CSB Bank Ltd Q3 FY2021 Concall Summary

Key Takeaways

• Profit held up despite heavy provisioning: Q3 PAT of Rs 53 cr was delivered even after an incremental Rs 89 cr standard asset provision and a Rs 36 cr hit from a voluntary provisioning policy tightening.
• Asset quality improved sharply: Gross NPA fell from 3.04% to 1.77% QoQ and net NPA from 1.30% to 0.68%, driven by the end of regulatory forbearance on moratorium accounts.
• NIM has peaked, per management: NIM jumped to 5.17% on lower deposit costs and loan growth, but the CEO stated it has peaked and the commitment is only to stay above 4% as the bank chases volume.
• Gold loans are the engine, for now: The gold book grew 60% YoY and 14% QoQ, now at 40% of the loan mix, while new verticals (Agri, MFI, Two-wheeler, MSME) added Rs 190 cr.
• What to watch next quarter: The Rs 80 cr VRS charge hitting Q4, the trajectory of deposit costs as Rs 4,000 cr of deposits reprice, and any reversal of the Rs 154 cr stressed-asset provision buffer.

Profitability & Margins

• NIM spike, then fade: Q3 NIM of 5.17% was driven by a 27 bps drop in cost of deposits and 5% QoQ loan growth. Management believes this is the peak because corporate and SME loans carry lower yields and excess liquidity has dried up, forcing the bank to pay more for deposits soon.
• Cost-income ratio ticked up: The 9M ratio improved from 70% to 49% YoY, but Q3 alone rose to 50% from 47% QoQ on higher staff costs (Rs 24 cr, including an Rs 18 cr AS-15 pension provision) and other opex (Rs 8 cr on depreciation, rent, and two-wheeler servicer expenses).
• Treasury gains de-risked: The bank booked Rs 48 cr in treasury profit (vs Rs 32 cr in Q2) while cutting trading book exposures by Rs 1,633 cr QoQ and reducing modified duration from 4.09 to 2.85 years, locking in gains and reducing rate sensitivity.
• VRS charge incoming: A scheme for 223 clerical and substaff employees will conclude by March. If all opt in, a one-time Rs 80 cr charge hits Q4, though management frames it as an acceleration of future retirement costs that improves long-term productivity.

Rajendran: "I feel our NIM has peaked now and further improvements will be challenging especially since our aim is to build significant volumes in the coming quarters."

Asset Quality & Provisions

• NPA ratios collapsed: Gross NPA fell from 3.04% to 1.77% and net NPA from 1.30% to 0.68% QoQ, as the full effect of withdrawing regulatory forbearance on moratorium accounts flowed through.
• Provisioning buffer built aggressively: The bank holds Rs 154 cr in provisions for stressed standard assets after adding Rs 89 cr in Q3 alone. PCR improved to 91%.
• Policy tightened voluntarily: The bank amended its accounting policy to provide 100% for doubtful accounts once they complete one year in that category, taking an additional Rs 36 cr hit in Q3. This front-loads pain but derisks the book faster.
• SMA pool shrinking: The SMA book has halved from over Rs 600 cr last December to roughly Rs 300 cr, with over Rs 200 cr of that in SMA-0, which is expected to regularize.
• Restructuring pipeline is tiny: No corporate accounts were restructured in Q3. Only about Rs 13 cr in small SME and personal loans are coming. Two or three consortium accounts (largest ~Rs 28 cr) may opt for restructuring if the consortium agrees, but neither the consortium nor the borrowers have approached the bank yet.
• Provision reversal is a when, not an if: Management stated that if there is no second COVID wave and businesses normalize, the Rs 154 cr buffer can be reversed gradually over 2-3 quarters, though no definite timeline was given.

Rajendran: "I am sure over a period when there is more clarity on the asset quality and the economic performance, we will be in a position to reverse a substantial portion of it and we will strive hard to live up to your expectation quarter after quarter."

Gold Loan Strategy

• The dominant growth driver: Gold loans grew 60% YoY and 14% QoQ, now constituting 40% of the loan book. Daily incremental disbursements slowed from Rs 25 cr to Rs 10 cr, but the bank will not deliberately slow gold lending.
• NBFC-like execution, bank-like pricing: Management attributes its gold loan outperformance versus other banks to hiring salesforce and gold loan officers from NBFCs, matching their delivery and turnaround times. Its rates are higher than public sector banks but cheaper than NBFCs. New branches have done over Rs 20 cr of gold business within a year.
• Mix shift, not a slowdown: The plan is to let gold's proportion fall organically by accelerating other portfolios (SME, retail, agri), not by capping gold. The board is comfortable at the current 40% level.
• LTV discipline: Average LTV is 75%, with disbursement LTV capped at 82% for the one-year product, suggesting conservative collateral coverage.

Rajendran: "Gold loan is a place to be in today. There is no need to tamper down the gold loan and our track record is good."

Deposit & Liquidity Dynamics

• Surplus liquidity is gone: The bank had consciously muted term deposit growth while it held excess liquidity. That excess has now dried out completely, so from Q4 onward it will chase term deposits again, likely at higher rates.
• Repricing wall ahead: Rs 4,000 cr of deposits will reprice in the next 6-8 months. The cost-of-deposits advantage may persist for one more quarter but is not sustainable beyond Q4.
• CD ratio ambition: Management's ideal CD ratio is around 85% on an ongoing basis, implying room to grow advances faster than deposits from current levels.

New Business Building

• SME portfolio reset, then rebuild: The SME book shrank from Rs 4,000 cr to Rs 2,000 cr after the bank weeded out accounts through exit and pricing policies. A new SME head (Mr. Shyam Mani) has joined, and management is confident of growing per original projections, though it will not compete on price, having lost a 35-40 year relationship when a private bank undercut its rate by 2.5%.
• Retail engine being assembled: A retail head (Mr. Neeraj) has joined, the LAP product has been relaunched, and the bank is building distribution, manufacturer tie-ups, and credit card partnerships. On the wealth side, mutual funds and insurance will be pushed. Management expects these building blocks to take one year to construct before the businesses scale.
• Branch expansion on track: 27 branches opened in Q3 and 6 more in January, with a plan to open 64 in Q4 to end FY21 with 101 new branches. The long-term target is roughly 1,000 branches within four years.
• New verticals contributing: Agri, MFI, Two-wheeler, and MSME verticals together added Rs 190 cr to the loan book, diversifying the portfolio away from gold.

Rajendran: "Leading private sector bank has come in and offered the rate, which is 2.5% less than my rate, with a BB account, I do not find any sense in retaining the account at that rate."

Capital & Balance Sheet

• Capital adequacy improved: The ratio rose from 19.7% to 21.02% QoQ, driven by a reduction in market risk-weighted assets as the treasury book was de-risked. The leverage ratio increased to 7.7%.
• Balance sheet deliberately shrunk: Total assets fell Rs 578 cr or 3% QoQ, entirely due to a Rs 1,231 cr reduction in borrowings, consistent with the surplus-liquidity exit strategy.
• No M&A interest: When asked directly, management stated the bank is not looking at M&A at this point.

Guidance & Commitments

Key Metrics