Brokers ‘smell a rat’ in CSB share price

Price-BV ratio unrealistically high compared with other banks

THRISSUR: Who has put a price tag of Rs140-Rs160 on the shares of Catholic Syrian Bank (CSB) in the grey market, and on what basis?

The stock market experts have expressed surprise over the high price at which the CSB shares are purportedly changing hands in the unofficial market at a time when the stocks of the listed banks are being hammered mercilessly on the stock markets. could learn from the brokers it approached in the pretext of prospective buyers of CSB shares that the currently traded prices work out about 50 per cent to 65 per cent premium to the book value (BV), which is around Rs90, as of June end, 2018.

Mind you, this happens at a time when shares of Federal Bank, the largest and the most successful  bank in Kerala, are being traded at only 28 per cent premium to its book value of Rs62.62 (taken as of June end, being the latest period for which CSB financials are available) at Rs80.20; shares of SIB are traded at Rs13.15 – at 52 per cent ‘discount’ to its book value, whereas the shares of Dhanlaxmi Bank are traded at Rs11.05 –  at 54 per cent discount to its book value as at 10.30 am, October 26.

Thus, the realistic market price for CSB shares that can be extrapolated from the market prices of other Kerala-based banks in relation with their book value (BV) is far below the reported currently traded price.

“For example, the price of CSB shares that can be derived from the Federal Bank share price could be Rs115, arrived from the 28 per cent premium it enjoys with its book value; Rs43.20 (in relation with SIB’s BV) and Rs41.40 when viewed from Dhanlaxmi’s market valuation,” analyst at a leading brokerage firm demonstrated with numbers on condition of anonymity.

Interestingly, the average of these prices could work out a market price of around Rs66.50 for CSB shares, though these are just indications as to how a share can roughly be valued in the absence of a market listing.

There could be other ways of arriving at a reasonable valuation too. Unfortunately, CSB shares cannot be valued in terms of its return on assets (RoA), return on equity (RoE) or in terms of earnings (EPS) multiples, obviously because the bank hasn’t posted a profit during any of the quarters or financial years in the recent past and hence such calculations could go haywire .

Certain groups of shareholders are keen to attribute the unrealistic price behavior in the CSB shares exclusively to the much-talked-about deal with the Fairfax whereby the Canadian holding company is all set to become the major shareholder in the bank with 51 per cent ownership.

One broker from Mumbai warned the unsuspecting investors against a possible lobby that might be at works to artificially jack up the price as part of a well-worked-out scheme.

He said, “The naive investors could be lured into buying these shares at high prices before the perpetrators could exit from the market at an opportune time after having made a killing from the deal.

A few days back Fairfax Holding informed that it had started infusing funds into CSB, where the Canadian company has decided to invest Rs1200 crore, a first-of-its kind move in the Indian banking industry – i.e. a foreign company buying majority stake into an Indian bank.

The Fairfax investment once complete could raise the net worth (total equity) of the bank from the present (as of June 30) Rs729.56 crore to close to Rs2000 crore, but will still remain a far cry from that of Federal Bank or South Indian Bank (SIB) that enjoys net worth equivalent to Rs12,206 crore and Rs5000.97 crore respectively.

The most worrying underbelly of CSB is its cost-to income ratio, which has been adamantly staying close to 98 per cent against Federal’s 50 per cent and SIB’s 54 per cent. This shows that CSB needs to go a long way in containing its expenses in relation to its income generation.

While the gross NPA of CSB is 8.23 per cent and net NPA at 4.49 per cent as of June end, 2018, the capital adequacy ratio (CARR) is at 10.13, which is destined to improve as Fairfax funding has started pouring in. Needless to say, most ratios – return on assets (RoA), return on equity (RoE) and earnings per share (EPS) for CSB have all been negative for some time now.


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