“Avoid” To CSB BANK Aggressively Priced Nov 21 2019 Salient features of the IPO: • CSB Bank Limited (CSB), incorporated on Nov 20’ 1920, is one of the Recommendation Avoid oldest private sector banks in India • The bank offering a wide range of products and services to overall Price Band (per share) Rs193-195 customer base of 1.3 million as on Sep 30, 2019, with particular focus on SME, Retail, and NRI customers. Face Value Rs10 • As of H1FY20, business size of the bank stood at Rs268 bn. Valuation : At the higher price band of Rs195, CSB’s share is valued at Shares for fresh issue 1.2 mn P/ABV multiple of 2.4(x) (to its post issue Sep’19 adjusted BVPS). Shares for OFS 19.8 mn Below are few key observations of the issue: Fresh issue size Rs240 mn • While the operations expanded to 16 states and four union territories, business of the bank is much skewed towards Kerala as Total Issue Size 267 branches out of 412 (~65%) are located in this particular state. Rs4,096.8 mn Thereby CSB, (erstwhile known as the Catholic Syrian Bank Ltd.) is a (on Higher Price Band) South India based regional bank. Bidding Date Nov 22, 2019 - Nov 26, 2019 • New mgmt, which came in 2016, is currently implementing strategic changes in business model to function efficiently. Since then, the MCAP on Higher Price Rs33,823.9 mn bank has been focusing more on gold and SME loans which are high Band yielding and comparatively less risky. High exposure to gold loans and decline in slippage turned bank into the profit in H1FY20. • Advances book stood at Rs113 bn as of H1FY20, out of which gold (Rs37.8 bn) and SME (Rs33.6 bn) accounted for 63% of book. NIM Book Running Lead Axis Capital Limited, IIFL improved to 2.8% in FY19 and 3.43% in H1FY20 mainly driven by Manager Securities Ltd. expansion in gold loan book having yield of ~12.5%. While the mgmt emphasized more on gold and SME loans and also stated continued focus on these segments, low yielding high risky wholesale advances grew by a CAGR of 52.2% during FY17-19 compared to (-) 0.9% CAGR in SME. Thereby, we expect NIM will be remained checked. Registrar Link Intime India Private Limited • Avg. ticket size of gold loan is Rs60,000 which attracts the risk weight of 50%. The mgmt strategically choose to focus on gold loans Industry Banking given the capital constraints. After Rs12 bn capital infusion by Fairfax India through FIHM in FY19 & Q2FY20, CAR surged to 22.8% which the mgmt consider enough to sustain growth for the next three years. Allocation detail • Share of CASA stood at 28.2% by H1FY20 in line with the other regional peers. Meanwhile, it would remain difficult for mgmt to Qualified Institutional Investors (QIBs) 75% increase the share to 40% given the larger share of branches to one particular state. C/I ratio stood at 71.5% in H1FY20, while it Non Institutional Investors (NII) 15% remained way higher than industry peers, the mgmt emphasized to reduce it to industry level through reducing employee costs. Retail Individual Investors (RII) 10% • CSB is the regional bank because 65% of the total branches is located in Kerala state making the business sensitive to a one Pre and post issue shareholding pattern particular state. Regional banks remains unable to derive higher Pre - Issue Post – Issue valuation due to constrained business activity like low CASA ratio, weak margin & fee income growth and higher risk if some Promoter and Promoter 50.1% 49.7% unforeseen events like natural calamities happens to business Group dominant state. Exceptional is City Union Bank driving higher valuation (P/ABV of 3x) which is justified by its strong profitability Non- promoter 49.9% 50.3% trend, higher margin and above 15% of RoE. In case of CSB Bank, it Total 100.0% 100.0% is too early to assume higher valuation (>2P/ABVx) with post issue FY20E RoE of ~6.8%. Retail Application Money at Higher Cut-Off Price per Lot • Improvement in business performance has been mainly driven by gold loans while the SME book witnessed contraction. Though gold loan book grew by a CAGR of 28.3% in FY17-FY19, it is difficult to Number of Shares per Lot 75 sustain such high growth because of high competition in gold financing segment particular in south India where the old age Application Money Rs14,625 players like Muthoot Finance and Manappuram Finance among others are active at their full capacity. GNPA/NNPA reduced from Research Analyst 7.25%/4.12% in FY17 to 2.86%/ 1.96% in H1FY20. Below BBB rated SME book stood at 59% and corporate at 27%, thus raising doubt Satish Kumar Sharma over stability in slippage trend. At the higher price band of 