A pleasant surprise to CSB shareholders

KOCHI: The shareholders (retail) of Catholic Syrian Bank (CSB) should be pleasantly surprised at today’s news that Reserve Bank of India (RBI) has given the green signal for Fairfax’s Rs1200 crore (Rs12 billion) investment (plan) in CSB shares.
This, once concluded, will leave the Canadian investor (investment bank) the majority shareholder in the bank with 51 per cent stake. Now the ball is in Fairfax’s court. Any time now, as the CSB chief hopes, the funds can start flowing in and the business can buzz once again.
Fairfax has been blowing hot and cold on the deal for some time, for the Prem Watsa-led company in May last said it was pulling off from the deal as it was averse to paying more than Rs90-95 a share, and then comes January [this year], the company sounded to CSB it was happy to sweeten the price to Rs140 per share.
The new realisation that CSB was worth much more than Rs95 a share – or even up to Rs140 per share, about 50 per cent more than it offered about five months ago, has stemmed from the ‘fact’ that the bank has improved on many fronts during this period.
The managing director of the bank reopened the dialogue with Fairfax in late January this year. “Based on the premise of the improvements he had made in the bank, including loan recoveries and successful enhancements to its organisational structure, a new price and valuation emerged. Fairfax then agreed to invest at Rs140 per share, implying a multiple of 1.1 times (110 per cent) the September 30, 2017 book value per share,” a leading newspaper reported.
This was a good news to the bank’s avid shareholders as they have been waiting for long for a structural change in their organization that has withstood several odds in the past more than nine decades.
Improvements?
An analysis of the numbers disclosed by the bank itself shows that the so-called ‘improvements’ was a misnomer.
The March 2017 figures show that CSB had a networth of Rs999.35 crores, which worked out Rs123.37 book value (BV) per share. But the December end (2017) financials show that the BV had eroded to Rs96.57, which improved thereafter to Rs109.75 in March 2018.
This improvement has nothing to do with the bank generating any profits during this period and being transferred to the reserves. This rise could be attributed to the fact that bank may have sold fixed assets on one hand and on the other, recoveries from bad loans also may have added to reserves.
December [2017] financials become relevant because this was the closest bank’s public data available immediately before the second round of talks commenced (in January this year) and hence this should be the one that encouraged the Canadian investor to look at the bank once again with enthusiasm.
And mind you, the offered price is at about 145 per cent premium to CSB’s book value as on December end, 2017 i.e. Rs96.57 versus Rs140.
Interestingly, Federal Bank, another Kerala based bank that is in much better shape and goodwill was traded at 126 per cent premium to its book value yesterday (on July 14, 2018) and South Indian Bank (SIB), which functions just under CSB’s nose and again a far better bank than CSB on all fronts, was traded at 22 per cent discount to its book value.
Of course, it can be argued that this comparison may not hold water from the perspective that Fairfax was paying for a strategic stake of 51 per cent.
During March last, the bank had an asset base of Rs16,223 crore which had shrunk to Rs15,870 crore as of March 2018 (December 2017 figures were not available on this). While the bank had posted a net profit of Rs1.55 crore (hushed up talks are there in the bank’s inner corridors questioning its genuineness) for March 2017, the bank has failed to report a profit since then.
But for the Rs1.55 crore profit the bank had posted for the year ending March 2017, market observers argue, the bank would have very well qualified for prompt corrective action (PCA) from RBI.
The non-performing assets (NPA) data is the only relief factor for the bank to flaunt. The gross NPA has shown a very marginal improvement between last March and December, but again, as of March end, 2018, the gross NPA has reversed  trend and touched 7.89 per cent, the highest in the recent past.
CSB needs capital badly as its capital adequacy ratio (CAR) is not at a sustainable level – at 9.91 per cent as of March end, 2018 vis-à-vis a comfortable 12.15 per cent a year earlier.