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 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.

Analytical Approach

CRISIL Ratings 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

During FY 2015 to FY 2019, CSB Bank witnessed multiple challenges amid deteriorating asset quality metrics, which had consequently eroded  net worth, and capitalisation metrics. The asset quality metrics peaked at 7.89% 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 totaling 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; post which the promoter entity FIH Mauritius Investments Ltd (FIHM), continues to hold 49.72% stake as on March 31, 2023 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. Currently, the Tier-1 ratio at 25.9% as of March 31, 2023, constitutes the majority of the capital adequacy ratios for the bank with overall CAR at 27.10%. 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 increases 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 24,506 crores as on March 31, 2023 as against Rs 20,188 crores as on March 31, 2022 with CASA being stable at 32.2%. 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 90%. 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 4.4% for fiscal 2023 with savings accounts at an average of 2.83%.

 

Incrementally, the bank is looking 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

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. Since his appointment, the bank had initiated the cleanup of the book and recognised the accounts as NPA and adopted an accelerated provisioning policy. Post his retirement, currently Mr. Pralay Mondal has been appointed as the MD and CEO. 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.

 

Weakness:

Lack of track record in the new non-gold loan book with modest scale of operations

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 demonetization as well as a few fraud cases. Post the issues seen in the past, the bank has clearly outlined its growth focus areas and has 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 24,506 crore and Rs 21,489 crore respectively, as on March 31, 2023, accounting for a small share of around 0.1% of deposits and advances in the banking system. Though the bank concentration in Kerala is gradually coming down, it continues to remain high at 38%. Overall, the loan book continued to be marked by 45% share of gold loans followed by corporate loans share of 29%, retail loans of 14% and SME loans of 12%.

 

However, the management has taken considerable steps in the cleanup of the portfolio. The gross NPA metrics for the bank stood at 1.26% as on March 31, 2023 as against GNPA of 1.81% as on March 31, 2022. The GNPA% for the unsecured loan portfolio was higher than that in MSME and large advances. 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. Going forward company plans to increase the scale of non-gold book by entering into Personal Loans, Home Loans, Auto loans, MSME, Credit Card, CV/CE amongst others. The ability of the bank to keep incremental slippages under control while scaling up its portfolio is a key monitorable.

 

Modest, albeit improving, earnings profile

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 2023. The bank continued to report profits for fiscal 2023, with a return on assets of 2.0% as compared to marginal profits in fiscal 2020. The Operating cost (as a percentage of average total assets) has historically remained elevated; the same was 3.5% for fiscal 2023. While operating expenses could continue to remain high over the medium term as the bank plans to recruit additional manpower especially sales team, and make investments on the technology front 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.

Liquidity: Strong

The bank maintains a comfortable liquidity. It runs a very conservative ALM (asset liability management) policy with no negative cumulative gaps up to 1 year in the ALM as on March 31, 2023. As on March 31, 2023, liquidity coverage ratio for the bank stood at 123%.

 

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 it is in the process of further strengthening the disclosures going forward.
• The bank is transporting plastic waste generated (including packaging waste) to Local Government bodies/vendors for processing and disposal. Also, E-waste generated is handed over to the authorized vendors or certified disposal agencies for the disposal.
• The bank has increased its exposure to agriculture and MFI loans approximately by 900+Cr between fiscal 2020 to 2022
• In terms of gender diversity, the bank has a diversity ratio of 29.56% permanent female employees to permanent employees.
• Company’s governance structure is characterized by over 60.00% of Independent directors and there is a segregation in chairperson and executive person.

 

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 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 operations

 

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

About the Company

CSB Bank Limited is an old private sector bank with a history of over 101 years and operating out of 703 branches. The business is concentrated in Kerala (~38% branches) with remaining spread mainly across Tamil Nadu, 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 Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	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