CSB Bank Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Gold loan book deliberately slowed: Gold loan growth was muted as the bank rebalanced its portfolio away from gold (now 48% of loans), avoided higher LTVs, and worked through system upgrades that temporarily slowed processing.
• Yield jumped ~70 bps QoQ on disciplined pricing: Management refused low-yield SME and wholesale business on a marginal cost basis, while gold loan LTV reductions allowed rebooking at higher yields. Yields improved across retail, Agri, MFI and gold.
• Negative credit cost is temporary: Several quarters of negative credit cost came from lower slippages and recoveries. Management explicitly warns it will not continue forever and next year may not be at this level.
• Heavy investment phase will keep cost-to-income elevated: Technology rebuild, 75-100 new branches per year, and ~30% manpower cost growth will keep cost-to-income around 60-65% for the next 1-1.5 years, before a glide path to below 50% by FY30.
• What to watch next quarter: Whether deposit costs actually peak in ~3 months as management expects, the pace of gold loan re-acceleration after system upgrades, and any sign that wholesale and SME are picking up ahead of the FY25 inflection point.

Gold Loan: The Deliberate Slowdown

• Three reasons for muted growth: The bank wanted to bring gold loan down from a dominant share of the portfolio, avoided higher LTVs to manage gold price volatility risk, and implemented system improvements that slowed processing. The book is being managed as less risky and more compliant.
• Yield benefit from lower LTV: Bringing LTV down to a comfortable level allowed the bank to rebook gold loans at higher yields, contributing to the 68-70 bps QoQ yield improvement.
• Gold remains the core for two more years: Gold loans carry low risk weights, high yield, and minimal loan losses (NPA in gold is lower than the bank-level NNPA of 31 bps). The cost of operations is high but already baked into the system.
• Long-term target is 20% by FY30: The share will fall not because gold is de-prioritized, but because all other businesses will start picking up after the new system delivers from FY25 onwards.

Pralay Mondal: "See, for another 2 years, we are in love with gold. Gold will continue to do well because it doesn't need risk weights much. It has high yield. Our loan losses are minimal."

Yield & Margin Management

• Marginal costing discipline drove the yield jump: Management evaluated every incremental business against the incremental cost of deposits. SME and wholesale loans linked to repo were refused because if repo falls, the bank must reprice immediately while deposit costs have not yet peaked.
• Old SME book run-off: The existing SME book saw run-off of ₹10-20 crores as the bank let go of clients showing interest rate pressure or stress signals.
• Surplus liquidity parked at negative carry: The bank chose to hold surplus funds in investments earning below funding cost rather than push low-yield assets, accepting a near-term NIM impact as the price of caution.
• Yield range is structurally narrow: CSB Bank operates in a 3-3.5% yield range because it does not take high risk. Unlike larger banks that can cross-sell wealth or transaction banking, CSB Bank's life cycle means it must primarily play the yield game.

Pralay Mondal: "I would like to err on the side of caution, where it impacts my NIM. All this surplus money, will go into investments, which has resulted in negative yield right now on an incremental basis, whereas your funding cost is higher than that."

Liability Franchise: The Binding Constraint

• CASA growth is structurally weak: CASA grew only 6% YoY because the bank has historically been a gold loan franchise and its customers are not yet at a level to build a strong CASA base. Management will not invest in the systems needed until FY25.
• CASA percentage unlikely to rise near-term: If deposit growth continues at 20-21%, CASA growth of 5-15% means the CASA ratio will not improve much. The bank will depend on retail term deposits and other borrowings until FY25.
• CD ratio deliberately pulled back: The CD ratio fell from above 87% to below 83% as the bank consciously avoided incremental business that would push it toward the 90% comfort zone, given the ₹3 lakh crore liquidity deficit in the system.
• TASC vertical created for relationship deposits: A new vertical covering Treasury, Asset-Liability, Structured products and Capital markets has been set up to build larger relationship-based deposits.

Pralay Mondal: "Growth in assets is not a problem for us. Our constraint will be, can we grow liability at more than 20% consistently with a reasonable cost. So that is something we have to notice."

SME & Wholesale: Building for FY25 Inflection

• SME showing 28% YoY growth after a long wait: Growth picked up late because the bank was setting up processes, systems, platforms and policy upgrades. Momentum started after that foundation work was completed.
• Hub-spoke model focused on 42 branches: The bank identified 20 catalyst and 22 prime branches, working with trade bodies, industry associations and knowledge banking advisory tie-ups. Focus sectors are manufacturing: light engineering, automobile, healthcare, pharma, food processing, and to some extent textiles and apparels.
• Wholesale deliberately slowed on pricing: The bank refused businesses that would come at low yield given rising cost of funds, applying the same marginal costing logic used in SME.
• NBFC lending turned cautious: After RBI raised risk weights on NBFC exposure by 25 bps, the bank became more selective, refusing NBFCs with large unsecured books because that risk translates back to the bank. The approach is risk-guidance-driven, not yield-maximization-driven.

Retail: Small Base, Liability-Led Strategy

• Retail is only 15% of loans including Agri/MFI: On a standalone basis it is just 9%. While it will grow much faster on a small base, it will not materially contribute to the loan book near-term.
• No DSA-led growth: The bank will not buy retail business through DSAs and external channels. The retail portfolio will mirror how the customer franchise is built, with cross-sell to existing liability customers.
• Short-term niche approach: Until the liability franchise starts picking up in 1-2 years, the bank is doing businesses primarily through internal customers, building bridges with manufacturers and end customers directly. Products include auto, commercial equipment, commercial vehicles, loan against properties, and healthcare.
• Unsecured book is only ~5% of the bank: Credit card growth was significantly slowed this quarter based on market ecosystem concerns, not portfolio-specific issues.

Pralay Mondal: "We are not going to go out and buy retail business through DSAs and all this external kind of channels. If that does not happen, our retail book will mirror how the customer franchise is building and based on this, cross-sell to them."

Investment Phase: Costs, Technology & the Glide Path

• Three primary cost lines growing: People costs (manpower up ~30%), infrastructure and distribution (75-100 new branches per year), and technology (front-end investments in rebuilding the bank's infrastructure).
• Technology spend is front-loaded: Most technology investments will be completed in the next 2 years, after which only maintenance and add-ons continue as opex. The spend flows through the P&L over 4-5 years, with a two-year payback starting from FY27-28. Tech spend is roughly 9% of total opex.
• Cost-to-income glide path: For the next 1-1.5 years, cost-to-income will remain around 60-65%. It will start tapering below 60% by FY25-26, and reach well below 50% by FY30. Branch breakeven is expected within 2-3 years of setup.
• Non-interest income target is 13-17%: The easy journey from 5% to 13-15% is done. The next leg to 17% will come from the newly started transaction banking vertical, with fees starting to rise from next year.

Pralay Mondal: "We have done all these calculation, and that's where we are saying how confident we are that by FY'30, our cost to income will be well below 50%."

Guidance & Commitments

Key Metrics