CSB Bank - IPO Note
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Sector
Bank - Private
Company
Bank - Private
November 22, 2019
Sensex: 40353.08
CNX Nifty: 11903.40
NSE:
BSE:
Price range
Rs.193 - Rs.195
Issue Period
22nd November 2019 to 26th November 2019
Date
November 22, 2019
Sensex
40353.08
CNX Nifty
11903.40
Exchange
Code
NSE
BSE
Issue details
Face value (Rs.)
10
Market lot
75
Issue size
410 crore
Public Issue
Fresh Issue of Equity shares aggregating up to Rs. 24 Crore and Offer for sale of
up to 19,778,298 Equity Shares.
Market cap post IPO
3382 crore
Equity Pre - IPO
17.22 crore
Equity Post - IPO
17.34 crore
Issue type
100% Book Built offer
Shareholding (Pre IPO)
Promoters
50.09
Public
49.91
Shareholding (Post IPO)
Promoters
49.73
Public
50.27
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Strengths
Strong channel network and trusted brand in South India
CSB Bank provides products and services primarily through an extensive physical
network of branches and ATMs. It operates in 16 States and four Union Territories
in India, reaching 1.3 million customers through 414 branches (excluding three service
branches and two asset recovery branches) and 277 ATMs, as on March 31, 2019.
With over 98 years of history, the bank has developed a well-recognized and trusted brand in south India, particularly in the states of Kerala and Tamil Nadu, where it has built strong relationships, which has been one of the key growth drivers. The bank’s deposit renewal rate has increased from 88.01% as of March 31, 2017 to 93.00% as of March 31, 2018 and to 97.24% as of March 31, 2019.
Strong capital base for growth
The bank’s capital position has been significantly strengthened post FIH Mauritius
Investments Ltd (FIHMs) investment in the bank. Pursuant to a preferential allotment
of Equity Shares and warrants to FIHM, for which the bank received Rs. 7,20.75 crore
in Fiscal 2019 and the balance amount of Rs. 4,86.93 crore in Fiscal 2020, the bank
has a strong capital base for growth acceleration.
As per the Basel III Norms, the capital adequacy ratio (CRAR), as on March 31, 2019, is 16.70%. This is above the minimum prescribed CRAR of 10.875% stipulated by the RBI in the Basel III Norms. Capital augmentation post infusion of funds by FIHM helped vitalize the bank’s growth engine.
Well established SME business
CSB Bank has a strong SME client base and focuses on meeting the funding and banking
requirements of these SME customers. As a percentage of the bank’s total advances,
loans to SME customers accounted for 43%, 37%, and 32% as on March 31, 2017, March
31, 2018, and March 31, 2019, respectively. We believe that lending to SMEs enables
the bank to diversify its credit risk profile due to relatively smaller individual
exposures. As on March 31, 2019, the bank’s advances to SME customers aggregated
to Rs. 3,473.3 crore, spread across 7,529 accounts. Further, as on March 31, 2019,
working capital advances such as cash credit and overdraft facilities to its SME
customers constituted 14% of the bank’s total advances, while term loans to
SME customers constituted 18% of our total advances. SME business offers comparatively
higher yields, cross-selling and associated business opportunities, and higher degree
of secured and collateralized loans. As on March 31, 2019, 99.26% of the CSB Bank’s
SME loan portfolio is secured by tangible collateral. Lending to SMEs also helps
CSB Bank to meet its priority sector lending targets.
Retail offering driven by strong gold loan portfolio
Gold loans constituted a major portion of advances, contributing 24%, 26%, and 31%
of total advances as on March 31, 2017, March 31, 2018, and March 31, 2019, respectively.
