CSB Bank Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Soft quarter, deliberate rebuild: Q1 was soft by design as high-cost short-term deposits matured and were replaced cautiously; management expects the cost-of-funds drag to peak this quarter, with NII and NIM recovering from Q3.
• Gold loan book crosses ₹10,000 Cr: The portfolio grew ~42% YoY and now drives nearly half the bank's assets with negligible credit cost, though its mix will taper from FY25 as retail and SME scale.
• Investment spend is front-loaded and unapologetic: Higher opex on people, technology and distribution is being treated as investment with a payback period; the heavy-lifting phase runs through FY25, after which cost-to-income is guided toward 45%.
• Credit build is top-down and deliberately slow: A centralized credit governance structure is being built under a new CCO, with SME approval rates below 50%; management will sacrifice business to avoid bad credit.
• What to watch next quarter: Whether the promised Q3 NII/NIM inflection materializes, the pace of branch additions (100 planned for FY24), and any regulatory clarity on fintech partnerships and the labour code.

The Q1 Softness: Deposit Strategy and NIM Pressure

• Deposit book reset: High-cost short-term deposits mobilized in Q3/Q4 of last FY to fund loan growth matured in Q1; the bank deliberately kept replacement deposits at shorter tenure, betting the rate cycle would flatten, and expects the benefit to show after a quarter or two.
• Cost of funds peaking: Management stated this is the last quarter where any elevation in cost of funds will be seen; after that it will start flattening or tapering down, and NIM will follow that trajectory.
• NII outlook is cautious near-term: Q2 will not be better than Q1 on NII; Q3 onwards should start picking up, and the FY24 exit will probably be better than the current run-rate. The bank plans to make up the softness with fee income.
• LCR dipped tactically: LCR fell to ~106%-107% because the short-term deposits taken earlier were not LCR-friendly, and CASA as a percentage also declined. Both CASA and LCR ratios are expected to start improving from Q3 onwards, with LCR targeted above 110%.

Mondal: "This is the last quarter where any elevation in cost of funds will be seen. After that, it will start either flattening or tapering down. NIM will also follow that."

Gold Loan: The Engine and Its Limits

• Scale and growth: The gold loan portfolio crossed ₹10,000 crores, registering ~42% YoY growth. It now represents 45%-50% of the bank's portfolio.
• Economics are compelling: Gold loan IRR is 11%-12% with very minimal loss and very little risk weights. Most gold loan branches have already broken even from a marginal cost perspective.
• The cross-sell ceiling: Beyond the gold loan, the bank cannot do much with that customer; there is no cross-sell of other businesses. In high-cost primary locations like Delhi and Bombay, gold loan can be one product but the main focus of those branches must be other businesses.
• Mix will taper, not growth: From FY25 to FY27, gold loan as a percentage mix will start tapering down, though absolute growth continues. From FY27 to 2030, significant growth shifts to retail and SME.

The Investment Phase: Costs Today, Leverage Tomorrow

• Opex is being framed as investment: Higher spending on people, technology, systems and distribution is described as "investments going full blown" with a payback period, not as permanent cost creep. The major accelerator of this investment phase continues until FY25 end.
• Three cost heads and their breakevens: Technology is the largest opex head, followed by distribution and manpower. Manpower cost breaks even in ~6 months; branch/distribution breaks even in 2-2.5 years for proper branches; technology breakeven between capex and opex may take ~3 years on a rolling basis.
• Capex vs opex split: On total investments, capex will be ~35% and opex ~60%-65% flowing through the P&L. On the investment side specifically, capex will be ~70%-80% and opex ~20%-25%.
• Cost-to-income glide path: Over a period, cost-to-income will start having a glide path towards the 45% guidance, though the investment phase means near-term pressure.
• Employee expense was a one-off: Q1 employee expense spiked due to bonus payouts and higher actuarial costs; if netted off, employee cost growth is actually less than headcount growth because the base is expanding.

Credit Governance: Building Top-Down, Saying No

• Centralized architecture: The bank has moved away from decentralized underwriting. Under the CCO, separate verticals have been created for SME, Wholesale and Retail, along with dedicated debt management, collections and analytics functions, all centralized by policy except gold loan (due to operational risk).
• SME credit discipline is aggressive: The bank is rejecting more cases than it approves in SME, with an approval rate well below 50%. Management stated plainly: "We do not do bad credit. Because of that, sometimes we have to sacrifice business and we will."
• SME growth was paused until pricing rationalized: Until Q3 of last FY, the bank did not pick up SME business because market pricing of risk was not to their appetite. From Q4 onwards, pricing became more rational and growth picked up.
• Credit cost trajectory is a long story: This year credit cost will probably be in single digits (bps). Gold loan has near-zero credit cost; costs come from the older, reducing-balance portfolio. New retail credit costs will not show up for the first two years, then start appearing. SME will have cycles. The bank targets a gradual move to ~40 bps credit cost by FY30.

Mondal: "We are rejecting more cases than we are approving at this stage in SME, and our approval rate is well below 50% right now in SME. That is the kind of credit results."

Retail and SME: Green Shoots, Slow Build

• Retail and SME have turned positive: After showing negative growth as the old portfolio ran down, both the retail franchise and SME book have started showing growth; management calls these "green shoots" and will grow slowly and cautiously from a risk perspective.
• Retail is a two-year franchise build: Management does not believe in distributing retail loans purely on credit bureau scores; they want to understand customer income and bank relationship. Building a proper franchise will take a minimum of two years, with the full retail asset strategy showing up from FY25 onwards.
• SME is now national and branch-led: The new SME book spans North, West and South with no specific geography concentration. The bank is leveraging its branch-banking channel with 20 specific SME-focused branches and expanding significantly in West and North.
• New products being built: The bank is building home loans, retail LAP, SME LAP, commercial vehicles, commercial equipment, auto loans, and targeted education and healthcare loans, with LOS, LMS and leadership teams for each. Tractor loans and farm mechanisation have been technically launched but will progress gradually.
• Fintech partnerships on hold: The bank is sourcing almost nothing through fintech partners currently, waiting for full regulatory clarity on FLDG. The API stack is ready. The only active partnership is on cards with One Card, since the bank has no investment planned in cards for the next few years.

Mondal: "I still believe that you do not go out and distribute retail loans based on our credit bureau score and things like that. You need to understand the income of the customer, his or her relationship with the bank. We want to build a proper franchise and it will take us minimum two years."

Franchise Building: Branches, CASA and Fee Income

• Branch expansion is aggressive: The bank plans to launch 100 new branches during FY24, with 60% of those in North and West where the liability franchise is stronger. The long-term target is 1,500 branches by FY30.
• CASA strategy is utility-led: CASA can only grow when the bank can utilize the money, whether for business current accounts or household savings. The bank will cross-sell and create utilities around accounts to get reasonable average ticket size and value per account. CASA ratio is guided to sustain at 30%-32%, with faster growth from FY25.
• Transaction banking launched: A new current account product variant is being launched where the current account team and SME team work together. The Transaction Banking Head reports to the SME Head, building solutions on trade finance, CMS, etc. A new liability acquisition channel has also been created.
• Fee income is diversifying: Core fee income comes from insurance, liability fees, PF, LCBG commission, trade finance income, card fees and more, not any single line. Management states the bank cannot depend on one-offs and that whatever is visible will be a sustainable franchise story. PSLC income was zero this quarter despite sitting on a reasonably large book, implying future upside.

Mondal: "Our bank cannot depend on a one-off. Secondly, I do not believe in one-off. Whatever you see will be sustainable franchise and a long-term growth story."

Guidance & Commitments

Key Metrics