CSB Bank Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Profitability up, NIM held above 5%: Net profit rose 19% YoY to INR 547 crores for FY23, with ROA improving to 2.06%. NIM stayed at 5.48% for the year, though management is willing to sacrifice a few basis points for growth.
• Gold and SME drove 31% loan growth: Advances grew well ahead of the ~16% industry pace, led by a 48% YoY surge in the gold portfolio and a deliberate SME re-entry once risk pricing improved.
• Deposit franchise deepened, CD reliance collapsed: Deposits grew 21% YoY while the CD book was slashed from ~INR 500 crores to INR 95 crores, making the liability side a core deposit franchise. CASA improved sequentially to 32.18%.
• A massive tech rebuild is underway: Management stated 70%-80% of the bank's current technology will be replaced within two years, with the new core system targeted for FY25. The cost-to-income ratio will stay elevated near 55-60% in the short run before tapering to ~45% by FY30.
• What to watch next quarter: Whether the SME momentum holds into FY24, the pace of branch expansion in North and West, and any further rise in cost of deposits that could test the 5% NIM floor.

Growth Strategy: SME as the Engine, Retail on Deck

• SME re-entry was deliberate and timed: The bank avoided SME expansion when risk pricing was unattractive, exited accounts with unacceptable rates, and only leaned in during Q4 of FY23 when pricing improved. The portfolio grew ~10% QoQ in Q4.
• SME is the seven-year growth engine: Management explicitly named SME as the growth engine for the next seven years and expects to sustain the momentum into FY24 barring a market shift.
• Retail growth is a post-FY25 story: The bank is building retail asset systems through mid-to-end FY24, but real scale-up will only happen between FY27 and FY30. Green shoots are expected by FY25. The FY30 target mix is 20% gold, 30% retail, 20% SME, and 30% wholesale and other.
• Branch expansion tilts toward under-penetrated regions: At least 100 new branches are planned for FY24, with over 60% in North and West, regions that will also support the CASA franchise build.

Mondal: "Frankly speaking, none of those will take off until FY '25. FY '25, we will start seeing some green shoots out there."

Margins, Deposits, and the Cost of Growth

• NIM is a function of mix and cost of funds: FY23 NIM was 5.48%, and management expects to operate in a 5% to 5.5% range. The bank is willing to sacrifice a few basis points for franchise growth, calling too high a NIM unsustainable when scaling.
• Cost of deposits rose 55 bps QoQ by design: The increase came from higher term deposit rates for retail customers with ticket sizes above INR 2 crores, as the bank built a liquidity buffer for sustainable growth. Card rates were not raised significantly; the bank only matched the top three private sector peers.
• The outlook for deposit costs is flattish: Management does not see much further growth in cost of deposits and expects any NIM pressure to last at most one or two quarters, since the bank did not lock in long-term funding.
• CD ratio will stay below 90%: If credit grows at 20-25%, the CD ratio can hold at current levels. Management is comfortable up to 86-88% but will never cross 90%.

Mondal: "I'm willing to sacrifice margins for growth because ultimately we are building a large franchise and we leverage this franchise over the next decade - two decades, so given that perspective, few basis-points here and there I don't want to lose my sleep on that."

Fee Income: The 15% Ambition

• Core fees grew 44%, offsetting a treasury drag: Total fee income rose 28% despite treasury and PSLC income being INR 30-31 crores lower than the prior year. Core fee drivers were gold, insurance, debit cards, ATMs, and core liability fees. Card, trade, forex, and transaction banking fees have not yet contributed.
• Management committed to a 15% fee-income share within two years: Fee income currently contributes ~12% of total income. The bank expects PSLC income to return next year, processing fees to rise with credit cards and SME, and overall fee growth to outpace loan growth with "definite conviction."

Mondal: "I think in the next two years, we should be able to reach at least 15% in terms of our fee income contribution to the overall income, which will be then in the same league as the big players."

Asset Quality and Credit Cost

• Asset quality is strong and provisioning is conservative: GNPA stood at 1.26%, NNPA at 35 bps, with a PCR of 92% including write-offs. Contingency provisions on the books exceed NNPA. Slippages have been positive, signaling that risk management and credit governance are working.
• Credit cost was negative ~25 bps this year: Management guided that GNPA will stay below 2%, NNPA below 1%, and credit cost below 40 bps on a CAGR basis for at least the next three to four years. Next year should be well below that upper bound.
• NBFC exposure rose to 8.8% but is low-risk: The increase from 7% in Q3 is to top-rated borrowers (A and above), highly diversified, and mostly in home loans and similar businesses, not vehicle finance.

Mondal: "I will hold on to that. Having said that, obviously, given the trajectory, we may not have a negative credit cost, but we may not reach that higher end of this limit."

Technology Overhaul: Replacing 70-80% of the Bank

• A near-total tech rebuild is underway: Management stated that 70-80% of the bank's current technology will be gone within two years, spanning the core system, LMS, LOS, corporate net banking, API integration, lead management, and project management systems.
• The new core system is targeted for FY25: The bank will not compromise on quality and will integrate everything around the new core. Technology investments in FY24 will cover distribution, people, and channels, with payback periods closely tracked.
• Cost-to-income will stay elevated before tapering: The short-run target is 55-60%, with next year at the tipping point. The FY30 target under the SBS 2030 plan is 40-45%. Management framed annual profits as the investable capex pool, apportioned over three to five years.

Mondal: "The easiest way to say what we're doing in technology is almost 70% - 80% of what is there in the bank won't be there after two years."

Guidance & Commitments

Key Metrics