CSB Bank Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Gold-led profit surge, but NIMs soften: Net profit jumped 88% YoY to ₹114.50 Crores, yet NIM contracted 25 bps QoQ to 5.17% as gold yields fell 120 bps amid competitive pressure.
• Gold loan dominance is the deliberate strategy: The gold portfolio grew 26% YoY and 8% QoQ, and management expects it to lead growth for the next 12–18 months, reaching ~45% of the portfolio before tapering.
• The retail pivot is a post-2024 story: Product rollout begins this year, but management refuses to press the accelerator until technology systems are in place, pushing the real retail growth momentum to after 2024.
• Cost-to-income spiked to 58% on expansion: Branch count rose from 514 to 603, staff costs climbed ₹25 Crores YoY, and management is explicit that investments in distribution and technology will not be sacrificed to manage short-term costs.
• What to watch next quarter: Whether gold yields begin to recover as guided, the pace of the 100-branch rollout, and any sign that the non-gold book has bottomed out.

Gold Loan Engine

• Portfolio growth is broad-based: The 26% YoY and 8% QoQ growth is driven by new customer acquisition, not just repeat pledges, powered by branch-level sales machinery and reference selling.
• Customer profile is retail, not SME: The sweet spot sits between NBFCs and large private banks, with high customer loyalty and rare auctions because the bank knows its customers well.
• Tamil Nadu is catching Kerala fast: Tamil Nadu has grown much faster and now accounts for 36% of the gold book versus Kerala's 38%, with management calling Tamil Nadu a very high potential state.
• Yield compression was partly structural, partly one-off: Of the 120 bps QoQ decline, roughly 30–40 bps came from the absence of ₹7 Crores in NPA interest recoveries that boosted Q4, while the remaining ~80 bps reflects an industry-wide competitive yield reduction from easy liquidity last year.
• Yield recovery is promised soon: Management has already increased gold loan yields and expects an uptick to become visible in the next one or two quarters.

Mondal: "The focus that we see in this bank branch by branch cannot be there in those banks because that is a very small portion of their overall balance sheet. Therefore, our focus, knowledge, understanding, operations and processes are very different and so that does not worry me at all."

Margins & Profitability

• NIM held above 5% despite yield pressure: Cost of funds declined from 4.21% to 4.10%, partially offsetting the 57 bps drop in yield on advances from 11.19% to 10.62%.
• Cost of funds sustainability is uncertain: Management cautioned that the 4.10% level may not sustain for long because deposit costs are rising across the ecosystem.
• Treasury and PSLC income vanished: Treasury profit fell from ₹19.50 Crores to ₹5.2 Crores YoY on rising rates, while PSLC income dropped to zero from ₹12.50 Crores as the bank adopted a wait-and-watch policy on weak premiums, sitting on its entire PSLC book for better timing.
• Core other income grew: Excluding treasury and PSLC, other income rose ₹10 Crores YoY, powered by ₹7 Crores in commission income growth.
• Sequential non-interest income dipped: Non-interest income excluding treasury fell ₹7 Crores QoQ because ₹15 Crores in annual savings account and debit card charges are booked only in Q4.
• ROE improved sharply: ROE reached close to 19%, up from 12.65% in Q1 FY22.

Asset Quality & Credit Cost

• Asset quality metrics are strong: GNPA and NNPA indicators are healthy, PCR is above 90% and crosses 100% with COVID provisions, and excess standard asset provisioning is higher than NNPA.
• Credit cost was marginally negative: A reversal of ₹1.20 Crores this quarter versus an additional provision of ₹97.3 Crores in Q1 FY22, as fresh slippage and migration provisions of ₹16 Crores were offset by recoveries in technically written-off accounts.
• Management prefers controlled slippages over recovery gains: The philosophy is to avoid slippages entirely rather than reverse them later and feel good about it, so the bank targets a low-slippage, low-recovery operating model going forward.
• Wholesale book shows no stress: Exposure to textiles, construction, infrastructure and NBFCs has been substantially increased, and the portfolio is described as robust.
• Textile sector saw lower utilization: Commodity and cotton prices have come down, reducing working capital utilization, but management asserts deep understanding of the sector.

Mondal: "First of all, we do not want to have a slippage and then reverse it and feel happy about it. I think the best way to handle a business is that slippage itself is controlled and managed well."

The Retail Pivot: A Deliberate, Slow Build

• Product rollout starts this year, but acceleration waits: Credit cards will launch very soon, and most other products will gradually follow, but the real rollout needs corporate LOS, retail LOS and LMS technology in place first.
• Management refuses to rush retail: The bank will not press the accelerator until systems and processes are fully ready, because retail is a business where mistakes from premature rollout can be punishing.
• Real pickup is 12–18 months after technology is in place: That timeline pushes the primary retail growth momentum to after 2024, with retail expected to become one of the largest components of the asset book by FY2028-29.
• Customer acquisition will double almost every year: The primary focus will shift to liability as the bank builds a granular franchise to support consistent credit growth in a rising-rate environment.
• CASA ratio will stay volatile: CASA will continue growing faster than 10% QoQ and 15% YoY, but if the balance sheet grows much faster, the ratio may remain stable rather than expand meaningfully, and management deflected a question about reaching 40–45% by calling it not that easy.

Mondal: "We do not want to make mistakes here, because in retail if you roll out products without system, processes etc, then you can be challenged because retail is one business where everything should be in place before you press the accelerator. Therefore, we are not willing to press the accelerator now."

Expansion & Investment Spend

• Branch expansion is front-loaded: The plan is to open around 100 branches every year, with over 50 locations already approved in Q1, 70–80% of branches rolling out in Q3, and a net increase of 100 branches by March 2023.
• Staff costs rose on headcount and pension provisions: Payroll costs increased ₹14 Crores YoY as headcount grew from 4,508 to 4,780, while AS 15 provisions rose ₹11 Crores due to CPI increases for pensioners.
• Other operating expenses jumped: Costs rose from ₹67 Crores to ₹89 Crores YoY driven by branch expansion, a ₹5 Crore increase in BC tie-up costs, and ₹3.70 Crores in PSLC premium payouts for micro-enterprise shortfalls.
• Cost-to-income will taper, but not yet: The ratio increased from 48% to 58% YoY, and while management expects it to taper down over the year, they will not shy away from investments in distribution, customer acquisition and technology.
• Accumulated losses are nearly gone: The accumulated loss in the balance sheet is expected to be wiped out completely during this year, and the deferred tax asset created on those losses has already been eliminated.

Mondal: "While our endeavor will be to manage the costs along the way, we will not shy away from investments and will not shy away from special investments into distribution, into customer acquisition and into technology and that is the most important thing."

Wholesale & Other Portfolios

• NBFC exposure is a strategic advantage: Roughly 40% of the corporate book is NBFCs, and as interest rates rise, NBFCs will depend more on bank credit as other funding avenues dry up, putting banks at an advantage.
• Wholesale strategy is expanding geographically: The bank is looking at transportation and HAM projects, building coverage in Western and Northern India while leveraging its Southern strength, with the securitization book also performing well.
• SME book is stagnant but positioned for growth: The old SME book and term book are gradually running off, and utilization was slightly lower this quarter on reduced commodity costs, but SME is expected to be the second-largest growth driver after gold this year.
• Microfinance should resume: All banks suffered in Q1 due to a regulation change, but things are settling down and growth should resume from the agri and microfinance portfolio.
• Non-gold book has bottomed: Management stated that Q1 is the bottom in terms of the non-gold book, and most negative carry in retail, SME and wholesale will go away as every business begins contributing positively.

Guidance & Commitments

Key Metrics