Top 5 facts to consider before investing in CSB IPO

Thinking of investing in CSB bank ltd IPO (Previously Catholic Syrian Bank ). Well, this is what you need to know -

IPO details -

About the company

CSB Bank Ltd. (Formerly known as Catholic Syrian Bank) was incorporated on 26th November, 1920. It is a private sector bank with a strong base in Kerala along with a significant presence in Tamil Nadu, Karnataka, and Maharashtra. It has a customer base of 1.3 million as on March 31, 2019, with particular focus on SME, retail, and NRI customers. Currently the bank has 414 branches and 277 ATMs spread across 16 states and four union territories as on March 31, 2019, and various alternate channels such as micro ATMs, debit cards, internet banking, mobile banking, point of sale services, and UPI.

Loan book segregation is as under -

Top 5 facts to consider before investing -

1) As you can see from above table that a major part of the growth in last 3 years have been from the wholesale segment which is 52% CAGR from FY17-FY19. SME Advances is flat over these years while the retail segment is growing at 16% CAGR. Wholesale segment has been proved risky historically. ICICI bank, yes bank, RBL bank and IndusInd bank all have been victims of the wholesale book in the past. The growth momentum can also be seen in the advances to various other NBFC’s which is 18.15% of total advances.

2) CSB bank has total 412 branches out of which ~65% branches are in Kerala, this denotes strong hold of CSB in Kerala however the same comes with concentration risk in a single state. This exposes the bank to unknown geographical conditions (like 2016 water crises) and political risks

3) Along with 65% state concentration, there is also high level of customer exposure. Top 20 customers contribute 15.5% of the total advances. Few of these accounts have been restructured in the past.

4) Though the management has been changed and the single largest promoter is now Fairfax Holdings (promoted by Mr. Prem Vatsa). though CSB’s operating matrix is improving from ROA to -0.36% to +0.43% and reduction in NPA from 7.25% to 2.86%, NIM from 2.11% to 3.43%, the same is still on a lower side and a lot of operating efficiencies with better underwriting and risk diversification is needed.

5) The IPO price is at a valuation of 2.7x P/B which seems expensive in terms of valuation due to the operating inefficiencies and risks associated. CSB is aiming to add 425 new branches in next 5 yrs. However, moving to a national level bank from a state level bank, a firm needs to be first effective on the state level to replicate the same on the national level as each region comes with different set of opportunities. A rapid expansion might further deteriorate the operating ratios.

Thank you

Team Equialpha

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