With 33 per cent of the bank’s book comprising gold loans and 68 per cent business coming from Kerala, the bank has a higher concentration risk than any other private banks in the listed space
Kerala-based CSB Bank, formerly known as Catholic Syrian Bank, has announced the details of its Rs 410 crore initial public offering. The CSB Bank IPO comprises a fresh equity issue and an offer for sale of existing investors.
CSB Bank, one of the oldest private sector banks in India with a history of over 98 years, is backed by Fairfax India Holdings through FIH Mauritius Investments. As on September 30, the bank has 412 branches and serves 1.3 million customers.
The CSB Bank IPO will open for subscription on November 22 and will close on November 26. The IPO has a price band of Rs 193-Rs 195 per share, with an aim to raise Rs 410 crores at the higher end of the price range.
Financial Performance
For the six months ending September 2019, the bank logged a cumulative net profit of Rs 44.27 crore. It, however, had reported net loss of Rs 66 crores, and Rs 127 crores in FY19 and FY18 respectively. The bank’s revenue at the end of H1FY20 was Rs 816 crores, and total assets stood at Rs 17,323 crores.
Why should you be cautious?
Nearly 60 per cent of the bank’s portfolio is made of SME and secured gold ornaments. The improvement in business performance has primarily been driven by gold loans while the SME book has contracted.
Though the gold loan book grew by a CAGR of around 28 per cent in FY17-FY19, the bank will find it difficult to maintain this momentum going forward on account of increasing competition.
Furthermore, a little over 30 per cent of the bank’s advances are secured by gold ornaments. A sudden decline in the price of gold could adversely affect CSB's financial condition as the bank may not be able to realise the full value of its pledged gold.
Below investment grade SME loan book stood at 59 per cent and corporate loan book at 27 per cent, further raising doubts over the quality of the bank’s loan book
At the higher price band of Rs.195/share, the bank will be valued at an adjusted price to book multiple of 2.4x. This would be a significant premium to the valuation of banks like Karur Vysya Bank (1.0x), Karnataka Bank (0.5x) and Federal bank (1.4x) that operate in the same geography. Given the high concentration risk and steep valuations, investors would be advised to be cautious before participating in the bank’s IPO.
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