It is almost a no-brainer that CSB Bank’s Rs 410-crore initial public offering (IPO) will be oversubscribed at least 50 times if market gossip is to be believed. That may give lucky allottees a nice bounce on December 4, when CSB Bank’s shares are listed. But the moot point is does one hold on to the private lender’s shares in the fond hope of reaping a fortune in the medium term?

Investors might as well look elsewhere for long-term price appreciation. The reasons are not hard to decipher. Firstly, CSB Bank just about turned profitable on the net level and that, too, for the first half of the current financial year. It reported losses for the previous three financial years stretching back to 2017 and its Return on Net Worth was negative as well for FY 2016-17, FY 2017-18 and FY 2018-19.

Intense competition from private and public sector banks down South, a key market for CSB Bank, resulted in its financial benchmarks being on the modest side. The bank’s net interest margin, for example, was 2.9 percent in FY18-19. It rose to 3.43 percent in the first six months of the current year.

Also Read:- Key things to know about the CSB Bank IPO

Interestingly, the IPO is more an offer for sale from 26 existing investors who are collectively offering 1.9778 crore shares in a price band of Rs 193 to Rs 195 per share. This totals to Rs 385.6 crore at Rs 195 per share.

Additionally, the bank is issuing 12.43 lakh shares to raise Rs 24 crore to augment Tier 1 capital and to meet future capital requirements. The minimum lot is of 75 shares (14,625 shares at Rs 195 per share) for retail investors and in multiples thereafter.

So, pretty much a lion’s share of the funds raised are going mainly to institutional investors, many of whom such as HDFC Standard Life Insurance, Reliance Nippon Life, ICICI Prudential Life and Federal Bank, are exiting altogether.

The main promoter of CSB Bank is FIH Mauritius Investments, owned by Canadian billionaire Prem V Watsa. FIHM will retain a 49.73 percent stake post-issue from 50.09 percent now.

Another overhang on the listed stock will be the Reserve Bank of India’s guidelines where bank promoters (FIHM) are forced to cut stake to 40 percent within 5 years of listing and to 15 percent within 15 years. An equity supply overhang in a mediocre bank beset with the cut-throat competition is hardly a recipe for long term equity gains.

Now, let us look into CSB Bank’s main businesses. The 98-year old lender is a major beneficiary of Indians’ growing lust for gold. Loans against the precious metal account of 31 percent of total loans. Typically, the bank lends an average ticket size of Rs 60,000 as a gold loan to an average borrower. The lender had 522,248 active loan accounts spread over Rs 3,333 crore.

Loans against gold are rising rapidly as the value of the metal appreciates and more borrowers use it as a collateral. Such loans stood at Rs 3,782 crore at the end of September 30 for the bank. CSB Bank mentioned in its risk factors that a potential drop in gold prices may impact NPAs adversely.

Several points in favour of those wanting to hold the stock for the longer term are: the presence of two very well-known investors, Vallabh Bhanshali and Satpal Khattar, in the list of investors who have decided to stay on with the bank. Bhanshali has 2.185 million CSB shares and Khattar owns 1.773 million shares in the bank.

Moreover, CSB Bank will focus on more than doubling its existing network of 414 branches over the next five years in a bid to reduce its geographic dependency on the four southern states.

The IPO closes on November 26.

First Published:Nov 25, 2019 1:47 PM IST