*Key takeaways from CSB Bank catholic ipo meet*
*View- honestly the sort of turnaround that the bank has achieved in past 18 months is nothing short of phenomenal. Profitability of the bank should see massive improvement in next 2 years driven by higher loan growth, better book mix, high margins and low cost income ratio. Bank can deliver mid teens ROE from FY22, and hence can command a premium to peers. Also CEO seems very confident on its ability to deliver better return ratios, management team quality is also very decent*
Capital adequacy at 22% has improved substantially post fair fax infusion.
Loan book has started to grow at 17-18%, this is helping in an increase in credit deposit ratio, which in turn is helping in better margins. Credit deposit ratio should continue to improve.
Current book mix - 33% is gold loan, 32% SME, 8% retail and 28% corporate.
Going forward growth will be driven by gold, msme and retail.
A new msme team from a private bank is joining this month to drive msme growth. 2 wheeler and gold loans there is already a very competitive team in place.
NIM has improved to 3.4% from 2.1% in FY16, margins should continue to improve via a better credit deposit ratio, a better loan book mix (gold loan yields are 12.5% and have an upward bias, MSME yields also upwards of 12%, - both the business should be growth drivers for them with their mix improving sharply)
Deposits- Bank has cut rates this year and despite the cut seen a 98% renewal rate in retail term deposits, this should help contain cost of funds at low levels. CASA ratio stands at 28%, management intends to take this to over 40% in next few years.
Operating costs- In last 2 years, employee base has reduced from 3000 to 1900, additionally now the bank is out of the IBA wage agreements, almost all its employees are on CTC basis. Management has reduced employee cost significantly, and they target further reduction. Current average salary per employee is 11.5 lac, where as new employees are being appointed at 3.5-4 lac, it expects a material reduction in costs of wages in next few years.
Also currently bank has 260 branches which won’t be expanded in a big way, they will shut some branches and open new branches.
Cost Income ratio- FY19 cost income ratio was 102%, it included one time provisioning of 100 crore on account of VRS given to employees. Currently cost income ratio has improved to 66%, this should further see sharp improvement driven by higher income growth led by better margins and expansion in loan book, at the same time operating cost should be contained in account of continuous reduction in employee cost.
Asset Quality- currently GNPA is 2% with almost 80% Provision cover. All of the legacy problems have been more than addressed and no shocks is expected going ahead. In the new disbursement taken place in last 3 years, they have seen only one major NPA of 25 crore, and as such management is confident of asset quality of the new book. Credit costs are expected to be pretty controlled.
Promoter holding - Fairfax will own 49.7% stake post listing, it has to get this down to 40% in next 5 years, 30% in 10 years and 15% in next 15 years progressively.
Post heavy losses in FY18/19, CSB declares operating profit of 90 crore in H1FY20 and 44 crore of PAT. This implies 4.5% ROE.
Bank post issue Mcap is expected to be 3400 crore, it’s net worth is about 2000 crore currently implying a P/BV of 1.7x TTM.