CSB Bank Ltd Q1 FY2021 Concall Summary

Key Takeaways

• A transformed quarter, not a lucky one: NIM hit 4.06% and cost-to-income halved to 50.26%, driven by structural yield improvement and falling funding costs, not just treasury windfalls.
• Asset quality fears are receding fast: The moratorium book collapsed from over ₹400 crores to less than ₹126 crores, SMA 2 is under ₹4 crores, and collection efficiency hit 78% in July.
• Gold loans are the engine, and the engine is accelerating: Yield rose to 12.20% and the 90% LTV rule unlocked growth, but lockdowns and staff hesitancy left unmet demand on the table.
• Excess provisions create a thick cushion: ₹144 crores in total excess provisioning (₹108 crores post-tax) sits against ₹211 crores of moratorium overdue excluding gold, a buffer management calls "enough and more."
• What to watch next quarter: Whether gold loan tonnage growth materializes as lockdowns ease, the pace of deposit repricing on the ₹2,200 crores falling due, and any sign of stress in the hospitality and textile-retail segments.

The Turnaround: NIM, Costs & Earnings

• NIM leap to 4.06%: Yield on advances held at 10.74% despite corporate rate renegotiation, while cost of deposits fell 38 bps to 5.48% and repo borrowing at 3.35% dragged cost of funds to 4.56%.
• Cost-to-income halved: The ratio fell from above 100% to 50.26%, a target originally promised over three years and delivered in one. Management wants to hold ~50% near-term and drive toward 40% over time.
• Windfall caveat: Roughly ₹30 crores of treasury gains from softening yields and some TLTRO-related income lifted the quarter; these are not assumed to repeat every quarter.
• NIM methodology changed: The bank now calculates NIM on interest-earning assets, not total assets, aligning with industry practice. This will be the basis going forward.
• ROE and EPS: Annualized EPS stood at ₹12.35 with ROE at 11.80%, a level the bank commits to strive to maintain.

Rajendran: "We will try to maintain it around 50% and our desire to go down to 40% over a period. You were also there in the marketing team for the IPO. We originally promised 50% over a period of five years and revised it to 3 years. We are surprised that we are able to reach it in one year itself."

Asset Quality: Moratorium Meltdown & Provisioning Buffer

• Moratorium book collapsed: SMA including SMA 0 fell from over ₹400 crores in February to less than ₹126 crores, with the major portion now in SMA 0. SMA 1 and SMA 2 improved from over ₹125 crores to under ₹22 crores, with SMA 2 below ₹4 crores.
• Collection efficiency climbing: Moratorium collections improved month-on-month from 48% in May to 59% in June to 78% in July. Even within the moratorium portfolio, 47% was collected.
• Corporate resilience: 92% of corporate customers did not opt for the moratorium; the book is mostly AA/AAA-rated. Only a few MFIs, small NBFCs, and one or two manufacturing companies took it.
• SME outperformance: SME moratorium uptake was ~27%, roughly half the industry average of 50-60%.
• Provisioning fortress: The bank holds ₹89 crores in excess NPA provisions above RBI requirements, ₹31 crores in COVID provisions (1.5% of assets under moratorium), and ₹24 crores from conservative Security Receipt provisioning. Total excess provisioning is ₹144 crores (₹108 crores post-tax) against moratorium overdue of ₹211 crores excluding gold.
• Credit cost target: Credit cost is currently 0.48%; management targets containment below 1% for existing businesses.

Rajendran: "We have enough and more provisions and collection efficiency is improving."

