Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1+’ ratings on the debt instruments of of CSB Bank Limited (CSB Bank).

 

The ratings continue to reflect the 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 earnings profile, lack of track record in the new non-gold loan book and modest scale of operations.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of CSB Bank.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation levels along with commitment of support from Fairfax, in case of exigency: Capitalization remains healthy with Tier-1 capital ratio at 23.10%, which constitutes majority of the capital adequacy ratio for the bank with overall CAR at 24.47%, as of March 31, 2024.

 

Fairfax, via its company, FIH Mauritius Investments Ltd holds 49.72% stake as on March 31, 2024 in the paid up capital of the Bank, which is subject to dilution schedule as mandated by Reserve Bank of India and relevant RBI guidelines.

 

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. Fairfax, if required, can also support the bank by investing in its Tier 1 and Tier II debt as well. The overall CAR is also supported by benefit of lower risk weights on gold loans. Going ahead as the proportion of non-gold loans is expected to increase, capital ratios are expected to reduce from current levels, albeit is expected to continue to remain comfortable.

 

• Stable resource profile: The deposit base for the bank remains stable and fairly sticky. The total deposits for the bank improved to Rs 29,719 crores as on March 31, 2024, as against Rs 24,506 crores as on March 31, 2023.

 

CASA share of the bank stood at 27.20% for fiscal 2024 as compared to 32.18% for fiscal 2023. CASA ratio has declined for many banks in general due to stronger demand for credit and increased preference for term deposits.

 

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 5.35% for fiscal 2024 with savings accounts at an average cost of 2.93%.

 

Bank has added 76 branches in fiscal 2024 and plans to open 60 to 75 branches during current fiscal. Incrementally, the bank is planning to open branches outside of South India and increase its presence in other geographies within the country. The Bank also plans to open specialized branches to cater to HNI’s and SME’s across the country. As the Bank now scales up outside Kerala, the ability to garner pace in deposit growth commensurate with advances growth will be a key imperative.

 

• Experienced management: The bank has experienced personnel across different leadership positions. Mr. Pralay Mondal, the MD and CEO of the bank, has around 30 years of retail banking leadership experience with HDFC Bank, Yes Bank and Axis Bank.

 

Mr. B.K. Divakara, the Executive Director of the bank has around 38 years of experience in the areas of credit, treasury, risk management, internal audit, finance, HR and Operations. He was earlier the Executive Director in Central Bank of India and prior to that he was holding a very senior position in Corporation Bank.

 

Mr. Satish Gundewar, the CFO of the bank has around 28 years of experience in the areas of finance, taxation, strategic planning, portfolio management, risk management and treasury. He was earlier associated with DCB Bank Ltd., Yes Bank Ltd., and Standard Chartered Bank in various capacities.

 

Majority of the senior management has experience of more than 20 years in the banking domain. The bank has also been hiring mid- and low -level experienced staff for different verticals, thereby strengthening its entire team. The bank should continue to benefit from seasoned professionals having varied experience across their respective fields.

 

Weaknesses:

• Lack of track record in the new non-gold loan book with modest scale of operations: The bank’s scale of operation, as reflected in deposits and advances, stands at Rs 29,719 crore and Rs 24,572 crore respectively, as on March 31, 2024. While it has grown at 21.3% and 17.9% respectively in fiscal 2024, the scale remains small with it accounting for a share of around 0.15% of deposits and advances in the banking system.

 

Though the bank concentration in Kerala is gradually coming down, it continues to remain high at 35%. Overall, the loan book continued to be marked by 48% share of gold loans followed by corporate loans share of 24%, retail loans of 17% and SME loans of 11%, as of March 31, 2024. Going forward company plans to increase the scale of non-gold book across secured segments like, Home Loans, Auto loans, MSME, CV/CE amongst others.