195/sh, the demanded valuation at Rs33,824 mn is valued at P/ABV multiple of 2.4(x) (to its post issue Sep’19 adjusted BVPS of Rs81), factoring Desk Phone - 022 - 6707 9999; Ext: 913 all positive developments. At 2.4x, CSB is valued premium to Karur Vysya Bank (1.0x), Karnataka Bank (0.5x), Federal bank (1.4x). e mail: [email protected] Considering the above factors, we assign ‘Avoid’ rating to the issue. © CHOICE INSTITUTIONAL RESEARCH1 About the issue: • CSB is coming up with an initial public offering (IPO) with 1.2 mn shares as a fresh issue and 19.8 mn shares as offer • for sale (OFS). FIH Mauritius Investments Ltd, is the single largest shareholder in the bank. Post IPO, promoter holding will dip marginally to 49.7% from 50.1%. Promoter, Prem Watsa owned FIHM, is not selling stake in firm and marginal dilution in stake due to new equity raise. • The issue will open on 22th Nov 2019 and close on 26th Nov 2019. Post allotment, shares will be listed on BSE and NSE. • Not less than 75% of the issue will be allocated to qualified institutional buyers (QIB). Further, not more than 15% of the issue will be available for non-institutional bidders (NII) and not more than 10% for retail investors. • Total issue size is Rs4,096.8 mn on higher price band out of which ~94% is OFS. • Average cost of share acquisition of promoter is Rs140 per share. • The company will receive Rs240 mn as a fresh issue . The company proposes to utilize the net proceeds from the fresh issue to augment bank’s Tier-I capital base to meet bank’s future capital requirements which are expected to arise out of growth to ensure compliance with Basel III and other RBI guidelines. Pre and post issue shareholding pattern Pre - Issue Post - Issue Promoter and Promoter Group 50.1% 49.7% Public* 49.9% 50.3% Total 100.0% 100.0% * - Public includes employee trusts Source: Choice Broking Research, Company data, RHP Offer Closes on Unblocking of Listing on Stock 26-Nov-2019 ASBA Account Exchanges 3-Dec-2019 4-Dec-2019 Offer Opens on Finalization of 22-Nov-2019 Basis of Credit to Demat Allotment Accounts 2-Dec-2019 3-Dec-2019 Source: Choice Broking Research, Company data, RHP 2 Company Introduction: CSB Bank Limited (CSB), incorporated on Nov 20’ 1920, is one of the oldest private sector banks in India offering a wide range of products and services to overall customer base of 1.3 million (mn) as on Sep 30, 2019, with particular focus on SME, Retail, and NRI customers. While the business activities expanded to 16 states and four union territories, business is much skewed towards Kerala as 267 branches out of 412 (~65%) of bank located in this particular state. Thereby CSB, (erstwhile known as The Catholic Syrian Bank Ltd.) is a south based regional bank. Larger share of the remained branches includes Maharashtra, Tamil nadu and Karnataka. Our of 412 branches, 267 branches located in semi-urban and rural region. Business Overview: As of H1FY20, business size of the bank stood at Rs268 bn. Advances book of the bank stood at Rs113 bn and deposits at Rs155 bn with credit-to-deposits (C/D) ratio at 72.8%. Advances book grew at a CAGR of 15.2% during FY17-FY19 as compared to 0.7% CAGR in deposits. CSB has four principal business areas namely (a) SME banking, (b) retail banking, (c) wholesale banking, and (d) treasury operations. Source: Choice Broking Research, Company data, RHP Under SME banking business, the bank caters to financial institutions, agriculture and allied businesses, and vendors and dealers of corporates through offer a wide range of products including term loans, working capital loans, invoice/bill discounting, letters of credit and bank guarantees. SME lending enables it to diversify credit risk due to relatively smaller individual exposures. On the other hand, SME business compared to other businesses offers higher yields, cross-selling, and associated business opportunities. Before extending SME loans, the bank conduct assessment of borrowers’ business, cash-flows, repayment capacity and security mainly tangible security. As on Sep 30, 2019, the SME loan book of CSB was Rs33.6 bn which accounts for around 29.5% of the advances book spreading across 7,534 accounts, implying an average ticket size of approximately Rs4.5 mn, respectively. Compared to SME book of Rs35.4 bn, the growth has contracted in subsequent years due to cautious lending approach in difficult macro environment post demonetization and GST implementation and focus on low risk weighted products due to capital constraint and improving quality of SME exposures by lending to SMEs with higher credit rating.