Detailed Rationale

CRISIL has reaffirmed its ‘CRISIL A1+’ rating to Rs 2000 crore Certificate of Deposits programme and Rs 2000 crore 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 the first nine months ended December 31, 2020, was driven by the growth in the gold loans portfolio of the bank which continued to constitute over 40% of the advances as on December 31, 2020. As on December 31, 2020, the bank’s gross advances stood at Rs 14,055 crores, almost 20% 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 improved to 1.8% as on December 31, 2020 as against 3.5% as on March 31, 2020. Without the Supreme Court directive, the pro-forma GNPA for the bank would have stood at 3.4% as on December 31, 2020. A bulk of the accounts which would have slipped to an NPA category without the Supreme Court order, are from the Gold loans portfolio. CRISIL Ratings understands that the management has managed to recover from most of these accounts and therefore, eventual slippage to NPA category would be limited.  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 13 crores till December 31, 2020 (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 the nine months ended December 31, 2020. The bank reported profits in the nine months ended December 31, 2020, with a return on assets of 1.1% (annualised) as compared to marginal profits in fiscal 2020. This comes despite CRISIL adjusted Provisioning coverage ratio improving to 62% as on December 31, 2020 from 47% as on March 31, 2020. Consequently, the credit costs for the bank increased to 1.6% (annualised) for the nine months ended December 31, 2020 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 provides for optional employee expenses 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 17753 crores as on December 31, 2020 as against Rs 15791 crores as on March 31, 2020 with CASA improving to 30.4% 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 5.18% for the nine months ended December 31, 2020.

 

The bank maintains a comfortable liquidity. It runs a very conservative ALM (asset liability management) policy with no negative cumulative gaps in the ALM as on December 31, 2020. It had around 2.17% excess SLR (statutory liquidity ratio). As on December 31, 2020, liquidity coverage ratio for the bank stood at 200%.

Analytical Approach

CRISIL has evaluated the standalone business and financial risk profile of CSB Bank.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation levels along with commitment of support from Fairfax, in case of exigency.

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 49.74% as on December 31, 2019, and will have to reduce its stake to 15% over a period of 15 years as per the existing regulatory requirement. CRISIL 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 19.77% as of December 31, 2020 constitutes the majority of the capital adequacy ratios for the bank with overall CAR at 21.02%. 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 19.77% and 21.02%, respectively, as on December 31, 2020, 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 24 times as on December 31, 2020 compared to 2.1 times as on March 31, 2018.

 

• Stable resource profile

The deposit base for the bank has remained stable and fairly sticky. The total deposits for the bank improved to Rs 17753 crores as on December 31, 2020 as against Rs 15791 crores as on March 31, 2020 with CASA improving to 30.4% 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 which has helped in reducing the cost of funds and yet not yet faced any withdrawal pressure. The average cost of deposits also remains competitive at 5.18% for the nine months ended December 31, 2020 with savings accounts at an average of 2.73%.

 

• Experienced management

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:

• Lack of track record in the new non-gold loan book

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 improved to 1.8% as on December 31, 2020 as against 3.5% as on March 31, 2020. Without the Supreme Court directive, the pro-forma GNPA for the bank would have stood at 3.4% as on December 31, 2020. A bulk of the accounts which would have slipped to an NPA category without the Supreme Court order, are from the Gold loans portfolio. CRISIL Ratings understands that the management has managed to recover from most of these accounts and therefore, eventual slippage to NPA category would be limited.  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 13 crores till December 31, 2020 (Post moratorium), the same is expected to be controlled.

 

Amidst the pandemic and its consequent impact on the economic environment, the growth in advances was driven by Gold loans portfolio in the nine months ended December 31, 2020. With the re-opening of the economic activities, other segments too are expected to contribute to growth going forward, with retail and SME being the focus segments over the medium term. Therefore, sustainability of the asset quality metrics as the book scales up remains a key monitorable. 

 

• Modest, albeit improving, earnings profile

With improvement in the asset quality metrics and the clean-up exercise being done in the previous years, the earnings profile has improved in the nine months ended December 31, 2020. The bank reported profits in the nine months ended December 31, 2020, with a return on assets of 1.1% (annualised) as compared to marginal profits in fiscal 2020. This comes despite CRISIL adjusted Provisioning coverage ratio improving to 62% as on December 31, 2020 from 47% as on March 31, 2020. Consequently, the credit costs for the bank increased to 1.6% (annualised) for the nine months ended December 31, 2020 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 provides for optional employee expenses 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.

 

• Modest scale of operations

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 17753 crore and Rs 14,055 crore respectively, as on December 31, 2020, 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 in the ALM as on December 31, 2020. The bank had around 2.17% excess SLR (statutory liquidity ratio) and the liquidity coverage ratio for the bank stood at 200% as on December 31, 2020.

Rating Sensitivity factors

Downward factors:

• Significant deterioration in asset quality evidenced by GNPAs increasing to beyond 5% and translating into pressure on earnings and capitalisation metrics.
• Any pressure on the deposit profile with deposit outflows.

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 454 branches (excluding three service branches and two asset recovery branches) and 319 ATMs spread across 16 states and four Union Territories as on December 31, 2020.

 

In October 2018, the bank partnered with the Toronto-based Fairfax group, which infused around Rs.1208 crore for 51% stake. Fairfax held around 49.73% as on December 31, 2019, and will have to reduce its stake to 15% over 15 years as per the existing regulatory requirement.

Key Financial Indicators

As on / for the period ended/for the year ended		December 31, 2020	March 31, 2020	March 31, 2019
Total assets	Rs crore	21497	18864	16911
Total income (net of interest expenses)	Rs crore	954	814	575
Profit after tax	Rs crore	176	12.7	(197)
Gross NPA	%	1.8	3.5	4.9
Overall capital adequacy ratio	%	21.0	22.5	16.7
Return on assets	%	1.1	0.1	-1.2

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating assigned  with Outlook
NA	Short Term Fixed Deposits	NA	NA	NA	2000	Simple	CRISIL A1+
NA	Certificate of Deposits	NA	NA	7 to 365 Days	2000	Simple	CRISIL A1+