CSB Bank Ltd Q3 FY2022 Concall Summary

Key Takeaways

• Gold NPA overhang cleared: Gold loan NPAs, the dominant investor concern, are on track for full recovery by March, with the bank already booking an ₹11 cr interest write-back and carrying a fully provided ₹9 cr residual deficit.
• NIM above 5% is the "new normal": Five straight quarters above 5%, powered by yield improvement on advances and falling cost of deposits, with management confident of pushing the cost of funds below 4%.
• Provision reversals flatter profits: A ₹52 cr net NPA provision reversal, not operating leverage, drove the net profit beat; operating profit was flat QoQ as treasury income collapsed and PSLC costs spiked.
• Growth engine is still idling: Non-gold loan growth remains elusive as SME accounts are poached by larger banks at rates management considers irrational, and new branches are taking longer than expected to break even.
• What to watch next quarter: Whether the promised gold NPA clean-up actually delivers zero discussion of gold NPAs from Q4 onward, and whether credit growth in retail and SME accelerates once the Omicron wave subsides.

Gold Loan NPA Recovery

• The strategy was deliberate forbearance: Management chose not to auction aggressively during COVID, giving borrowers breathing time to repay. The bank believes aggressive auctions would have destroyed brand value and customer goodwill, and claims the approach has now paid off in business growth.
• Recovery is already flowing through the P&L: ₹11 cr of interest income was written back from gold loan NPAs in Q3, and the total ₹9 cr deficit on the portfolio is fully provided for. Management expects to recover a major portion of even that residual deficit.
• Gold loan book grew 7% QoQ: The goodwill generated by the forbearance strategy is, per management, directly reflected in business momentum, with customers speaking positively about the bank in the market.
• Slippage is contained, not alarming: Management clarified that gold loan slippage runs at roughly 1% of the portfolio, not the 4% annualized figure an analyst calculated, and stressed that gold NPAs carry very high recoverability given the underlying collateral.

Rajendran: "By March end, the entire gold loan NPA will be completely recovered and we will not discuss gold loan NPAs in any of the future quarterly results."

Margin & Yield Trajectory

• NIM sustained above 5% for five quarters: Management declared this the "new normal," with Q3 NIM up 24 bps QoQ driven by both spread gains and a 21 bps improvement in yield on advances, the latter partly from the gold loan interest write-back.
• Cost of deposits has room to fall: Management is confident of pushing the cost of deposits below 4%, citing a newly formed institutional deposits team targeting short-term money and a top-rated ₹2,000 cr CD programme available at cheaper rates than retail deposits.
• Treasury shift to capture higher yields: The bank plans to move from T-Bills to long-term paper in HTM in a phased manner, targeting yields above 7% and an incremental spread of roughly 3.5%.
• Gold loan yields still have headroom: Repricing is expected in products currently yielding only 7% where interest is serviced monthly, and management sees scope to increase yields further even in a competitive environment by targeting a different customer segment than PSBs or NBFCs.
• Management declined to upgrade formal margin guidance: When asked if the earlier 4.5% NIM outlook should now be closer to 4.9-5%, the CEO explicitly refused to make a forward-looking statement, calling it only a "strategic guideline."

Rajendran: "For the past 5 quarters we have been able to maintain NIM of above 5% and this is the new normal."

Asset Quality & Provisioning

• Gross NPA ratio nearly halved: Improved from 4.11% to 2.62% QoQ, with net NPA down from 2.63% to 1.36%. Of the ₹389 cr gross NPA, only ₹102 cr is gold NPA, which carries higher recoverability.
• Provision reversal, not operating profit, drove the bottom line: A ₹52 cr net reversal in NPA provisions, powered by recoveries on both gold and non-gold portfolios, enabled higher net profit despite flat operating profit. PCR improved from 73% to 83% even after the reversal.
• Accelerated provisioning policy masks true profitability: The bank has been making accelerated provisions on stressed assets since the pandemic. Proforma results reversing ₹235 cr of these provisions (₹131 cr NPA + ₹104 cr standard asset) show significantly higher profitability and will be published on the website for better industry comparison.
• Credit cost can stay negative for a few more quarters: An RBI circular change allows recoveries from written-off accounts to be reduced from provisions, and CSB continues to account for it this way. This accounting treatment, not normalized credit behavior, is what keeps credit cost negative.
• SMA book has shrunk drastically: SMA accounts carry nearly the same provisioning as NPAs, with ₹105 cr sitting in SMA provisions as temporary COVID provisioning. Management says this can be reversed once it is confident COVID is no longer a problem.
• Restructured book is small and provisioned conservatively: Total rescheduled book stands at ₹125 cr (₹71 cr under resolution policy), with a 25% provision on the entire outstanding. No retail book has been rescheduled, and management insists these are genuine accounts, not problem postponement.

