The tale of four Kerala banks and a case for merger

What stopped Dhanlaxmi, CSB from growing during last 5 years?

KOCHI: Does Kerala need all these four banks – Federal Bank, South Indian Bank (SIB), Catholic Syrian Bank (CSB) and Dhanlaxmi Bank – all octogenarians or nonagenarians?

A close look at the accounts of all these banks for the past five years points to a startling fact that two of them – Catholic Syrian Bank (CSB) and Dhanlaxmi Bank — have failed to mark any noticeable growth during this period with Dhanlaxmi even shrinking in size.

Today, these two banks are insignificant players in the field, together representing just 12.75 per cent of the combined market – the rest being controlled by SIB and Federal Bank, with the latter keeping more than 55 per cent alone.

The statistics tell the story better. Both CSB and Dhanlaxmi seemed to have been averse to lending all these years, maybe for different reasons, and the credit-deposits (CD) ratio for these two banks has, in fact, declined during this five-year period with CSB ratio dropping from 72.73 per cent to 63.56 per cent, whereas that of Dhanlaxmi falling from 69.43 per cent to as low as 55.95 per cent as if, it has been downsizing its lending business through these years.

There are many within the banking circles, including former directors and key shareholders, who honestly believe that a merger or a buy-out could be the right option now for CSB and Dhanlaxmi at this juncture. Both these banks in the past have experimented on different management teams at their helm and different strategies with no tangible results coming forth.

“We don’t have time to idle away and hence let’s stop kicking the can down the road further, and think aloud on a workable plan,” said an investor who owns substantial shares in both Dhanlaxmi and CSB.

Even the global trend is of consolidation. “Earlier it was large number of small banks, but the new trend is small number of large banks,” said Dr VK Vijayakumar, leading economist and investment strategist while discussing the topic with

He underlined the urgency for the banks becoming larger and possessing a proper pool of talents as today’s banking has to look beyond lending. “The banks need to think out of the box and get out of the straitjacket of traditional banking and try their hands on investments, advisory services, capital markets, mergers & acquisitions, etc in order to build a sustainable and healthy bottom line,” he added.
It’s true that CSB is close to a deal where Fairfax Group is expected to bring in Rs1200 crore to own 51 per cent stake in the bank, which is bent on building a reputation leaving behind it the successive loss-making quarters.

Despite being in the same market and sharing almost the same philosophy of the other two, as many claim, SIB, the second largest bank in the lot has been able to expand its asset base by more than 66 per cent as its CD ratio also grew by about 4 percentage points to 76.51 per cent during the period under review.

Federal Bank, the leader by far, witnessed an overall growth in deposits and advances through this period whereby it could improve its CD ratio from 76.53 per cent to 83.11 per cent, thereby taking the assets up by a whopping 95.67 per cent to Rs1,38,314 crore during the past five years and thus enabling it to control more than 55 per cent of the combined assets of these four banks.

However, the behavior in profit growth has failed to justify the exemplary growth these ‘good banks’ have posted in their topline numbers during this period. While the Federal Bank’s net profit has only marginally improved from Rs838.17 crore in 2012-13 to Rs878.85 crore after five years, that of SIB has dropped from Rs502 crore to 334.89 crore.

Admittedly, these are not numbers that grow cumulatively like in the case of assets, loans or advances. Federal could very well blame it on the huge provisions and contingencies to the tune of Rs1434 crore the bank had to make during 2017-18, and of course this is an era of bad loans and provisions that has hijacked the banking industry as a whole.

“Though the operating profit for the financial year hit an all-time high of Rs2291.03 crore, the net profit figures were recorded at Rs 878.85 crore. The total business (deposits and loans) of the bank crossed a milestone of Rs2 trillion for the year ended March 31, 2018, growing at 19.27 per cent over the last financial year,” stated Shyam Srinivasan, managing director and CEO of Federal Bank.

The case is no different for SIB too, on the profit front. The drop in net profit for 2017-18 has been spawned by the large provisions and contingencies that went to the extent of Rs1146 crore, which is not an easy number for a bank of SIB’s size.

SIB is seriously exploring ways to strengthen the bottom line and it is of the view that it’s not possible with the traditional basket of business.

The MD and chief executive of the bank, VG Mathew, is advocating for the sale of third-party products to make the bank’s going strong. “The bank is providing a wide array of third-party products like mutual fund (MF), life insurance, health insurance, national pension scheme (NPS) and demat facility to NRI clientele,” said Mathew.

While Dhanlaxmi doesn’t face any capital shortage, CSB’s main issue has always been the shortage of capital, which will hopefully be addressed soon by Fairfax as it is bringing in Rs1200 crore to strengthen the bank.

Dhanlaxmi had burnt its fingers by a loan proliferation a few years back and it is said that the bank is still licking its wounds caused by the NPA ‘garbage’ built up during that period. “For us it’s once bitten, twice shy, when it comes to building the asset book. However, we have got a new leader and we hope things will brighten soon for Dhanlaxmi,” a major shareholder exuded confidence.

Has the large capital base built by the two top banks over years has in fact, become a ‘burden’ for the time being, in terms of return on equity (RoE)?

ROE (not on average equity) of Federal Bank dropped from 13.17 per cent to about 7.30 per cent as of 2017-18, as the capital base expanded hugely from Rs6365 crore to Rs12,210 crore in a matter of five years. The SIB’s ROE too dropped from 16.70 per cent to 6.39 per cent during this period.



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