CSB Bank Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Profitability surged on core operations: Net profit rose 29% QoQ to INR 156 crores, driven by a 58% jump in core non-interest income and improved operating performance, not treasury or PSLC gains.
• Gold loans are the tactical engine: The gold portfolio grew 51% YoY, with tonnage up 49%, as management leans on this high-ROA business to deliver short-term returns while the broader franchise is being built.
• The CASA franchise is a multi-year build: CASA growth was muted at 8% and the ratio is under pressure; management expects to see growth within 12 months but a real franchise will take two to three years.
• Investment mode is on, CTI will stay elevated: The bank is spending heavily on technology, branches, and people, aiming to keep the cost-to-income ratio around 60% in the short term before targeting 40-45% by 2030.
• What to watch next quarter: The pace of deposit growth needed to fund a 24-26% loan book expansion, any further dip in the CASA ratio below 30%, and the initial traction in newly launched retail asset products.

Profitability & Operating Performance

• Core fee income is now the driver: Core non-interest income (ex-treasury, ex-PSLC) grew 58% QoQ and 40% for 9 months, moving from low single-digit to a 13% share this quarter. Management calls this sustainable and aims for 14-15% in the medium term.
• NIM remains elevated but normalizing: NIM stood at 5.8% for the quarter and 5.52% overall. Management expects normalization and aims to hold around 5%, happy with that level.
• ROA improved sharply: ROA moved from 1.87% to 2.37% QoQ and from 1.83% to 2.00% yearly, reflecting the core operating performance improvement.
• Cost of deposits is in a transient phase: The cost of deposits reduced from 4.34% to 4.19% YoY but has gone up sequentially; management describes this as a passing phase.
• Credit cost has been negative, but that ends soon: Credit cost has continued to be negative due to recoveries and upgrades from old SME and retail portfolios, but management explicitly states it will not be negative next year and will be below 40 bps on a 3-year basis.

Mondal: "Our core non interest fee, is now more sustainable and doesn't depend on cycles. PSLC is a cycle business because it depends on what is the premium that is available in the market. The treasury income is also interest rate cycle dependent."

The Gold Loan Engine & Tactical Deployment

• Gold loans are doing the heavy lifting for growth: The portfolio grew 51% YoY and 9% QoQ, with tonnage growth of 49% outpacing customer acquisition growth of 36-37%, meaning existing customers are borrowing more.
• LTV is managed conservatively: The bank kept LTV at around 75% by not increasing rates much, protecting asset quality in a rising gold-price environment.
• 40% of disbursements are balance transfers: The rest are new-to-bank customers, with an average ticket size of 1-2 lakhs. Management declined to provide a split by ticket size.
• Tactical deployment is a deliberate short-term choice: Management is deploying capital where RoA is highest (2.37% this quarter) and is refusing businesses at particular yields that larger peers are doing, because the bank lacks the cross-sell products to make lower-yield lending profitable on a risk-adjusted basis.
• SME book is flat by design: The old SME book is running off while fresh disbursements are being added, but risk-adjusted returns on SME were not good enough and the bank lacks surround products (fees, CMS, supply chain, vendor financing) to make it work yet.

Mondal: "I know this is not a very long-term good strategic view. But in the short term, I also have to deliver."

Liability Franchise: The CASA Challenge

• CASA growth is muted and the ratio is under mathematical pressure: CASA grew only 8% YoY, and the ratio can decline even if CASA grows faster than FDs when overall deposit growth is high. This quarter, CASA itself came down.
• Building CASA is a multi-year project: It requires products, processes, distribution, customer segmentation, and surround products (retail assets, credit cards, transaction banking). NTB accounts grew 50% last year with better quality, but the real franchise will take two to three years.
• Management will try to hold a 30% floor: Even if CASA grows faster than TDs, the ratio will continue to fall below 30% until it reaches above 35-40%. Management will try to ensure it does not fall below 30%.
• Deposits must grow at least 20%: With an 81% CD ratio and a comfort level of 85% (willing to go to 90%), deposit growth must match asset growth. Some will come from term deposits because CASA will not deliver overnight growth.
• Top 20 depositor concentration is 12-13%: Management is trying to bring that down over time.

Mondal: "CASA is a slightly high road and we have to do the building blocks to reach there. Many senior leaders, say self, our retail head here, all of us have built CASA businesses in various, at least three large banks before. So we know how to do it, and we will go step by step. There is no shortcut to that success."

Asset Quality & Credit

• Asset quality is strong and improving: GNPA at 1.45%, NNPA at 0.42%, and PCR with write-off at 92% (71% without write-off, up from 66% last quarter). Contingent provisions are higher than NNPA.
• Slippages are low and manageable: Slippages are close to 1% this fiscal. Gold loan NPAs and slippages are very low. The old retail portfolio slippage is becoming negligible, and the bank is getting upgrades and recovery from old SME and retail portfolios.
• The SR portfolio is fully provided for: An INR 12 crore hit was taken in the P&L this quarter based on regulatory guidance. Future recoveries will go straight to the P&L.
• Capital position is comfortable: CRAR improved to 25.78% despite asset growth, helped by lower risk weights as the gold loan mix increased.

The Build Phase: Investments, Products & Distribution

• Technology is the top investment priority: The CIO has been told to run as fast as possible and will be funded for whatever he can execute. Work spans core banking, LOS (4-5 products), LMS, corporate LOS, corporate net banking, and a revamp of mobile and net banking.
• Branch expansion continues at 100 per year: As technology costs taper in 3-4 years, the pace will go beyond 100. Management believes branches are the way to build distribution until at least 2,000 branches.
• New retail asset products have been launched: Personal loans, education loans, home loans, CV, auto loans, CE, HCF, commercial equipment, and healthcare are now live with policies, processes, and systems in place. Visibility on the balance sheet will take at least a year.
• Credit cards are a CASA acquisition tool: The bank launched a premium digital card with OneCard. The strategy is to cross-sell CASA to credit card customers, not the reverse, to build a better-quality CASA franchise. Next quarter may see another 10,000 cards issued.
• A transaction banking vertical has been created: A separate vertical for CMS, supply chain, and related services is being built, with systems under development.
• Management is willing to invest 70-80% of yearly profit into opex: This covers distribution, people, and technology on a project basis over the next 3-4 years. CTI will stay closer to 60% in the short term.

Mondal: "I have told our CIO Mr Rajesh to run as fast as possible. Whatever he can run, we will fund it."

The Metro & Urban Challenge

• The bank is moving from deeper geography to metro/urban markets: To be present profitably in these markets, a full-service franchise is required, including multiple products, premium businesses, and access to the mid-to-top of the pyramid.
• Tier 2/3 markets are well-served by existing strengths: Gold loan, agri, MFI, and MSME perform well there, and digital is becoming a major part even in deeper geographies. But smaller branches do not make big money; larger presence and higher-end customers in metro/urban markets are needed.
• Retail liability is existential: Management states plainly that if they cannot build retail deposits, the bank has no story to tell or build. Most of the management team has done it before in large organizations.

Mondal: "If we can’t build that, we don’t have a story either to tell or to build it."

Guidance & Commitments

Key Metrics