CSB Bank IPO: Why lender may ride the Street and be its dark horse

If one attaches importance to its past performance, the initial public offering (IPO) of CSB Bank (formerly Catholic Syrian Bank) is clearly a no-go zone. However, if an investor is willing to heap praises on the bank for its course correction, then the bank offers an interesting and different proposition.

With 33 per cent of its book comprising gold loans and 68 per cent business coming from Kerala, the bank has a concentration no other listed private bank has. CSB could be termed as a ‘gold loan offering bank’. Even if gold loans don’t strike as a major retail loan offering, they carry a very minuscule default rate. Given that this is an asset-based business value, which is appreciating, unlike vehicle loans, the non-performing assets ratio (NPA) for the industry is pegged at 0.3 per cent. CSB claims its NPA ratio in this segment is far more negligible (at 0.01 per cent), making it a compelling factor for investors.


Yet, gross NPA for the first half of FY20 (H1FY20) stood at 2.9 per cent. A reason might be that CSB is coughing up for some of its past mistakes.

The lender was no exception from 2010–2013, when most banks got greedy on big-ticket loans and saw their bad loans mount.

However, the gross NPA ratio falling from 7.9 per cent in FY17 to current levels is evidence that many of its past errors are being rectified. 

Consequently, cost-to-income ratio at 71.54 per cent in H1FY20 falling from 97.68 per cent two years ago substantiates this factor. Despite its asset quality mess, the bank touched a net interest margin of 3.4 per cent during this period. This indicates the strength of its core gold loan business.

 
Another comforting factor is the management’s approach to diversification. While the bank has limited presence (less than 5 per cent each) on segments such as loan against property, home loans and vehicle loans, it plans to ramp up disbursals in these segments and introduce new products as it gets its skill-sets right. This indicates that the bank may not repeat its past mistakes, and is also testimony to its cautious approach.

A compelling aspect is having the Prem Watsa-backed private equity firm — Fairfax — as its promoter. The IPO is as part of Fairfax having to mandatorily list the bank. With 22.77 per cent capital adequacy ratio, CSB is adequately capitalised, even without the IPO. Fairfax’s stake is expected to reduce from 51 per cent to 49 per cent post the IPO, as most of the offering is an offer for sale by some investors.

Risk factors

CSB’s core strength is its concentration in Kerala and gold loans, which could also turn into its weakness in times of adversity. Therefore, while the bank prefers to remain cautious on growth, reducing the concentration factor within a reasonable time frame is important. While efficiencies are improving, at the current levels, CSB’s cost-to-income ratio is the highest among listed comparable peers, which clock a figure ranging 50 – 60 per cent. It is possible that with the bank expanding into new geographies, this number may not reduce much in the near-term.

Valuation

At a price band of Rs 193-195 a share, CSB trades at around 2x its FY20 estimated book value. Compared to peers such as Federal Bank and Karur Vysya Bank, its nearest competitor, the asking rate is high, considering how its financials are at the moment. 

Yet, Siddharth Purohit of SMC Capital says the IPO is worth considering given its cautious stance, ability to play on its core strengths and healthy capital adequacy. “Given the current state of economy, these aspects are very important,” he says.



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