As on March 31, 2019, bank had 522,248 gold loan accounts, with advances aggregating
to Rs. 3,333.1 crore. Apart from liquidity of the security and low probability of
credit losses, gold loan advances offer benefits of hassle-free lending and lower
operational costs. CSB Bank’s gold loan book has grown by 23% from Rs. 2,026.3
crore as on March 31, 2017 to Rs. 2,483.6 crore as on March 31, 2018 and by 34%
to Rs. 3,333.1 crore as on March 31, 2019. The bank has a dedicated team within
its retail banking business to focus on gold loan product offerings and have established
internal processes towards origination, valuation of gold being pledged as security,
and subsequent monitoring and collection from customers towards loan repayment,
including timely disposal of pledged gold to realize receivables in the event of
default.
Stable and granular deposit base
The bank’s deposit base has remained stable. During the last three Fiscals,
despite a decline in term deposits due to conscious strategy of not focusing on
such deposits, overall deposits base has remained intact and has increased from
Rs. 14,911.6 crore in Fiscal 2017 to Rs. 15,123.9 crore in Fiscal 2019, owing to
an increase in CASA deposits (CASA stands for Current Account Savings Account).
CASA ratio has improved from 24.78% in Fiscal 2017 to 27.84% in Fiscal 2019, which
has led to reduced cost of borrowings for the bank and improvement in net interest
margins in Fiscal 2019. As on March 31, 2019, retail deposits constitute 93.73%
of total term deposits and these deposits have consistently exhibited renewal patterns
of above 90%. The deposit renewal rate has increased from 88.01% as of March 31,
2017 to 93% as of March 31, 2018 and to 97.24% as of March 31, 2019.
Professional and experienced management
CSB Bank’s Key Managerial Personnel (KMP) bring substantial experience and
in-depth knowledge of banking operations and management. While some of the KMP have
been with the bank for more than 35 years, the bank has also brought in other experienced
professionals from the banking industry. We believe the bank’s management’s
capabilities, strong reputation, extensive network of industry relationships, and
wide-ranging experience in the finance and banking industry will continue to help
the bank grow, modernize, and develop further.
Streamlined risk management controls, policies and procedures
CSB Bank’ has instituted prudent risk management controls, policies, and procedures
that are critical for the long-term sustainable development of its business. It
has implemented risk management procedures for credit exposures, including credit
evaluation, credit scoring, risk-based pricing models, and risk monitoring and control
mechanisms.
A separate risk management department formulates and implements credit risk evaluation, approves risk management framework and policies, oversees the credit approval process, and periodically reviews the same so as to ensure that the business conducted is consistent with the bank’s risk appetite, with a focus on maintaining and enhancing asset quality. The bank continuously monitors its portfolios through internal control system, which includes macro level portfolio analysis, migration of credit rating analysis, and stress testing analysis.
The bank managed risk by ensuring that advances are adequately secured. As on March 31, 2017, March 31, 2018, and March 31, 2019, 95.09% (i.e. Rs. 78,659 million), 96.01% (i.e. Rs. 92,985 million), and 95.95% (i.e. Rs. 104,637 million), respectively, of its advances were secured. We believe that, efforts in strengthening risk management have improved the bank’s asset quality. Gross NPAs decreased to 4.87% as of March 31, 2019 from 7.25% as of March 31, 2017. Net NPAs decreased to 2.27% from 4.12% during the same period, while provisioning coverage ratio was 65.50%, 75.83%, and 78.16% with respect of NPAs as of March 31, 2017, March 31, 2018, and March 31, 2019 respectively.
Industry
India’s banking sector has been facing a large overhang of balance sheet stress. During 2017-18, the persisting deterioration in asset quality necessitated sharp increases in provisions and for the first time since 1993-94, the banking system as a whole, particularly driven by public sector banks (PSBs), registered losses.
The overhang of stressed assets weighed down the consolidated balance sheet of the banking sector, necessitating large provisions, which adversely affected their profitability during 2017-18. Recent data for H1:2018-19, however, indicates that the non-performing assets (NPAs) have begun to stabilize, albeit at an elevated level; capital positions have been buffered and the provision coverage ratio has improved.
The revival in credit growth in 2017-18, from the deceleration in the previous year, coupled with improving share of bank finance in the total flow of resources to the commercial sector, augurs well for the growth prospects of the banking sector. The continuing credit growth recovery in 2018-19 may further reinforce this momentum.
