Explained: How the Kerala-based CSB Bank made a dramatic turnaround

In 2016, if you had asked investors to put money in CSB Bank (formerly Catholic Syrian Bank), they may have said jokingly that they would do so for charity. In March 2015, CSB had filed for an IPO to raise Rs 400 crore, but the plan was shelved for lack of interest. In 2017, CSB tried — and failed — to raise money from various investors, including private equity.

Today, a less than a year since it listed on December 4, 2019, its market cap is more than the combined valuation of its southern private banking peers. Its H1 PAT of Rs 122.5 crore was by far the best in the bank’s history, crossing the Rs 100-crore mark in its centenary year.

What accounts for the turnaround of CSB, set up in 1920 to serve the Syrian Christian community in Kerala, when its peers are struggling? It was the years of adversity that strengthened it.  

To start with, CSB did not conform to the Reserve Bank of India (RBI) guidelines on foreign shareholding. It was only in 2010 that the bank started reducing the stake of its largest shareholder, Bangkok-based entrepreneur Sura Chansrichawla, from 34 per cent to less than 10 per cent (as of 2016-17). Though the RBI mandated one year, it took Chansrichawla three or four years to comply.

The years 2010 to 2017 also saw internal board struggles that caused the management to take its eye off the ball and miss the capital boom that benefited other private banks. Once the issue of Chansrichawla’s holdings was sorted out, CSB set itself the target of doubling its balance sheet by expanding its corporate lending business. Lacking experience, it joined bank lending consortiums. Initially, the going was good enough for the bank to raise Rs 387.5 crore through three rights issues in 2009, 2013 and 2015.

But once the economic slowdown began, CSB started feeling the heat with many corporate accounts turning into non-performing assets (NPA). This was true for the banking sector as a whole but CSB’s case was extreme since corporate lending accounted for a quarter of its loans. In 2015-16, the bank tipped into the red with losses of Rs 149 crore and the capital base had eroded. “It was a small, extreme adventure. We accepted the failure and we were open about it to all the stakeholders, including new investors,” said T S Anantharaman, who was chairman of CSB between 2017 and 2018.

The losses concentrated minds. A capital infusion was the immediate need but three rights issues ruled out accessing existing shareholders. Luckily, in May 2017, the RBI tweaked ownership norms and allowed foreign non-banking financial entities to acquire majority stakes in banks, on condition that they lowered it to 40 per cent in five years, 30 per cent in 10 years and 15 per cent in 15 years. CSB quickly responded and knocked on the RBI’s doors with a proposal from Canadian billionaire Prem Watsa’s Fairfax, which agreed in 2018 to infuse Rs 1,200 crore for a 51 per cent stake.   

One of the key reasons for Fairfax’s decision was the new board and management.  In December 2016, an Anantharaman-led committee identified the former Andhra Bank CMD C V R Rajendran as managing director & CEO. He came with three-and-a-half decades of experience and his first challenge was to travel to West Asia, Singapore and India to meet shareholders, an influential Bishop from the Syrian Christian church, union members and employees to convince them to allow Fairfax on board. 

  

Having addressed the capital issue, Rajendran turned to the nuts and bolts. The bank had not hired for nearly a decade and existing employees, who were largely untrained, impacted branch-level productivity. Labour cost as a percentage of total income was 23.5 per cent against an industry average of 10.5 per cent. 

Despite opposition from local trade unions, Rajendran sacked around 200 people for under-performance, offered another 1,000 VRS, reduced the retirement age by two years and recruited afresh. Today, the original staff accounts for about 45 per cent of CSB’s workforce and the average age of employees fell from 50 years to 36.  

The lending portfolio was also rejigged to focus on gold loans and small and medium enterprises (SMEs). “We cannot fight the State Bank of India in market share. We have to compete against small banks and NBFCs, which is what we will do. We will play in niche markets and products. Being small, our decision-taking is much faster than the bureaucratic bigger banks, so we have a natural advantage in taking over the NBFC space immediately,” Rajendran explained.   

To this end, he recruited from NBFCs in Kerala, the state that houses the largest number of gold lending NBFCs. Soon, CSB’s gold loans grew by Rs 1,100 crore, or 47 per cent, year-on-year from September 2019 to touch around Rs 5,000 crore in Q2 of FY21.

CSB also strengthened its digital capabilities to cut costs. During the first half of FY20, 57.33 per cent of transactions were digital; a year later the proportion rose to 71.25 per cent. This enabled the bank to deploy branch employees for acquiring new business and customers.   

All these initiatives have started paying dividends. Labour cost came down to 16-17 per cent in a year-and-a-half, and the target is to bring it down below 10 per cent of total income. Of the 400 branches, 300 were loss-making, a number that is down to 60.   

The impact of all these moves are reflected in the numbers. Analysts from Axis Capital reckon that given its strong parentage, competitive gold loan business and the diminution in its NPA legacies will give CSB strong earnings momentum. “Best among peers; well placed on business,” said the analyst.

For FY21, CSB is looking at growth of around 25 per cent and is confident of doubling it in two years. And it is also exploring options to acquire a mid-size bank with a good client base and branches in the north to acquire an all-India presence.