CRISIL has assigned 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 earnings profile amidst the significant recognition of non-performing assets (NPAs), modest asset quality and modest scale of operations.
 
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% 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 7.87%¹ and overall capital adequacy ratio (CAR) at 8.33% 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 720 crore in fiscal 2019 and the remaining Rs 488 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.
 
Capitalisation metrics are healthy with Tier 1 and overall CAR at 22.34% and 23.00%, respectively, as on December 31, 2019, against 7.87% and 8.33%, 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 9.5 times as on December 31, 2019 compared to 2.1 times as on March 31, 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. 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. For the new SME book (that is the book generated post-2016), the GNPA levels are well controlled at sub 2%. Consequent to the efforts, the asset quality improved to 3.22% as on December 31, 2019, from 7.89% as on March 31, 2018 (4.87% as on March 31, 2019). The slippages for the bank also improved to 1.83% for the nine months through fiscal 2020 compared 3.46% for fiscal 2018 (2.11% for fiscal 2019).
 
On account of the deterioration in the asset quality, earnings profile of the bank had been impacted with the bank reporting losses in the past 2 fiscals owing to the accelerated provisioning adopted by the bank. Amidst the accelerated provisioning the bank has adequately provided for the accounts which were under stress. Consequently, the CRISIL adjusted provisioning ratio for the bank increased to 55% as of March 31, 2019 as compared to 25% as of March 31, 2017. However, in the nine months ended December 31, 2020, the bank reported profit of Rs 72 crore compared to a loss of Rs 197 crore for the full fiscal 2019 (loss of Rs 97 crore for fiscal 2018). The improvement in the earnings profile is also reflected in the fact that the pre-provisioning profits of the banks too have increased to Rs 173.59 crores in the nine months of fiscal 2020 as against Rs 51.48 crores in the corresponding period in the previous fiscal. This has been supported by an improvement in the Net interest margin (NIM) owing to better cost of funds and improved yield on advances (average yield on portfolio  stood at 8.6% for the nine months ended December 31, 2019 against 7.9% for the corresponding period in the last fiscal). With the improvement in the asset quality metrics, credit costs too have subsequently improved, which also has supported the earnings profile. The credit costs for the bank stood at 0.5% for the nine months ended December 31, 2019 compared to 1.3% as on March 31, 2019 (1.1% as on March 31, 2018). With expectations of reduction in incremental slippages, increased focus on gold loan portfolio and stable deposit franchises, CRISIL believes that the earnings profile of the bank would improve over the medium term. 
 
The deposit base for the bank has remained stable and fairly sticky. While the overall deposits remained broadly flat from March 31, 2015 (Rs 14,474 crores) to  March 31, 2018 (Rs 14,691 crores), the same is on account of the bank looking at reducing the share of the bulk deposits and focus on garnering more retail and granular deposits. This has resulted in the CASA + retail term deposit ratio for the bank being comfortable at 95.5% as of March 31, 2019 on total deposits of Rs 15,124 crores. 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%. Even in the past one month, wherein there has in general been a deposit outflow from some private sector banks, the deposits for CSB Bank have increased marginally reflecting the stickiness of the depositor base for this bank. The stability is also reflected in the fact that the bank has also reduced its term deposit rates which has helped in reducing the cost of funds and yet not yet faced any withdrawal pressure. For the nine months through fiscal 2020, cost of deposit for the bank improved and stood at 5.9%, compared to 7.9% in fiscal 2016 (5.8% for fiscal 2019, 6.1% for fiscal 2018, and 6.8% for fiscal 2017).
 
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, 2019. It had around 6.60% excess SLR (statutory liquidity ratio). As on December 31, 2019, liquidity coverage ratio for the bank stood at 256.94%.
 
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 15,241 crore and Rs 10,808 crore respectively, as on December 31,2019. The bank, as on December 31, 2019, accounted for a small share of around 0.1% of deposits and advances in the banking system. The bank has a network of 414 branches as on December 31, 2019 with majority being in Kerala.
 
The 21-day nationwide lockdown declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of companies. While most of the measures are applicable till April 14, 2020, their revocation will be contingent on further directives from the Central government and the extent of spread of Covid-19. Any delay in return to normalcy will put pressure on collections and asset quality metrics. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. CRISIL will continue to monitor the situation closely for all its rated companies.

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

The bank runs a very conservative ALM policy with no negative cumulative gaps in the ALM as on December 31, 2019.  As on December 31, 2019, the bank had around 6.60% excess SLR. As on December 31, 2019, liquidity coverage ratio for the bank stood at 256.94%. The deposit base for the bank has also remained stable since January 1, 2020. Bank also has access to systemic sources of funds, such as the liquidity adjustment facility from RBI, access to the call money market, and refinance limits.

CSB Bank (formerly The Catholic Syrian Bank Ltd) is an old private sector bank in India with a history of over 99 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 414 branches (excluding three service branches and two asset recovery branches) and 277 ATMs spread across 16 states and four Union Territories as on March 31, 2019.
 
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.

¹As per restated financials in the Draft Red Herring Prospectus.

Any other information: Not applicable