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Kerala-based private lender Catholic Syrian Bank (CSB)'s profitability might come under pressure in the near term owing to higher operating costs, on the back of rising salaries and credit costs, India Ratings said.
According to the rating agency, CSB has a modest common equity tier-I capital (8.7 per cent at the end of December 2013) and weak pre-provision profit margins (0.8 per cent for April-September 2013). The latter limits the ability to absorb the credit losses through profits. Higher operating and credit costs will keep profitability subdued over the near term.
However, successful capital raising and controlled loan growth on current operating infrastructure will lead to structural improvements in performance, driving a rating change, India Ratings noted.
The bank's funding profile is largely retail - 79 per cent of total deposits in FY13 - and facing limited refinancing pressure through a asset liability mismatch profile (ALM). These are positive factors.
However, higher funding costs relative to larger regional peers are likely to persist, due to a low proportion of current and savings account deposits. High reliance on bulk funding, which leads to a stretched ALM profile, will be viewed negatively.
Higher operating costs
CSB's elevated and sticky operating cost base (cost/income ratio was 76 per cent in the first half of FY14) contributes to its weak profitability. Higher employee costs could add to the pressure. The costs could go up as the pension plan migrates to new mortality assumptions and the salary base moves up following sector-wide wage negotiations.
Higher credit costs due to a moderate loan loss reserve cover (36 per cent at end December 2013) and any incremental asset quality stress could also pressure the bottom line.
Weakening credit quality in the wholesale banking portfolio has contributed to a sharp pick-up in non-performing loan (NPL) accretion. NPLs jumped from 2.3 per cent of the total at end-March 2013 to 4.7 per cent by December 2013.
An elevated level of restructured loans (4.6 per cent in December 2013) is also of concern, though 60 per cent of these are exposures to state-backed utilities, where ultimate loss expectations are low.
The asset quality pressures are expected to sustain over next year. Also, significant de-coupling from the experience of similar regionally-concentrated peers is unlikely, the rating agency said. Total assets at end-December 2013 stood at Rs 15,077 crore.
Focus on SME, retail loans
Incremental loan growth at CSB will be driven by small and medium enterprises and retail loans. Current delinquency trends in the segment are stable. Competition, however, is intense and loan pricing remains untested in the absence of a sustained drop in collateral values.
