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Catholic Syrian Bank: No spunk in its performance - Outside View by Luke Verghese

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Catholic Syrian Bank: No spunk in its performance
Mar 4, 2011

Baptism by fire

The incumbent CEO of Catholic Syrian Bank, V P Iswardas, has had his baptism by fire. He took over at the top job half way through FY10, from his predecessor R Venkatraman who laid down the baton. The company suffered a disastrous fall in its net profit to Rs 16.5 m in FY10 compared to Rs 372 m in the preceding year. This is by far the lowest profit that it recorded in the last five years. (With the net profits scraping the very bottom of the barrel, the directors wisely cottoned on to omitting dividend payment.) The board of directors in its wisdom apparently decided for whatever reason, that this loss of face will be shared by the two CEOs in equal measure. Iswardas should have tried to stall his appointment for another six months, so that he could have begun his innings on a clean slate. However, having now been foisted on to the hot seat he has decided to make light of the bank's poor showing. In his first address to the shareholders via the pages of the annual report, he calls it a tumultuous year, and against all odds he says the bank could grow its loan portfolio by 21%, while containing the net NPAs to 1.6%. If the bank is able to reverse its showing in the current year running, he can at least take all the credit for the turnaround. Actually he should find it quite easy given the manner in which it slipped in FY10.

Among the other learned observations of the new helmsman is that FY10 has been a very challenging year for the bank, and it had to face a plethora of challenges both micro and macro, to stay in business, and continue uninterrupted the 90 year old passion for serving customers. Strong words all right. The directors' report goes on to inform the shareholders that the bottom-line was affected due to extra commitment on salaries, increased delinquency rates and strain on margins faced by banks in general.

Covering up the warts and all

If these statements are to be taken at face value then the bank has done a very commendable job of covering up the warts and all in the balance sheet, and presenting the shareholders only the sunny side of things. For sure there was a slightly bigger mismatch between what it earned as revenues from its lending and investment portfolio on the one hand, and what it paid out from its deposits taken portfolio. Based on a rough back of the envelope calculation, the average interest paid on deposits rose to 6.4% from 6.0% in the preceding year. The average interest earned on advances and bills fell to 9.3% from 11% previously, while the income from investments fell to 18.2% against 18.8% previously. The fall in the level of income from investments has more to do with the bank's investment management skills than to do with the business environment. And, besides, the operating expenses which represent a big chunk of its expenditure grew very marginally by 1.6% to Rs 1.9 bn. Payments to employees-which is a part of this expense item actually fell by 2.5% to Rs 1.2 bn. Why then is the company making such a noise about the employee wage bill adding to its burden, especially on account of back dues to them?

How the profit was arrived at

To get back to the main issue, the primary reason for the sharp fall in the pre-tax profit is the drop in the value of receipts in the other income schedule. Several receipts make up this schedule. Profit on sale of investments, and the profit on sale of land and buildings together fell to Rs 128 m from Rs 455 m in the preceding year. There was also a fall in forex transactions, and consequently the income booked from this line of activity fell to Rs 64 m from Rs 100 m. If the bank had been able to maintain these income receipts at the same level as in the preceding year, the bank's profit would have actually surpassed that of the preceding year. Profits or losses from such ‘other income' lines of activity require no banking skills- merely the honing of its trading skills, and getting the better of right interest rate differentials to make it all possible. As a matter of fact there was quite some shift during the year in its investment portfolio. The holding in government securities grew to 79% of all investments, against 75% previously, while there was an increase in emphasis on shares in companies to that of debenture holdings. Its holdings in other approved securities also dropped. So there was some activity in its portfolio management division.

What is most remarkable about this annual report is that the provisions for contingencies for the year had dropped drastically to Rs 60 m from Rs 416 m in the preceding year. This is primarily incomprehensible, as the bank management is simultaneously parroting about the most turbulent times that the bank is passing through, as also the increase in the level of delinquencies. Why then has the provisioning been reduced so drastically? It appears to have been resorted to only to show a profit at the net level. Is provisioning such an amiable exercise or is there a science behind it?

The profound finding

The more important revelation that comes to the fore is that the bank does not make any money from its core activities - that is to say turning a profit from borrowing and lending dosh, which is the main function of any bank. Other income is incidental to the main focus and purpose of the bank, and cannot always be counted upon to bring home the bacon. This is an anomaly that must be addressed urgently. The board consists of 14 directors and one wonders what advice is being proffered by these learned gentry. Besides, this Trissur, Kerala based bank is a hardened veteran in the business of organised banking, having initiated its tryst with Mammon some 90 years ago. It will also help if the gentry who are tasked with writing the copy of the annual report pay a little more attention to the garb that is written for the benefit of the shareholders and other investors. It must also realise that all investors are not a bunch of fools either.

All in all a pathetic all round performance.

Disclosure: I do not hold any shares in this company either directly or under non-discretionary portfolio

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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3 Responses to "Catholic Syrian Bank: No spunk in its performance"

Ankur

Dec 5, 2011

Hi Luke,
A very good in-depth review indeed!
But I have a question. As a customer to the bank I have been dealing with them for the past 20 years in Delhi, and don't have much to complain.

Their interest rates on FD is the highest among all banks. 10.25-10.75 for 991 days FD!

I was thinking of making a few investments (FD) for these attractive rates. But now am a little apprehensive. What do you suggest?

Like 

srinivasan

Jul 30, 2011

Hi Luke,

As usual, a stunning analysis. How come a bank with such history and tradition cannot earn on its main core of business ?. You were giving some wonderful analysis. Had the bank atleast read your article, they will know how they have missed simplest of things. To not provide enough for bad/doubtful debts is a serious corporate governance issue. Hope RBI takes note of these things. Thanks Luke.

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Avid Follower

Mar 6, 2011

Hi Luke, I have recently stumbled upon your stories. Very interesting stuff. Made inquiries with friends in media but cannot get to you. Wanted to connect with you. Can you contact me at my mail id/give your contact so that i may get in touch.

Like 
  
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