurance Company Ltd. and The Federal Bank Ltd.

The lender mopped up Rs 184 crore by allotting shares to 24 anchor investors at Rs 195 apiece. ICICI Prudential Mutual Fund, SBI Mutual Fund, Aditya Birla Sun Life Trustee, Axis Mutual Fund, Sundaram Mutual Fund, HSBC and Ashoka India Opportunities Fund were among the anchor investors.

CSB Bank’s strategic investor-cum-promoter, Fairfax India Holdings–Mauritius, which holds a near-51 percent stake, isn’t tendering any shares in the IPO, though its stake will reduce marginally to 49.73 percent after the issuance of fresh shares. Fairfax India, however, will have to pare its stake to 15 percent in the next decade and a half. The central bank, last year, accorded its approval to Fairfax India through its Mauritius subsidiary to acquire the stake, resulting in infusion of Rs 1,208 crore.

In the offering, 75 percent of the shares is reserved for qualified institutional buyers, 15 percent for non-institutional buyers and 10 percent for retail investors. Based on its share price-band, the lender will be valued at Rs 3,348-3,382 crore after the IPO.

Business And Financials

CSB is one of India’s oldest private banks with a 98-year history and has a strong base in Kerala, along with significant presence in Tamil Nadu, Karnataka and Maharashtra. The bank primarily focuses on small businesses, retail and NRI customers and has four main areas of operations—SME banking, retail banking, wholesale banking and treasury operations. As of Sept. 30, CSB Bank has a network of 412 branches and 290 ATMs across 16 states and four union territories.

Around 80 percent of its branches are in Kerala and Tamil Nadu, the bank said at an analyst meet. Kerala contributes 65 percent of its total liabilities and 20 percent of total assets.

The lender caters to financial institutions, agriculture and allied businesses, and vendors and dealers of corporates under its SME banking segment. Under its retail banking business, it offers loan and deposit products to retail and NRI customers. The retail portfolio is driven by gold loans, which forms 33.17 percent of its total advances as of June. CSB Bank also caters to large and mid-sized corporates and other businesses (with credit requirement of Rs 25 crore and above) under its wholesale banking segment. Its treasury operations comprises statutory reserves management, asset liability management, liquidity management, among other activities.

The bank, which faced problems including those related to employee unions, weak asset quality and capital levels, transformed after the induction of CV Rajendran as chief executive officer and managing director, who also facilitated the on-boarding of Fairfax.

Its capital position has since strengthened significantly. CSB Bank’s tier-1 ratio and capital adequacy ratio stood at 22.11 percent and 22.77 percent, respectively as on Sept. 30. The bank has reduced its cost-to-income ratio to 71 percent from over 100 percent three years ago, Rajendran said at an analyst meet this week. He attributed the high cost-to income ratio to staff costs which forms nearly 65 percent of its total operating expenditure.

And it has been working on cutting costs. “The current management has done the course correction in the bank by reducing the influence of unions/religious institutions, retiring unproductive staff via VRS/CRS and cutting the NPAs by high write-offs, and has now embarked upon the next leg of journey,” Emkay Research said in a report. “It has been laterally hiring various business/vertical heads from large private banks and has introduced improved products and processes on assets/liability side to gradually transform it into a new-age bank.”

The lender’s non-performing assets declined in the past three years even as its provisioning coverage ratio rose on the back of write-offs, resulting in losses. The bank posted a profit in the first half of the ongoing fiscal led by better margins, lower provisions and lower staff expenses. Staff expenses fell to 64.5 percent of the total operating expenses as of June compared with 66 percent at the end of March 2017.

Valuations

Although the return ratios of CSB Bank seem lesser in comparison with its peers, it commands a higher valuation in terms of its price-to-adjusted book value ratio.

Key Risks

According to Kotak Securities, IIFL and Emkay Research, some of key risks for CSB Bank include:

  • Significant increase in impaired loans or deterioration in quality of assets that the bank holds as security
  • Regional concentration in southern India, especially Kerala.
  • Concerns remain about its corporate/SME portfolio, particularly in the current stressed environment and its sub-par non-technical provisions coverage ratio (32 percent), which will keep credit cost higher and thus remain a drag on return on assets.
  • Managing unions and retaining/acquiring external professional talent.

At a recent conference, the bank said that it will focus on growing SME loans, gold loans and personal loan portfolio and corporate lending will reduce. It also said it’s working on revamping employee base, realigning the organisation setup and transitioning towards digital channels.