| CSB Bank Limited | ||||||
| 'CRISIL A/Stable' assigned to Tier II Bonds (Under Basel III) | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A/Stable’ rating to Rs 500 crore Tier II Bonds (under Basel III) and has reaffirmed other ratings at ‘CRISIL A1+’ for Certificate of Deposits programme and Short-term Fixed Deposit programme of CSB Bank Limited (CSB Bank).
The rating centrally reflects the current healthy capitalisation levels along with commitment of support from Fairfax, in case of exigency. The rating also factors in the stable deposit profile and experienced management team. These strengths are partially offset by the modest, albeit improving, earnings profile, lack of track record in the new non-gold loan book and modest scale of operations.
CSB Bank had witnessed multiple challenges from 2014 to 2018 with asset quality metrics peaking at 7.89% as on March 31, 2018 primarily owing to slippages from the SME (small and medium enterprises) portfolio. Consequently, Fairfax had infused capital in the company and became the single largest shareholder in 2018. The bank had a change in the management with the appointment of the current managing director, Mr C VR Rajendran, in 2016 and other senior management team since 2014 onwards. The management team, post capital infusion, had cushion in the metrics to initiate the cleanup in the bank. The bank had also clearly outlined its growth focus areas and has also narrowed down on sectors for operations with gold loans being the preferred segment. The growth in fiscal 2021, was driven by the growth in the gold loans portfolio of the bank which continued to constitute around 40% of the advances as on March 31, 2021. As on March 31, 2021, the bank’s gross advances stood at Rs 15,388 crores, almost 25.7% growth over March 31, 2020 (Rs 12,240 crores). With the re-opening of the economic activities, other segments too are expected to contribute to growth going forward, nevertheless, Gold Loans will continue to remain bulk of the portfolio.
On the asset quality front, the gross NPA metrics for the bank stood at 2.68% as on March 31, 2021 as against proforma GNPA at 3.4% as on December 31, 2020(3.5% as on March 31, 2020). A bulk of the accounts which could have slipped to an NPA category without the Supreme Court order, were from the Gold loans portfolio, most of which was subsequently recovered during the last quarter. In the past, the gross NPA (GNPA) metrics for the bank was mainly on account of deterioration in the SME book owing to demonetisation as well as a few fraud cases. However, the management had taken considerable steps in the cleanup of the portfolio. Not only GNPA, even the stressed accounts remains comfortable and controlled for the bank. Even in terms of restructuring, the bank has only restructured around Rs 97.76 crores till March 31, 2021 (post moratorium), the same is expected to be controlled. Nevertheless, sustainability of asset quality metrics as the bank scales up its portfolio, especially in the non-gold loans book, remains a key monitorable going forward.
The improvement in the asset quality metrics and the clean-up exercise being done in the previous years coupled with increase in share of gold loans which enjoy higher spreads has led to improvement in the earnings profile for fiscal 2021. The bank reported profits for fiscal 2021, with a return on assets of 1.0% as compared to marginal profits in fiscal 2020. This comes despite CRISIL Ratings adjusted Provisioning coverage ratio improving to 57% as on March 31, 2021 from 47% as on March 31, 2020. Consequently, the credit costs for the bank increased to 1.5% for fiscal 2021 as against around 1% for fiscal 2020 including the aggressive provisioning towards Covid. While operating expenses could be high over the medium term as the bank plans to recruit additional manpower especially sales team as well as continues to open new branches, the sustainability in the improvement in the earnings profile hinges upon the control over credit costs which remains a key monitorable going forward.
The deposit base for the bank remains stable and fairly sticky. The total deposits for the bank improved to Rs 19140 crores as on March 31, 2021 as against Rs 15791 crores as on March 31, 2020 with CASA improving to 32.2% from 29.2%. Being a community linked bank previously, it has created a brand name among NRIs (non-resident Indians) in the South region which has provided steady inflow and stability to its deposit base. The bank also benefits substantially from a sticky and large NRI deposit base which too has remained stable. Deposit renewal rate over the past five fiscals has remained at above 85%. The average cost of deposits also remains competitive at 4.94% for fiscal 2021.
