CSB Bank Ltd Q2 FY2024 Concall Summary

Key Takeaways

• NIM bottomed, recovery promised: NIM fell to 4.84% from a 5.12% half-year average, driven by a deliberate exit from high-LTV gold loans that compressed yields. Management says the trough is behind and expects full-year NIM above 5%.
• Gold loan yield drop was tactical, not structural: Gold loan portfolio yield fell ~70 bps QoQ to 11% as the bank preemptively shed higher-LTV, higher-yield exposure on gold-price fears. With gold prices now rebounding, yields are expected to recover immediately.
• Cost-to-income stays elevated on deliberate investment: The bank is spending heavily on technology (new core banking system, full stack rebuild), leadership, distribution, and customer acquisition. Operating leverage is promised, but only from FY25 onward.
• Asset quality remains a standout, but credit cost is unsustainably low: GNPA at 1.27%, NNPA at 0.33%, and negative credit cost of -15 bps. Management calls this "too good to be true" and guides toward 40-50 bps eventually.
• What to watch next quarter: Whether gold loan yields actually rebound, whether NIM crosses back above 5%, and any sign that the technology investment spend is plateauing rather than rising further.

Margin Trajectory & Gold Loan Dynamics

• NIM compression mechanics: Yield on advances fell 30 bps sequentially (11.18% to 10.88%) while cost of deposits rose 22 bps (5.00% to 5.22%). The yield decline was concentrated in gold loans, where the bank exited higher-LTV customers as gold prices dipped in the second half of Q2.
• Gold loan yield drop quantified: Portfolio yield fell from ~11.78% in Q1 to ~11% in Q2, a ~70 bps sequential decline. The half-year carrying yield of 11.70% shown in the presentation is an average that masks the Q2 drop; carrying yield includes loans disbursed on the last day of the quarter that generated no P&L return yet.
• The tactical exit rationale: Management worried that if gold prices fell further, LTV on higher-yield loans could breach 90%. They could not have predicted the subsequent gold-price recovery or the geopolitical crisis that drove it. The decision was risk-averse, not demand-driven.
• LTV dynamics are counterintuitive: Despite exiting high-LTV loans, average portfolio LTV can still rise because the bank continues underwriting new gold loans at 80% LTV while the overall gold loan book grows. LTV is always calculated including interest applied, so the customer receives ~10% less than the gold value.
• Recovery thesis: Management expects gold loan yields to "go up immediately this quarter" and believes increases in yields across retail, SME, and wholesale will outpace any further rise in cost of funds, pushing NIM above current levels.

Pralay Mondal: "I mentioned that we have bottomed out on our margins. Obviously, cost of funds is sort of flattening, but we still don't know if there is some more increase panning out there."

Deposit Franchise & Cost of Funds

• Deposit growth came at a price: Deposits grew 21% YoY, but term deposit costs have risen 125 bps as the bank grows term deposits by nearly 30% at rates of 7.5% to 8-8.1%, up from 5-5.5% in Q2 FY23. CASA growth remained muted, consistent with industry trends.
• Renewal strategy is working: The bank introduced special rate buckets to ensure renewals are not impacted. Renewal rates are very high, and these funds come at reasonable rates, higher than before but not at the elevated rates demanded by new depositors.
• Term deposit cost outlook is tied to G-Sec: Management sees term deposit costs as nearly peaked. If the 10-year G-Sec moves closer to 7-7.25% by year-end, deposit costs might rise another 10-20 bps, but "7% is out of question." The risk case is if US G-Sec moves from 5% to 6%, which would change the picture.
• Not buying the liability franchise: Management explicitly rejects pricing as a customer-acquisition strategy, pointing to savings account rates still below 3% as evidence. The bank will not sacrifice growth for NIM, but also will not buy liability business.

Pralay Mondal: "I never believe in pricing as a way to attract a customer because then, that's not the way to build a franchise; because if I give 5%, somebody else will give 6%, somebody else will give 7%, they will go away."

