CSB Bank IPO review (May apply)

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Review By Dilip Davda on November 19, 2019

•    CSB will be a century-old bank by the time issue closes.
•    Aggressive provision resulted in a loss for FY17 to FY19.
•    Enjoys surplus capital and hence fresh issue is just for namesake.
•    All peers are trading at a very low P/Es compare to CSB's issue price.
•    The issue is aggressively priced and discounts all near term positive factors.
 
ABOUT BANK:
CSB Bank Ltd., (erstwhile known as The Catholic Syrian Bank Ltd.)  - (CSB) - is one of the oldest private sector banks in India with a history of over 98 years and have a strong base in Kerala along with a significant presence in Tamil Nadu, Karnataka, and Maharashtra. It offers a wide range of products and services to an overall customer base of 1.3 million as of September 30, 2019, with a particular focus on SME, Retail, and NRI customers. CSB delivers its products and services through multiple channels, including 412 branches (excluding three service branches and three asset recovery branches) and 290 ATMs spread across 16 states and four union territories as on September 30, 2019, and various alternate channels such as micro ATMs, debit cards, internet banking, mobile banking, point of sale services and UPI. It believes with focus on the 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. CSB Bank enters in 100th year on 26.11.19.
 
While CSB has a long operating history as a traditional bank, it currently focusing on the implementation of strategic changes in its business model to function efficiently as a full-service new age private sector bank backed by new marquee investor - FIHM, its Promoter. To this end, the bank is re-aligning its organizational set-up for efficiently driving operations and business strategy, wherein branches will be responsible only for deposits, cross-selling and customer servicing and all loan products will be driven by dedicated teams, with each business team operating as a profit centre.
 
It is in the process of rebranding itself to 'CSB Bank Limited' to address region and community-related perceptional issues associated with its previous brand name. CSB has four principal business areas, namely, (a) SME banking, (b) retail banking, (c) wholesale banking, and (d) treasury operations. As on September 30, 2019, CSB had a network of 412 branches (excluding three service and three asset recovery branches) and 290 ATMs. Out of these 412 branches, 64 branches are in metropolitan areas, 86 branches are in urban areas, 220 branches are in semi-urban areas, and 42 branches are in rural areas. Further, as on September 30, 2019, it had organized all its branches under eight zonal offices.
 
ISSUE DETAILS/CAPITAL HISTORY:
To part finance bank's future capital requirement (Rs. 24 cr.) and providing an exit route to PE investors, CSB is finally coming out with a maiden IPO via book building route to mobilize Rs. 405.72  cr. - Rs. 409.68 cr. (based on lower and upper price bands). The issue comprises of fresh equity issue worth Rs. 24 cr. (approx 1230750 shares) and offer for sale (OFS) of 19778298 equity shares of Rs. 10 each. It has fixed a price band of Rs. 193 - Rs. 195 per share. The issue opens for subscription on 22.11.19 and will close on 26.11.19. Minimum application is to be made for 75 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE/NSE. CSB has allocated 75% for QIBs, 15% for HNIs and 10% for Retail Investors.
 

Having issued initial equity at par till 1993, CSB raised further equity in the price range of Rs. 32 to Rs. 190 during January 1999 - August 2019 period.  It also did ESOP of 5000000 shares at par in July 2019. It also underwent in forfeiture of shares due to unpaid calls and thus did many adjustments in equity capital during these periods.
 
As on the date of filing RHP (i.e. 13th Nov. 2019) promoter (FIH Mauritius Investments Ltd. - FIHM) is holding 50.09% (86262976 equity shares) of the bank. The average cost of acquisition of shares by the promoters i.e. FIHM is Rs. 140 per share while for selling stake holders it ranges from Rs. 83.98 to Rs. 255.86 (refer page 21 of RHP). Post issue, CSB's current paid-up equity capital of Rs. 172.28 cr. will stand enhanced to Rs. 173.51 cr. Issue constitutes 12.11% of the post issue paid-up equity capital of the bank. Post issue FIHM's holding will come down to around 49.75%.
 
