Avoid CSB Bank: Choice Equity Broking

November 21
15:33 2019

Choice Equity Broking’s IPO report on CSB Bank

While the operations expanded to 16 states and four union territories, business of the bank is much skewed towards Kerala as 267 branches out of 412 (~65%) are located in this particular state. Thereby CSB, (erstwhile known as the Catholic Syrian Bank Ltd.) is a South India based regional bank. • New mgmt, which came in 2016, is currently implementing strategic changes in business model to function efficiently. Since then, the bank has been focusing more on gold and SME loans which are high 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 improved to 2.8% in FY19 and 3.43% in H1FY20 mainly driven by 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.

Valuation and Outlook

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 sustain such high growth because of high competition in gold financing segment particular in south India where the old age players like Muthoot Finance and Manappuram Finance among others are active at their full capacity. GNPA/NNPA reduced from 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 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 all positive developments. At 2.4x, CSB is valued premium to Karur Vysya Bank (1.0x), Karnataka Bank (0.5x), Federal bank (1.4x). Considering the above factors, we assign ‘Avoid’ rating to the issue.

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