CSB Bank Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Gold drove a 31% profit jump, but NIM is peaking: Net profit grew 31% YoY, powered by a 47% surge in the gold portfolio, while NIM touched 5.60% QoQ. Management explicitly called this level unsustainable as the bank scales other segments.
• The bank is in a deliberate investment phase: A multi-year technology overhaul (LOS, core system, LMS) and a branch expansion of 100 per year are underway, pushing the cost-to-income ratio toward 60%. The payoff is not expected until 2027.
• SME growth was sacrificed for credit quality: SME book growth was muted because the bank tightened credit governance, implemented risk-based pricing, and let old term loans run off. Growth is expected to resume in H2.
• Non-interest income is a weak spot with a plan: Fee income ex-treasury grew 48% sequentially, but total non-interest income was dragged down by a lack of PSLC sales and negative treasury income. Management aims to lift the non-interest income ratio to 10-15% over time to protect ROA as NIM normalizes.
• What to watch next quarter: Whether PSLC income materializes in Q3/Q4 as guided, the pace of deposit mobilization to fund growth with a CD ratio already at 87%, and any sign of credit costs normalizing from near-zero levels.

Gold Portfolio: The Engine and Its Limits

• Volume-led growth, not price-led: The 47% YoY portfolio growth came from increased tonnage as gold prices stabilized, with both existing customers bringing more gold and new customers being added. Management attributed this to better branch productivity driven by execution focus, monitoring, and leadership.
• A distinct customer segment: CSB's gold customer segment differs from NBFCs' clientele, and larger banks operate in a different segment with a different price and yield strategy. Management estimates roughly 20% overlap with competitors.
• Mix will peak before rationalization: The gold proportion of the book may rise to 45% before the bank begins to rationalize it, as part of a planned shift toward a more balanced portfolio by 2030.

Margin Trajectory and the Liability Challenge

• NIM is above the sustainable range: NIM stood at 5.38% YoY and 5.60% QoQ, but management stated this is not sustainable as the bank scales retail, SME, and corporate loans. The cost of deposits, which fell from 4.39% to 4.14% YoY, will start rising in line with market rates, pressuring NIM over time.
• Medium-term vs. long-term NIM guidance: In the next 12 months, NIM should hold between 5% and 5.5%. The longer-term guidance remains 4.5% to 5%, once the bank has a more balanced mix and other income streams mature.
• NIM growth is decoupling from advances growth: When an analyst noted that absolute NIM grew only 17% while advances grew 24%, management explained that the CD ratio rose to 87% and the investment book was rationalized, but beyond a point, pricing cannot be increased.
• Deposit franchise must be built, but no target given: With a CD ratio of 87% and ambitions to grow faster than the industry, management acknowledged it has no choice but to build a granular liability franchise and will not depend heavily on CDs. However, no quantitative deposit growth target was provided.

Pralay Mondal: "NIM is not the only judgment of a franchise. Sometimes 4.5% to 5% is better than 5% to 5.5% depending on how we look at the overall franchise."

The 2030 Vision: Investment Before the Hockey Stick

• Technology build is the prerequisite: Significant investments are flowing into the technology stack, with execution started on the loan origination system, core system migration, and loan management system. By 2024, the bank expects to be ready with its technology stack, credit processes, collections ecosystem, and payments ecosystem.
• Branch expansion is locked in: Management is confident of opening 100 more branches this year, with 81 locations already approved and work in progress. The plan is to continue adding at least 100 branches every year.
• Cost-to-income will stay elevated: The ratio will remain within 55% to 60%, and management does not mind it closer to 60% if most of the spend is investment-led rather than operational cost. The aspiration is to bring it below 45% by the end of the decade.
• The payoff is years away: The next 2-3 years after the 2024 technology readiness will be spent building the retail and SME businesses, with hockey stick growth expected only between 2027 and 2030.

Pralay Mondal: "We are looking for that hockey stick growth somewhere between '27 and '30."

SME and Wholesale: A Deliberate Slowdown

• Credit governance reset caused the drag: SME book growth was muted because the bank significantly enhanced credit governance, implementing risk-based pricing and rating requirements with a more stringent approach to ensure sustainable growth. Some of the old book is also running off naturally as term loans mature.
• Growth should resume in H2: SME growth is expected to align with the bank's overall growth in the second half of the year.

Non-Interest Income: The Missing Piece

• PSLC income was deferred, not lost: PSLC income was low this quarter because pricing was unattractive to sell. The bank bought what it needed for the year and is waiting for Q3 and Q4 to get a better price. Last year, roughly ₹34 crore was booked under this head.
• Treasury income was a drag: Total non-interest income was low due to the lack of PSL income and negative treasury income, as the bank strategically booked some losses given market adversities.
• Fee income is the long-term ROA anchor: Non-interest income ex-treasury profits grew 48% sequentially. Management wants to lift the non-interest income to total income ratio to 10-15% by the time NIM settles at 4.5-5%, so that ROA sustains between 1.5% and 1.8% even as margins compress.

Asset Quality and Credit Cost

• Credit cost is unsustainably low: Credit cost looks negative, which management acknowledged is technically too good to be true. Some credit cost will eventually come in as slippages as the bank grows.
• Asset quality targets are set: Gross NPA will remain below 2% and net NPA below 1% over a period.

Guidance & Commitments

Key Metrics