Catholic Syrian Bank MD to reap additional Rs15 cr in Fairfax deal

KOCHI: Come March 21 (2018), and if nothing extra ordinary happens at the extraordinary general meeting (EGM) of the shareholders of Catholic Syrian Bank (CSB), the Fairfax offer to buy up to 8.629 crore newly issued shares of the bank at a price of Rs140 per share (Rs10+Rs130 premium) will be approved without much fuss.

While the Canadian billionaire’s Fairfax will romp home with a majority stake in the bank for a price of a little above Rs1,200 crore, the shareholders can heave a sigh of relief as their bank will be ultimately positioned to compete in the banking space with its pocket full of cash.

But the ‘dark horse’ in the game will be the managing director and CEO of the bank, who will stand to take home an additional 17.260 lakh shares at a price of Rs75 per share in addition to the 16.192 lakh shares that have already been offered to him as part of the package as stock option while taking up the job on December 9, 2016.

This has been made possible by an agreement between the bank and the MD that he would be granted two per cent of the shares on the enhanced capital too, again at a price of Rs75 per share.

Naturally, there are performance parameters to be met by the MD before he could qualify himself for these shares and obviously, the second block of shares will come to him only after the transfer of all shares to the Fairfax Group is concluded as agreed in the deal.

Upon his appointment as the managing director and CEO on December 9, 2016, the agreement stated that, “The Bank has subject to the approval of Reserve Bank of India (RBI) agreed to grant two per cent stock options, equivalent to 16.19 lakh shares, as hiring grant to the managing director & CEO. The exercise price of the options is fixed at Rs75 per share and option when granted would be vested and could be exercised only on achieving certain performance parameters.”

More importantly, it further states that, “The bank has also subject to the approval of RBI, agreed to grant to the managing director & CEO, additional stock options as performance grant, which is equivalent to up to two per cent of the enhanced paid up equity capital of the Bank – 17.26 lakh shares as part of the Fairfax deal –  as on the date of the grant. The grant of the said option is further subject to fresh equity investment in the bank over a period of three years of assuming charge by the managing director & CEO. The exercise price of the options is fixed at Rs75 per share.”

With the shares of CSB rumoured to be trading in the grey market in the range of Rs160-Rs180, the notional profit for the MD from his possible holding (once completed and after all the conditions are met) will be in the range of Rs28.34 crore to Rs35 crore. And conservatively, if the value of shares is marked to the price at which Fairfax strikes the deal – at Rs140, the notional gain will be Rs21.68 crore.

Though the bank posted a nominal profit of Rs1.55 crore for the year ended March 31, 2017, after more than a quarter of the new MD’s appointment, this profit is being debated in the market as to whether this was a true profit or not. A query to the MD by businessbenchmark.news to this end seeking clarity still remains unanswered.

There were also reports in the media that about 50 per cent of the corporate loans advanced by the bank have turned NPA and on this count, CSB is reported to be at the top on percentage terms.

Seemingly, in an effort to enhance book size, the bank has focused more on corporate loans after the new MD’s appointment and if reports from Mumbai are to be trusted, the Fort branch of the bank alone has advanced loans to the extent of Rs1,200 crore or more to corporate clients and a big chunk of these loans are said to be ‘bullet loans’ whereby the repayment of the principal would start after two years. Most of these loans are also said to be priced close to the bank’s cost of funds and without proper security backing.

A query to this regard from this portal also still awaits a response. With the loan book having expanded through the past nine months, though the percentage of gross NPA stands reduced from 8.8 per cent to 7.16 per cent, in absolute terms they have increased from Rs600 crore to Rs700 crore.

Coming to the quantum of capital being proposed to be brought by Fairfax, a section of analysts are of the view that the bank will find it difficult to match the growth in assets so as to justify the capital increase, which is about Rs1200 crore. As of September end, 2017,  the bank had a total asset base of Rs16,357 crore, which was only a tad above the asset base six months prior to that, at Rs16,223 crore.

On a rough estimate, assuming that the asset mix will continue to be more or less the same, the bank needs to grow its asset base to approximately Rs40,000 crore if it desires to maintain the current capital adequacy ratio (CAR), at 11 per cent (as of September end, 2017).

It is not sure, if the new investor would bring in the capital in one go or will it bring it gradually as the asset book grows. There are serious doubts whether the market has enough potential to share with CSB an asset base as large as Rs40,000 crore in the near future.

Though the stock option to the MD & CEO has been tied to certain performance parameters, these are not accessible to the shareholders from the documents published by the bank. However, banking analysts estimate that they could include items such as operating profit and NPA levels and maybe more.

 

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