CSB is issuing fresh equity just for namesake but the major portion is secondary issue i.e. OFS to provide an exit to certain stakeholders and listing of IPO as per RBI directives while taking permission for 51% stake by FIHM. As the time limit given for this was 30.09.19, CSB requested an extension which was granted till 31.12.19 and hence this issue is coming.  According to management, the bank has opted for higher provisioning that stipulated by RBI and has done balance sheet cleaning exercises for the last three fiscals that have resulted in losses. As maximum provision is done, it could clock in net profit for the first half and is poised for better prospects ahead. However, all these positive factors are discounted in its aggressive pricing.
 
The issue is jointly lead managed by Axis Capital Ltd. and IIFL Securities Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.
 
FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CSB has posted a total income/net profit (loss) of Rs. 1617.50 cr. / Rs. (57.99) cr. (FY17), Rs. 1422.27 cr. / Rs. (127.09) cr. (FY18) and Rs. 1483.43 cr. / Rs. (65.69) cr. (FY19). For the first half-year of FY20, it has posted a net profit of Rs. 44.27 cr. on a total income of Rs. 816.71 cr.
 
For the last three fiscals, CSB has posted an average EPS/RoNW of Rs. - (10.46) / - (17.12%) and on the basis of post-conversion of warrants issued Rs. - (4.93) / - (5.49%). For the first half of FY20, these data show EPS of Rs. 3.86 and RoNW of 2.88%.   Thanks to the kitty of share premium that has largely helped CSB to show positive book value. The issue is priced at a P/BV of 2.19 based on the post-conversion equity NAV of Rs. 89.19 as on 30.09.19. Based on the last three fiscals' average negative EPS and negative RoNW, the issue is at a negative P/E against the industry average of 18.8. If we annualize its FY20 earnings and attribute it on fully diluted post issue equity, then asking price is at a P/E of around 38+ making it an aggressively priced offer.
 
Its gross NPAs decreased to 4.87% as of March 31, 2019, from 7.25% as of March 31, 2017. As on 30.09.19, it's gross NPAs was 2.86%. The net NPAs decreased to 2.27% as of March 31, 2019, from 4.12% as of March 31, 2017, and its net NPAs was 1.96% as of September 30, 2019, while its provisioning coverage ratio was 65.50%, 75.83%, 78.16% and 79.45 % in respect of NPAs (including technical write-offs) as of March 31, 2017, March 31, 2018, March 31, 2019, and September 30, 2019, respectively.
 
The net interest margin increased from 2.11% in Fiscal 2017 to 2.80% in Fiscal 2019 primarily on account of reduction in its cost of funds and increase in credit to deposit ratio. Further, its net interest margin was 3.43% for the six months ended September 30, 2019.
 
Under a preferential allotment of Equity Shares and warrants to FIHM, CSB received Rs. 720.53 cr. in Fiscal 2019 and the balance amount of Rs. 486.93 cr. in the second quarter of Fiscal 2020, which made it well-capitalized and improved its capital adequacy ratio (including capital conservation buffer), as per Basel III Norms, from 10.93% as of March 31, 2017, to 16.70% as of March 31, 2019.

Its current loan book consists of 33% gold loans, 32% SME Loans, 28% corporate loans and 8% retail loans, It is now putting major thrust for Gold, Retail and SME loans.
 
COMPARISION WITH LISTED PEERS:
As per offer documents, CSB has shown DCB Bank, Federal Bank, S I Bank, City Union Bank and Karur Vysya Bank as its listed peers that are currently trading at a P/Es of around 15.6, 11.6, 6.6, 21.6  and 20.8  (as on 19.11.19).
 
On a total branch tally aspect CSB currently has 412 branches versus DCB Bank (361), Federal Bank (1300), S I Bank (949), City Union (632) and Karur Vysya (844).
 
MERCHANT BANKER'S TRACK RECORDS:
On merchant banker's front two lead managers associated with this offer have handled 33  issues in the last three fiscals (including the ongoing fiscal), out of which 15 issues closed below the issue price on listing date.

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