 

The gross NPA metrics for the bank stood at 1.47% as on March 31, 2024, as against GNPA of 1.26% as on March 31, 2023. Nevertheless, sustainability of asset quality metrics as the bank scales up its portfolio, especially in the non-gold loans book and ability of the bank to keep incremental slippages under control while scaling up its portfolio remains a key monitorable going forward.

 

• Modest earnings profile: The return on assets has moderated to 1.79% in fiscal 2024 as compared to 2.06 % for fiscal 2023, because of high operating costs. The Operating cost (as a percentage of average total assets) stood at 3.9% during fiscal 2024 as compared to 3.5% in fiscal 2023. Operating expenses remained elevated due to increased investments in technology, people, distribution etc.

 

Net Interest Margin (NIM) of the bank stood at 5.09% for fiscal 2024 as compared to 5.48% for fiscal 2023. NIM compressions were observed due to increase in cost of funds, which was a general trend observed for all the banks.

 

While operating expenses is expected to continue to remain high over the medium term as the bank plans to recruit additional manpower, and make investments on the technology front as well as continue 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.

Liquidity: Strong

The bank maintains a strong liquidity. The ALM (asset liability management) has no negative cumulative gaps up to 1 year in the ALM as on March 31, 2024. As on March 31, 2024, liquidity coverage ratio (average) for the bank stood at 117%.

 

ESG Profile

CRISIL Ratings believes that CSB’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 CSB has an ongoing focus on strengthening various aspects of its ESG profile.

 

CSB’s key ESG highlights:

• ESG disclosures of the bank are evolving and Bank is in the process of further strengthening the disclosures going forward
• CSB bank has put in place policy not to finance borrowers for setting up new units producing Ozone Depleting Substances (ODS) and manufacturing aerosol units using Chlorofluorocarbons (CFC).
• The company’s gender diversity (31%) is higher compared to peers, and its priority sector lending above regulatory norms. Attrition rate is an improvement area, with a high attrition rate of ~ 47% reported in fiscal 2024.
• The bank has increased its exposure to socially beneficial sector such as agriculture and Micro finance Institutions (approximately 6% of current portfolio)
• Its governance structure is characterized by 60% of its board comprising of independent directors, ~30% being woman board directors and split in Chairman and CEO positions. Further Bank has an independent chairperson and has extensive financial disclosure.

 

There is growing importance of ESG among investors and lenders. CSB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes that CSB Bank’s capitalisation will remain adequate to meet its business growth and manage its asset-quality related risk.

Rating Sensitivity factors

Upward factors:

• Substantial scale-up of operations while maintaining asset quality with GNPA being under 3%
• Track record of profitably scaling up non-gold loan book

 

Downside 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.
• Weakening in capital position with significant deterioration in the CET 1 ratio

About the Company

CSB Bank is an old private sector bank with a history of over 100 years and operating out of 779 branches. The business is concentrated in Kerala (~35% branches) with remaining spread mainly across Tamil Nadu, Andhra, Karnataka, and Maharashtra.

 

The Bank faced deterioration in capital position prior to 2017 and hence decided to bring in a partner and raise capital. In second half of 2018 the Bank partnered with Toronto-based Fairfax who would invest Rs. 1208 crore for a 51% stake in the bank. It is the first time the Reserve Bank of India (RBI) had allowed a foreign firm to take a majority interest in a local lender. At the same time, the RBI told Bank that it should list its shares before 30 September 2019. Eventually, the bank concluded its IPO in December 2019; post which the promoter entity FIH Mauritius Investments Ltd (FIHM), continues to hold 49.72 % stake in the paid up capital of the Bank, which is subject to dilution schedule as mandated by Reserve Bank of India and relevant RBI guidelines.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Tier II Bonds (Under Basel III)*	NA	NA	NA	500	Simple	CRISIL A/Stable
NA	Short Term Fixed Deposit	NA	NA	NA	2000	Simple	CRISIL A1+
NA	Certificate of Deposit	NA	NA	7 to 365 Days	2000	Simple	CRISIL A1+

*Yet to be issued