The initial public offering of CSB Bank, formerly known as Catholic Syrian Bank, has opened for subscription today, with a price band of Rs 193- 195 per share. At the higher end of the price band, the CSB Bank IPO aims to raise around Rs 410 crore. The IPO closes on November 26.
CSB Bank IPO comprises a fresh issue of shares of face value Rs 10 each with an aim to raise Rs 24 crore and an offer for sale (OFS) of 1.97 crore shares worth Rs 385 crore by existing investors. Following the fresh issue of shares, promoter entity Fairfax India Holdings' stake in CSB Bank will fall to 49.73 percent from the present 50.09 percent.
CSB Bank, which is one of the oldest private sector banks with a history of over 98 years, has a strong base in Kerala along with a significant presence in Tamil Nadu and Karnataka. It has a network of 412 branches across 16 States and 4 Union Territories, with 13 lakh customer base.
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Most brokerages advise 'subscribe' for the issue as it has a strong channel network and is a trusted brand in South India. The bank also has a strong capital base for growth and a well established SME business and most of its retail offerings are driven by strong gold demand, they said.
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In FY19, FIHM acquired a 50.1 percent stake in CSB for Rs 1,200 crore which significantly strengthened CSB’s capital base. During FY17-FY19, the loan book grew at 15 percent CAGR impacted due to low capital levels. However, post the capital infusion, the tier-1 has sharply improved to 22.8 percent, which would drive loan growth.
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Post the acquisition by the Fairfax group, the realigned operational strategy has helped the company to report profits in H1FY20. The company is focused to improve profitability and growth going ahead. We believe that given the strong promoter backing and turnaround in profitability, the investor can subscribe to the IPO for listing gains.
CSB’s performance has not been encouraging in the past with a rise in NPA level. However, a new promoter and strong management bring capital and execution strength on the table which bodes well for future growth as well as earnings. Therefore, the brokerage assigns a 'subscribe' recommendation to the stock.
The bank has done reasonably well in its first phase of transformation over the past 2-3 years, reducing the influence of unions, rationalizing branches and turning it from a capital-starved bank into a capital-excess bank after onboarding investor-cum-promoter Fairfax.
At the upper price band of Rs 195, the CSB IPO is priced at valuations of 2.4x Sep’19 adjusted book value for a sub-par RoA/RoE of 0.5 percent/3 percent compared to some of its close peers such as South Indian Bank and Federal Bank that are trading in the range of 0.6 percent to 1.4 percent.
The bank’s capital position has been significantly strengthened post FIHM’s investment in the Bank. Pursuant to a preferential allotment of equity shares and warrants to FIHM, for which the bank has received ₹721cr in Fiscal 2019 and the balance amount of Rs 487 crore in Fiscal 2020, CSB Bank has a strong capital base for growth acceleration, something which the bank was not able to accomplish in past due to paucity of capital.
CSB Bank has a credible pedigree post the Fairfax India Holdings acquiring the majority stake in the bank. The asset quality is showing an improving trend and CSB successfully turned its operations in the last six months and with healthy capitalization levels, the long term prospects look promising. At the upper end of the price band, the issue priced at 2.17x FY19 post issue book value.
Here are the key risks and concerns that analysts say might hamper the company.: Geographical concentration acts as risk: concentration in southern India, and specifically in Kerala, exposes it to many adverse economic, natural and political circumstances in the region compared to other public and private sector banks that have a more diversified national presence. An increase in NPA may impact earnings: As of September 30, 2019, GNPA and NNPA were at Rs 326 crore and Rs 222 crore, respectively. However, the GNPA and NNPA ratios declined to 2.86 percent and 1.96 percent from 7.89 percent and 2.87 percent in FY18, respectively, led by higher write-off and improving recovery. Going ahead, a continued slowdown in the economy, movements in global commodity markets along with a sharp and sustained
rise in interest rates could also negatively impact asset quality
Volatility in gold prices may impact financials: CSB’s significant loan portfolio (31 percent of advances) consists of advances that are secured by gold ornaments. A sudden decline in the market price of gold may adversely affect CSB's financial condition, cash flows and earnings. Execution Risk: The biggest risk for the stock is the future execution of the management strategy. Failure to abide by it could impact financial performance which in turn could erode value for shareholders.
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