A born-again bank! Fairfax deal a shot in arm for CSB's turnaround strategy

Last year, when Kerala-based Catholic Syrian Bank (CSB) tried to raise money from investors, it could not garner much interest. A year later, however, CBS has managed to pull off a Rs 12 billion commitment from Canadian-billionaire Prem Watsa-owned Fairfax for a strategic 51 per cent stake.

The deal, announced in February, will pave the way for the first take-over of an Indian bank by a foreign non-banking financial entity since the ownership norms were tweaked to allow such a structure in May last year.

Interestingly, Watsa had turned down a proposal for investment in CSB in 2017. A year later, however, when the banking sector is grappling with non-performing assets, he seems to have changed his mind. “We intend to take Catholic Syrian Bank to great heights through our re-capitalization as well as a long-term orientation towards management,” says Watsa, chairman of Fairfax India and Fairfax Financial Holdings.

So, what prompted him to invest in CSB? Those involved in the deal say Fairfax’s interest in CSB, which was set up in 1920 to serve the Catholic community in Kerala, is a vote of confidence in the untold story of growth being scripted at India’s old-generation private sector banks (OPSB). 

These banks, along with foreign players, have less than five percent share of the banking sector pie, where the 27 public sector banks hold sway with 70 percent of the market. But, while their public-sector peers are floundering, adding Rs 3.28 trillion of bad debt in 2016-17 alone, old private banks are reaping the rewards of a structural overhaul undertaken over the last five years.   

Crucially, OPSBs sacrificed growth in favour of stability, shifted focus on lending to retail and small-scale enterprises (SMEs), strengthened credit monitoring systems, enhanced efforts to improve current account and saving account franchise, and paid extra attention to cost optimisation. Moreover, they made room for a professionally-run management and board, taking the controls away from community members whose ancestors were the founding fathers of these banks.

Amid all this, what helped was the long-lasting relationship these banks enjoyed with households, traders, SMEs, and corporate branches within the community they served. This ensured the flow of business remained uninterrupted. “Asset quality of regional banks is far superior to that of their PSBs, due to higher retail/SME loans, where delinquencies are low.  Also, their small—ticket loans enable speedy recovery,” says an analyst.

No surprise then that investors are drawn to OPSBs. According to Venture Intelligence, a research company focused on private equity (PE) and M&A deals, from 2013 to 2017, PEs have invested around $843 million across 38 deals, with exit returns of around 1.7x to 7.3x. Anand Narayan, managing partner, Creador India, one of the active investors in this space, says the exits have given an internal rate of return of over 40 per cent.

Fairfax’s interest in CSB reaffirms this growth strategy. However, things weren’t always hunky dory at CSB. In March 2015, CSB had filed for an initial public offering to raise Rs 4 billion, but the plan was shelved due to lack of interest. In 2017, CSB tried to raise money again from a clutch of investors, including Fairfax, Aion Capital and JM Financial, but with little success.

There were several internal issues that stood in the way of the bank’s ambitions. For one, CSB was not in adherence with the Reserve Bank of India (RBI) guidelines on shareholding; it was only in 2010 that the bank brought down the stake of its largest shareholder, Bangkok-based entrepreneur Sura Chansrichawla, from 24.5 per cent to less than 10 per cent as mandated by the RBI. 

“There were instances where the board members won’t see eye to eye, which led to operational issues,” says a board member who does not want to be named. The turning point came in 2015-16, when CSB posted a loss of Rs 1.49 billion. It forced the bank to take urgent steps to shake off its legacy issues and chart out a growth path. “The transformation exercise is only half way through, but the implementation itself has convinced the investor (Fairfax) of the value in the bank,” says C VR Rajendran, MD & CEO, Catholic Syrian Bank. “There are no shareholders issues in the bank and except one investor (who holds 4.99 per cent) nobody holds more than 2-3 per cent.”

CSB reported a profit of Rs16 million in 2016-17, and it continues to remain in the green at the operating level. The entry of Fairfax at this point, says Rajendran, will strengthen the bank’s hand in carrying out the transformation exercise. The money raised through the deal will help CSB to double its balance sheet to Rs 500 billion. Some of the funds will also go towards meeting CSB’s Tier-I capital base and enhanced capital adequacy requirements arising from the increase in the bank’s assets--- loans/advances and investment portfolio.

While there are enough opportunities, the challenges for CSB mainly come on two fronts: technology and manpower. Besides, OPSBs have to contend with a bigger rival, public sector banks, in one of their niche areas: the loan-against-gold space.  Most PSBs offer loan against gold at 4 per cent interest, a rate that these smaller banks find hard to match. So, it makes more sense for these banks to compete with NBFCs that usually charge an interest rate of 20 per cent on loans. The OPSBs have a cost advantage here, and the deal with Fairfax, an NBFC, is expected to lend CSB an edge in this area.

“Branding, product, delivery and turnaround time, if these are improved, NBFCs will become history in this space. This is what we are trying to do,” says Rajendran. 

One of the major goals of CSB is to make its employees more efficient and productive to enable itself to compete with PSBs and NBFCs more efficiently. OPSBs and PSBs, unlike NBFCs, are required to follow the wage structure mandated by the Indian Banking Association.  These wages are higher than the average market rate, which means it is crucial for OPSBs, given their relatively small size, to ensure they have a lean and productive workforce.   

“NBFCs wage levels are not even one-fourth of that of public sector banks. You cannot go fight with NBFCs with salaries four times more than them and charge lower interest,” says Rajendran. 

Currently, he says, banks like CSB struggle with high wages and very low productivity. Rajendran, however, is confident that with the steps the bank is undertaking, the transformation story will be completed with a positive outcome.

So, is CSB a good bet for Fairfax? “Any old private sector bank is not a short-term story, it’s a long-term story. We preferred Fairfax because they agreed to focus on the long-term. They will not pressure us on a quarter-on-quarter basis,” says Rajendran. 

“In any transformation of old private sector banks, the first two years are a challenge,” he adds. So far, CSB seems to have hit the right note of optimism.