Nearly 96% of the shares up for sale are from existing shareholders through an offer for sale. Ergo, only ₹24 crore out of the total ₹410 crore IPO would be from fresh issue of shares and the proceeds will go to the bank. To be fair, the objective of the IPO is not to raise capital but to just tick off regulatory compliance.
Indeed, the presence of godfather marque investor Fairfax India Holdings Mauritius Investments should give comfort to the market even today. CSB Bank’s capital adequacy ratio is robust at 22.1% courtesy the investor’s massive infusion in 2018 to rescue the bank.
The balance sheet is on the mend. Surely, the modest IPO size is bound to see good demand. A convincing growth trajectory is enough to attract investors at a time when the financial space is rife with battered balance sheets.
But CSB Bank’s operations are focused on just two southern states—Kerala and Tamil Nadu. Granted, it is trying to expand, and part of the plan was to rebrand itself to shed its regional perception. Even so, investors should take note of the regional concentration of the bank.
Further, a third of the bank’s loan book is towards SMEs. These are tough times for SMEs and competition in the segment from non-banks and other private banks is intense.
“We believe that the second phase of transformational journey to take the bank to new growth phase will be challenging, particularly given current stressed scenario and rising competitive intensity, where even established (Federal Bank) and promising banks (RBL) have slipped," said analysts at Emkay Global Financial Services Ltd.
Then there is the valuation of the bank. The IPO is priced at ₹193-195 per share. Analysts estimated that post issue valuation works out to ₹3,380 crore. Peer banks such as South Indian Bank, Karur Vysya Bank and even the larger Federal Bank are trading at cheaper multiples, analysts said. To be sure, brokerages that have advised to subscribe to the issue pointed out that the growth potential justifies a higher valuation.
Nevertheless, there’s little room for large listing gains.