| CSB Bank Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its rating of ‘CRISIL A/Stable’ for Tier II Bonds (under Basel III) and at ‘CRISIL A1+’ for Certificate of Deposits programme and Short-term Fixed Deposit programme of CSB Bank Limited (CSB Bank).
The ratings 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.
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 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 2022, was driven by the growth in the gold loans portfolio of the bank which continued to constitute around 39% of the advances as on March 31, 2022. As on March 31, 2022, the bank’s gross advances stood at Rs 16742 crores, a growth of 9% over March 31, 2021 (Rs 15,388 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 1.81% as on March 31, 2022, as against 2.68% as on March 31, 2021. 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. 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 2022. The bank reported profits for fiscal 2022, with a return on assets of 1.9% as compared to 1.0% in fiscal 2021 and marginal profits in fiscal 2020. Operating expenses is likely to 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. Consequently, the sustainability in the improvement in the earnings profile 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 20,188 crores as on March 31, 2022, as against Rs 19,140 crores as on March 31, 2021 with CASA improving marginally to 33.7% from 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 average cost of deposits also remains competitive at 4.31% for fiscal 2022. In fiscal 2022, the growth in deposits was lower than the growth in advances. 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.
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, 2022. It had around 7.25% excess SLR (statutory liquidity ratio). As on March 31, 2022, liquidity coverage ratio for the bank stood at 154%. |
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 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; 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. 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 24.35% as of March 31, 2022, constitutes the majority of the capital adequacy ratios for the bank with overall CAR at 25.90%. 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. The leverage ratio remained at 9.12% as on March 31, 2022.
The deposit base for the bank remains stable and fairly sticky. The total deposits for the bank improved to Rs 20,188 crores as on March 31, 2022 as against Rs 19,140 crores as on March 31, 2021 with CASA improving to 33.7% from 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 4.31% for fiscal 2022 with savings accounts at an average of 2.61%. In fiscal 2022, the growth in deposits was lower than the growth in advances. 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.
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 Interim 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.
Weaknesses:
The bank had a change in the management with the appointment of the former managing director, Mr C VR Rajendran, in 2016 who retired in March’2022 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 1.81% as on March 31, 2022 as against GNPA of 2.68% as on March 31, 2021. Out of the total NPA of Rs 289.51 crore, NPA pertaining to Gold portfolio was only Rs 28.81 crore (0.42%) while that for MSME was 3.02% and for large advances was 2.45%. The GNPA for the unsecured loan portfolio was higher than that in MSME and large advances. 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. 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 to company plans to increase the scale of non-gold book by entering into Personal Loans, Home Loans, Auto loans, MSME, amongst others. The ability of the bank to keep incremental slippages under control while scaling up its portfolio is a key monitorable.
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 2022. The bank reported profits for fiscal 2022, with a return on assets of 1.9% as compared to 1.0% in fiscal 2021 and marginal profits in fiscal 2020. The Operating cost (as a percentage of average total assets) has historically remained elevated; the same was 3.27% for fiscal 2022. While operating expenses could continue to remain 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 20,188 crore and Rs 16,742 crore respectively, as on March 31, 2022, 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.
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Liquidity: Strong 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, 2022. It had around 7.25%excess SLR (statutory liquidity ratio). As on March 31, 2022, liquidity coverage ratio for the bank stood at 154%. |
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
Downward factors
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About the Company CSB Bank Limited is an old private sector bank with a history of over 101 years and operating out of 603 branches. The business is concentrated in Kerala (~50% 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. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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