Investment Cycle & Operating Leverage

• Four lines driving cost-to-income escalation: (1) Technology, the largest investment, where the bank is replacing everything it had three years ago with the latest and best systems; (2) leadership, people, distribution, and processes, hiring the best in the market to scale; (3) natural costs including HR and other opex; (4) customer acquisition machinery, including contact centers, outbound contact centers, and VRM channels.
• Technology transformation is a multi-year build: A new core banking system implementation begins next month. LMS, LOS, and corporate net banking are already done. The full stack around products and services, transaction banking, SME, supply chain, and CMS is being built. None of these technology-driven changes will materialize overnight or next quarter; all will happen from FY25 onward.
• Branch leverage is the operating model bet: Management plans to split existing branches into gold and other businesses, effectively creating two branches out of one, with more centralized operations. Execution waits on the technology stack and product suite being fully ready. This is expected to bring down operating cost and cost-to-income.
• Opex-to-assets path down: The ratio will decline once SME and wholesale businesses start growing and cross-selling multiple products to the same customer becomes possible. The bank will take another 2-3 years to enter the wealth business; once that happens, branch people become more productive with relationship managers.

Pralay Mondal: "A large part of our cost-to-income escalation is primarily happening because of 3, 4 lines: One is technology. The largest investment is happening in technology. As I said before, in our bank, we'll have nothing what we had 3 years back in technology, and we are taking the latest and the best technology in everything which we're doing."

Asset Quality & Credit Cost

• Headline ratios are strong: GNPA at 1.27%, NNPA at 0.33%, PCR at 75% without write-offs and 92% with technical write-offs. The SR portfolio is fully provided.
• Slippages concentrated in gold loans: Gold loan slippages were slightly higher than last quarter, but management notes these eventually do not lead to credit loss based on historic experience because the metal is held and recovered. Slippages in other segments were broadly in line with previous quarters.
• Credit cost is unsustainably low: At negative 15 bps, management acknowledges this is "too good to be true" and will eventually mirror the business mix. Guidance is for 10-20 bps this year on the higher side, rising to 40-50 bps from next year onward at full franchise level. The long-term FY2030 guidance embeds gross NPA below 2%, net below 1%, and credit cost between 40-50 bps.
• COVID provisions are being conserved: COVID risk is gone, but the bank created an internal policy earmarking these provisions against certain accounts. As those accounts resolve, the provisions can be redeployed. Management prefers keeping slightly higher provisions as a conservative process.

Pralay Mondal: "I keep wondering how long will we be on negative because this is not real... But this is too good to be true. It will mirror the business mix eventually."

Segment Growth & Business Mix

• All four segments grew for the first time: Wholesale grew 17%, SME 22%, Retail 38-40%, and gold loan 32%. The mix remained broadly stable: gold loan around 47%, wholesale down slightly, retail up slightly, SME almost the same.
• Gold loan growth was consciously slowed: Sequential gold loan growth was only 5%, lower than other segments, as the bank exited higher-LTV loans. Gold loan cannot scale to the level of a ₹2,50,000 Cr balance sheet; it is not a scalable business like wholesale, SME, and retail. Gold will continue to sustain and contribute, but the future growth engine lies elsewhere.
• SME book clarification: Last quarter's presentation showed SME at ₹2,527 Cr inclusive of prudential write-off; this quarter's ₹2,377 Cr is net of PWO. The actual sequential growth, net of PWO, is 8% from ₹2,205 Cr to ₹2,377 Cr.
• Credit card portfolio is being built: A ₹171 Cr credit card portfolio has been established, which consumes risk weights because some exposure is unsecured credit.
• New fee streams in development: Cash management services for retail and SME customers are being implemented via new software, aimed at attracting more current account customers, creating floats, and enabling SME business. Logistics for cash handling and movement will be outsourced.

Guidance & Commitments

Key Metrics