The bank maintains a comfortable liquidity. It runs a very conservative ALM (asset liability management) policy with no negative cumulative gaps upto 1 year in the ALM as on March 31, 2021. It had around 3.79%excess SLR (statutory liquidity ratio). As on March 31, 2021, liquidity coverage ratio for the bank stood at 210%. |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profile of CSB Bank. |
Key Rating Drivers & Detailed Description Strengths:
Over the past five years, CSB Bank has witnessed multiple challenges amid deteriorating asset quality metrics which had consequently eroded networth and capitalisation metrics. During fiscals 2014-18, the asset quality metrics peaked at 7.89%[1] as on March 31, 2018 primarily owing to slippages from the SME (small and medium enterprises) portfolio. This had resulted in the bank reporting losses due to higher provisioning and consequent deterioration of capitalisation metrics, with CET 1 ratio dropping to 9.45% and overall capital adequacy ratio (CAR) at 9.91% against the regulatory requirement (overall CAR inclusive of CCB) of 10.785% as on March 31, 2018.
However, Fairfax, via its company, FIH Mauritius Investments Ltd, took over 51% stake in the bank in October 2018 by infusing around Rs 1,208 crore as primary equity. This capital came in three tranches: two tranches totalling Rs 721 crore in fiscal 2019 and the remaining Rs 487 crore in fiscal 2020. As a part of the approval from Reserve Bank of India (RBI) to allow Fairfax to have 51% stake in the bank, the bank was to list its shares. Eventually, the bank concluded its IPO in December 2019. Fairfax held around 49.72% as on March 31, 2021, and will have to reduce its stake to 15% over a period of 15 years as per the existing regulatory requirement. CRISIL Ratings believes CSB Bank's capital profile benefits from Fairfax's stance that it will extend support as and when required and RBI will not object to Fairfax's support in a distress situation. Further, the bank also has sufficient headroom to shore up the capital ratios by raising additional Tier 1 and Tier II debt capital. Currently, the Tier-1 ratio at 19.96% as of March 31, 2021 constitutes the majority of the capital adequacy ratios for the bank with overall CAR at 21.37%. Fairfax, if required can also support the bank by investing in its Tier 1 and Tier II debt as well.
Capitalisation metrics are healthy with Tier 1 and overall CAR at 19.96% and 21.37%, respectively, as on March 31, 2021, against 9.45% and 9.91%, respectively, as on March 31, 2018. With substantial improvement in networth, the bank now has adequate cushion against asset-side risks with networth to net non-performing assets (NPA) of 12.9 times as on March 31, 2021 compared to 2.1 times as on March 31, 2018.
The deposit base for the bank remains stable and fairly sticky. The total deposits for the bank improved to Rs 19140 crores as on March 31, 2021 as against Rs 15791 crores as on March 31, 2020 with CASA improving to 32.2% from 29.2%. Being a community linked bank previously, it has created a brand name among NRIs (non-resident Indians) in the South region which has provided steady inflow and stability to its deposit base. The bank also benefits substantially from a sticky and large NRI deposit base which too has remained stable. Deposit renewal rate over the past five fiscals has remained at above 85%. The stability is also reflected in the fact that in the past the bank had also reduced its term deposit rates , in line with the market trends, which has helped in reducing the cost of funds and not yet faced any withdrawal pressure. The average cost of deposits also remains competitive at 4.94% for fiscal 2021 with savings accounts at an average of 2.23%.
After significant deterioration in performance, the bank decided to change its management and appointed Mr. C VR Rajendran as the MD & CEO in November 2016. He has over 40 years of experience in the banking and finance sector and was previously associated with Corporation Bank, Andhra Bank and Bank of Maharashtra. He has also served as the chief executive of the Association of Mutual Funds in India. Since his appointment, the bank had initiated the cleanup of the book and recognised the accounts as NPA and adopted an accelerated provisioning policy. In June 2020, the Bank also appointed Mr Pralay Mondal to lead the retail banking initiatives at the Bank. Mr Mondal has around 30 years of retail banking leadership experience with HDFC Bank, Yes Bank and Axis Bank. Majority of the senior management has experience of more than 20 years in the banking domain. The bank has also started hiring mid- and low -level experienced staff for different verticals, thereby strengthening its entire team.