Risks
- The bank’s business and financial performance could suffer if it is unable
to effectively manage the level of NPAs.
For Fiscals 2017, 2018, and 2019, net NPAs were Rs. 329.48 crore, Rs. 263.78 crore, and Rs. 240.68 crore, which represented 4.12%, 2.87%, and 2.27% of our net advances respectively. Gross NPAs represented 7.25%, 7.89%, and 4.87% of total advances as on March 31, 2017, March 31, 2018, and March 31, 2019, respectively. The bank reported provisioning coverage ratio of 75.83% and 78.16% as on March 31, 2018 and March 31, 2019, respectively.
There can be no assurance that the bank will be able to contain or further reduce NPAs or that the overall quality of its loan portfolio will improve or will not deteriorate in the future. - The bank has regional concentration in southern India, especially Kerala.
Any adverse change in the economic, political, or geographical conditions of Kerala and other states in southern India can impact results of operations. Additionally, the bank may not be successful in expanding operations to other parts of India which could have an adverse effect on business, financial condition, and results of operations. - Volatility in the market price of gold may adversely affect the bank’s
financial condition, cash flows, and results of operations.
Significant portion of the bank’s loan portfolio consists of advances that are secured by gold ornaments. As on March 31, 2019, gold loans represented 31% of the total loans outstanding, while it was 24% and 26% as on March 31, 2017 and 2018, respectively. Additionally, in Fiscals 2017, 2018, and 2019, defaults in gold loan portfolio constituted 0.25%, 0.40%, and 0.12%, respectively of total gold loan portfolio for such periods. A sustained decrease in the market price of gold could cause a decrease in new gold loans in loan portfolio, and as a result, interest income.
Company Description
CSB Bank is one of the oldest private sector banks in India with a history of over 98 years and has a strong base in Kerala along with significant presence in Tamil Nadu, Karnataka, and Maharashtra. CSB Bank offers a wide range of products and services to its customer base of 1.3 million as on March 31, 2019, with focus on SME, Retail, and NRI customers. The bank delivers products and services through multiple channels, including 414 branches and 277 ATMs spread across 16 states and 4 union territories as on March 31, 2019, and various alternate channels such as micro ATMs, debit cards, internet banking, mobile banking, point of sale services and UPI. The bank believes in focusing on quality of service and nurturing long term relationship with customers. It has developed a well-recognized and trusted brand in south India, particularly in the states of Kerala and Tamil Nadu.
Profit & Loss Statement:- (Standalone)
(Rs. Crores)
| Particulars (Fig. in Rs Crores) | FY17 | FY18 | FY19 | H1 FY20 |
|---|---|---|---|---|
| Interest Income | 1336.29 | 1296.81 | 1347.52 | 732.30 |
| Interest Expended | 1022.69 | 912.00 | 907.56 | 452.78 |
| Net Interest Income | 313.60 | 384.81 | 439.96 | 279.52 |
| Other Income | 281.20 | 125.42 | 135.92 | 84.42 |
| EBIT | 594.80 | 510.23 | 575.88 | 363.94 |
| Operating expenses | 443.09 | 435.90 | 562.51 | 235.71 |
| % of NII | 141.29 | 113.28 | 127.85 | 84.33 |
| Operating Profit | 151.71 | 74.33 | 13.37 | 128.23 |
| Provisioning | 160.62 | 223.69 | 313.46 | 59.30 |
| Profit before Tax | (8.91) | (149.36) | (300.09) | 68.93 |
| Tax | (10.46) | (51.89) | (102.68) | 24.66 |
| PAT | 1.55 | (97.47) | (197.41) | 44.27 |
| % Margin | 0.12 | (7.52) | (14.65) | 6.05 |
| EPS (Rs.) | 0.19 | (12.04) | (22.98) | 3.86 |
| Gross NPA % | 7.25% | 7.89% | 4.87% | 2.86% |
| Net NPA % | 4.12% | 2.87% | 2.27% | 1.96% |
| Net Asset value (Rs.) | 67.46 | 43.68 | 73.54 | 89.19 |
Source: Stockaxis Research, Company Data
Valuation
CSB Bank has turned around in H1 FY2020, after years of losses. With legacy book issues behind us, new promoter with capital, management with execution capability, strong network with 423 branches and a trusted brand in south India, we expect bank to perform well in future.