Gold Loans: The High-Yield Engine with Unmet Demand

• Yield transformation: Gold loan yield rose from 9.7% three years ago to 12.20%, driven by old low-rate loans closing and being replaced at higher rates. Management expects yields to continue rising this year.
• Growth constrained by lockdowns, not demand: Tonnage did not increase materially; portfolio growth came from higher gold prices and the 90% LTV rule. Lockdowns kept gold loan companies shut, branches operated with minimum staff, and cash-accepting infrastructure was inadequate. Staff hesitancy due to COVID further restricted execution.
• Unmet demand acknowledged: Management stated there is unmet demand "to a large extent" even today, as the human-touch nature of gold lending collides with pandemic constraints.
• Customer shift underway: SME marketing teams brought in large-ticket gold loans, pushing up average ticket size as borrowers moved into this segment because no other loan was available.
• Cultural barrier: Middle-class shyness about pledging gold remains a structural constraint; borrowers prefer credit cards at 36% or personal loans at exorbitant rates over pledging jewellery.
• Competitive puzzle: Management openly struggles to explain why NBFCs grow at 24% when the bank offers gold loans at half the rate, calling it a question they are "searching answer all along."
• Board mandate: The board approved an increased portfolio share for gold in the current year given uncertain times. Gold will continue growing at 25%, though its portfolio share will decline as other loans resume growth.

Rajendran: "Conventionally, people like you and me, we will go and borrow on the credit card at 36%. We will take the personal loans. We will take the consumer loans at an exorbitant rate, but we don't pledge the gold. In the middle-class families, there is shyness about pledging the gold, which we have to remove."

New Verticals & Diversification

• Two-wheeler loans: The division reached near pre-COVID levels at ~1,000 loans per month with a book of ~₹100 crores and very little stress.
• MSME division: Launched in April 2020 after COVID, focused on businesses that survived, with small ticket sizes of ₹3-10 lakhs. Returns are good and risk is not immediate.
• Agriculture & MFI: A new division with recruits from private sector banks has grown the Agri and MFI book to ~₹200 crores, focusing on Kerala, Tamil Nadu, and Maharashtra.
• Unsecured lending on hold: No big volumes expected this year; the focus is on product development, recruitment, and policy setting. Business will start only next year, after assessing COVID impact by March.
• Branch expansion: 100+ branches planned, with 40 already progressed and two opened during COVID. Most expansion is outside Kerala, concentrated in Tamil Nadu (gold loan potential), Karnataka, Andhra, Telangana, and Maharashtra. The board is open to going beyond 100 if the one-year breakeven promise is met.

Sector Stress Points & Restructuring Outlook

• Textile segment reviving: Textile companies are back in business at 90-95% capacity utilization, relying on local labor rather than northern migrant workers. Most have no or very low term loans, completed CAPEX, and captive solar or wind power, making them economically viable.
• Textile market challenges: Bhiwandi and Ichalkaranji markets remain closed; only the Tamil Nadu market (Palladam, Somanur) is open. Credit periods are longer and some may need COVID loans.
• Hospitality at risk: Smaller health resorts have lost business completely; the Aadi month treatment season is lost. This is the one segment where management expects some heat.
• Gold jewellery and textile retail: The bank exited gold jewellery lending in a large way previously, so impact is minimal. Textile retailers are struggling but servicing interest.
• Restructuring expected to be small: Management is in continuous touch with clients to provide preventive, tailor-made solutions rather than rephasement or restructuring. Some hotels and resorts may approach, but numbers are not expected to be substantial.

Liability & Treasury Strategy

• Deposit growth intentionally constrained: The bank uses cheaper alternatives: ₹800 crores in repo borrowing at 3.35%, plus CDs and wholesale deposits. Cost of funds is declining faster than cost of deposits.
• Deposit repricing tailwind: Around ₹2,200 crores of deposits fall due for repricing in Q2, which should further reduce the cost of deposits.
• Investment book strategy: The bank is not aggressive on non-SLR portfolios. TLTRO funds were deployed into Tier II bonds and NBFC bonds bought at attractive levels. A dedicated bond portfolio team will be developed within six months.
• Corporate book shrinking by design: When liquidity surplus erased the risk premium, AAA-rated NBFCs began raising CPs at 3.5%, making bank lending at 9.5% uncompetitive. The corporate book will likely decline from 25-26% of the loan mix, though no specific target was given.

Guidance & Commitments

Key Metrics