Weaknesses:
The bank had a change in the management with the appointment of the current managing director, Mr C VR Rajendran, in 2016 and other senior management team since 2014 onwards. The management team, post capital infusion, had cushion in the metrics to initiate the cleanup in the bank. In the past, the gross NPA (GNPA) metrics for the bank was mainly on account of deterioration in the SME book owing to demonetisation as well as a few fraud cases. However, the management has taken considerable steps in the cleanup of the portfolio. The gross NPA metrics for the bank stood at 2.68% as on March 31, 2021 as against proforma GNPA which stood at 3.4% as on December 31, 2020 and reported GNPA of 3.5% as on March 31, 2020.. A bulk of the accounts which could have slipped to an NPA category without the Supreme Court order, were from the Gold loans portfolio most of which was subsequently recovered during the last quarter. In the past, the gross NPA (GNPA) metrics for the bank was mainly on account of deterioration in the SME book owing to demonetisation as well as a few fraud cases. However, the management had taken considerable steps in the cleanup of the portfolio. Not only GNPA, even the stressed accounts remains comfortable and controlled for the bank. Even in terms of restructuring, the bank has only restructured around Rs 97.76 crores till March 31, 2021 (post moratorium), the same is expected to be controlled. Nevertheless, sustainability of asset quality metrics as the bank scales up its portfolio, especially in the non-gold loans book, remains a key monitorable going forward.
The improvement in the asset quality metrics and the clean-up exercise being done in the previous years coupled with increase in share of gold loans which enjoy higher spreads has led to improvement in the earnings profile for fiscal 2021. The bank reported profits for fiscal 2021, with a return on assets of 1.0% as compared to marginal profits in fiscal 2020. This comes despite CRISIL Ratings adjusted Provisioning coverage ratio improving to 57% as on March 31, 2021 from 47% as on March 31, 2020. Consequently, the credit costs for the bank increased to 1.5% for fiscal 2021 as against around 1% for fiscal 2020 including the aggressive provisioning towards Covid. While operating expenses could be high over the medium term as the bank plans to recruit additional manpower especially sales team as well as continues to open new branches, the sustainability in the improvement in the earnings profile hinges upon the control over credit costs which remains a key monitorable going forward.
Post the issues seen in the past, the bank has clearly outlined its growth focus areas and has also narrowed down on sectors for operations with gold loans being the preferred segment. The bank’s scale of operation, as reflected in deposits and advances still remains small with Rs 19140 crore and Rs 15388 crore respectively, as on March 31, 2021, accounting for a small share of around 0.1% of deposits and advances in the banking system. The bank concentration in Kerala continues to remain high. [1] As per restated financials in the Draft Red Herring Prospectus. |
Liquidity: Strong It runs a very conservative ALM (asset liability management) policy with no negative cumulative gaps upto 1 year in the ALM as on March 31, 2021. The bank had around 3.79% excess SLR (statutory liquidity ratio) and the liquidity coverage ratio for the bank stood at 210% as on March 31, 2021. |
Outlook: Stable CRISIL believes CSB Bank’s capitalisation will remain adequate to meet its business growth and manage its asset-quality related risk |
Rating Sensitivity factors Upward factors
Downward factors
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About the Bank CSB Bank (formerly The Catholic Syrian Bank Ltd) is an old private sector bank in India with a history of over 100 years and with strong base in Kerala along with significant presence in Tamil Nadu, Karnataka, and Maharashtra. The bank offers a wide range of products and services with particular focus on SME, corporate, retail, and NRI customers. The bank had 512 branches (excluding three service branches and three asset recovery branches) and 318 ATMs spread across 16 states and four Union Territories as on March 31, 2021.
In October 2018, the bank partnered with the Toronto-based Fairfax group, which infused around Rs.1208 crore for 51% stake. Fairfax held around 49.72% as on March 31, 2021, and will have to reduce its stake to 15% over 15 years as per the existing regulatory requirement. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Yet to be issue |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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