Growth Challenges

• Non-gold loan growth is stuck: SME disbursements are high but incremental growth is low because accounts are being taken over by large private banks at rates management considers irrational (7.5% for BB-rated customers vs CSB's 10-10.5%). The bank refuses to match that pricing, preferring a 6.5% AA corporate over a 7.5% BB customer.
• New branches are a drag, not a tailwind yet: 111 branches opened in the last year with an average age of just nine months, and breakeven is taking longer than expected. Business per branch is ₹60-65 cr versus ₹150-200 cr for competition, leaving enormous unutilized capacity.
• Q4 credit growth visibility is weak: Management admitted that matching last year's Q4 jump appears difficult, with no pipeline or visibility for that kind of non-gold loan growth as of now.
• Retail product launches are on hold: A housing loan product has been reintroduced and a tie-up with HDFC established, but an unsecured personal loan product, though launched, is not being sold aggressively because management felt the timing was wrong due to Omicron.
• Gold loan fintech partnerships have not crystallized: A tie-up with IIFL exists, but talks with other fintechs have not yielded results, partly because most BC companies are getting funds at cheaper rates and building their own books.

Rajendran: "Given our capital adequacy position we can easily double our balance sheet and still maintain comfortable CRAR without any external capital infusion."

Operating Costs & Efficiency

• Operating profit was flat despite multiple headwinds: A ₹33 cr negative impact from PSLC premium costs and a ₹12 cr spend on PSLC certificates for a micro-enterprise lending shortfall were absorbed, keeping operating profit flat QoQ at ₹148 cr.
• Staff costs are well-contained: 9M staff cost grew only 6% despite a 22% headcount increase, as AS 15 provisions decreased. The QoQ increase was driven by DA to pensioners, not headcount, which actually declined marginally.
• Cost-to-income ratio has further to fall, but no timeline: Management is confident of eventually reaching 40% once volume growth materializes and new branches and lateral hires reach full productivity, but declined to commit to a timeline, noting that the sub-50% level achieved in one quarter "may not happen in a hurry."
• Non-interest income target is 20% of total income: Credit-related fees will grow proportionately with credit growth, while transaction fees and other non-credit items will continue to grow independently. Treasury profits, which collapsed from ₹118 cr to ₹13 cr (9M to 9M), are being compensated by a 40% surge in other non-interest income streams.

Rajendran: "In one quarter we had gone down below 50% also, but consistently this may not happen in a hurry. Once the volume growth happens; we are very confident of reaching 40%."

Strategic Optionality

• M&A exploration is live: Management is open to acquiring or merging with another bank. It is waiting for PSU privatization, which is getting delayed, and will look at other candidates in the market if that does not materialize.
• Union risk has been neutralized: Only about 500 employees remain aggressively unionized, and even during nationwide strikes, barring a few remote Kerala branches, all other branches stayed open. Management says it is no longer an issue and hopes to reach a settlement before the current MD leaves.
• Gold loan strategy is a blue ocean play: CSB targets middle-class customers not traditionally borrowing against gold, with an average ticket size of ₹1.3 lakh versus gold loan companies' ₹50,000. Improved turnaround time and efficiency are driving customer walk-ins, and management sees this as a distinct segment from PSBs at 4% or NBFCs at 24-36%.

Rajendran: "Sir that is a possibility which we will keep on exploring. We are waiting for the PSU privatization, somehow it is getting delayed. If that is not happening probably we will look at other candidates also in the market."

Guidance & Commitments

Key Metrics