At upper price band CSB bank is valued at 2.2x P/BV on H1 FY2020 basis, which is little expensive as compared to closest peers. Investors with high risk appetite should subscribe for the long term.
Key Information:
Use of Proceeds:
A total of 21.02 million equity shares are being offered for an aggregate amount
of Rs 409.68 crore. Of this, fresh issue constitutes 1.24 million equity shares,
while 19.78 million shares will be put on the block as offer for sale (OFS).
The objects of the Offer are to augment the bank’s Tier-I capital base to meet the bank’s future capital requirements which are expected to arise out of growth in its bank’s assets, primarily loans/advances and investment portfolio, and to ensure compliance with Basel III and other RBI guidelines. Further, the proceeds from the Offer will be used towards meeting the expenses of the Offer.
Book running lead managers:
Axis capital and IIFL securities
Management:
Madhavan Karunakaran Menon is the Part – time Chairman and a Non – executive
Director of CSB Bank. He has over 30 years of experience in the finance and banking
sector. He has previously worked with ANZ Grindlays Bank Limited, Citibank N.A.,
Emirates Bank International, Birla Capital International AMC Limited. He is currently
the chairman and managing director of Thomas Cook (India) Limited and has been on
the Bank Board since September 3, 2018.
Rajendran Chinna Veerappan is the Managing Director and Chief Executive Officer of the Bank. He previously served as the chief executive of the Association of Mutual Funds in India and is currently responsible for overall management and expansion of the bank. He has over 40 years of experience in banking and finance sector and was previously associated with Corporation Bank, Andhra Bank and Bank of Maharashtra. He has been on the Bank Board since November 24, 2016.
Sumit Maheshwari is the Non – executive Director of the Bank. He has completed the post graduate programme in management from the Indian School of Business. He has over 10 years of experience in the finance sector. Previously, he has worked with KPMG and is currently the managing director and chief executive officer of Fairbridge Capital Private Limited. He has been on the Board since September 3, 2018.
Thomas Mathew is an Independent Director of the bank. He holds a bachelor’s in commerce degree from the University of Kerala. He is a fellow member of the Institute of Chartered Accountants of India and has around 34 years of experience in the finance sector. In the past, he has worked with Lovelock & Lewes, Chartered Accountants and has served as a director on the central board of State Bank of India. He has been on our Board since April 24, 2017.
Ms. Bhama Krishnamurthy is an Independent Director of the bank. She holds a master’s degree in science from the University of Mumbai. She has over 40 years of experience in the field of banking and small-scale industry. She has served as the chief general manager of the Small Industries Development Bank of India in the past. She has been on the bank’s Board since September 3, 2018.
Mr. Aravamuthan Madhavan is an Independent Director of the bank. He holds a bachelor’s degree and a master’s degree in arts from the University of Madras. He is also a certified associate of the Indian Institute of Bankers. He has over 36 years of experience in the banking and finance sector. He has served as the director of the Bank of Rajasthan and has been in service with the Reserve Bank of India in the past and has been on the bank’s Board since December 13, 2018.
Mr. Syed Nagoor Ali Jinnah is an Independent Director of the Bank. He has completed post graduate diploma in management (agriculture) from the Indian Institute of Management, Ahmedabad. He has also completed the course of junior associate of Indian Institute of Bankers and certified associate of Indian Institute of Bankers (rural banking) from the Indian Institute of Banking and Finance. He has about 34 years of experience in agricultural and rural banking sector and has worked with NABARD in the past. He has been on the bank’s Board since March 6, 2019.