CSB Bank Ltd Q2 FY2025 Concall Summary

Key Takeaways

• NIM permanently reset lower by regulation: NIM held at 4.3% but the RBI’s penal interest guidance carved out ~25 bps permanently; the revised medium-term NIM band is now 4.3% to 4.5%, down from 4.5% to 4.8%.
• Asset quality is improving, not yet clean: Slippages fell sharply from ₹122 cr in March to ₹64 cr in September, and credit cost dropped to 15 bps, but management is still exiting regular wholesale relationships and cannot rule out future surprises.
• The bank is being rebuilt, not just run: A full-stack technology overhaul is underway (new core banking, data centers, digital channels), and management is explicit that the real retail franchise will only start building from FY27 onwards.
• Fee income is the offset to NIM damage: Core fee has been lifted from ~5% to 17%-18% of income, with a target of 19%-20%, as the primary lever to defend ROA in a structurally lower NIM world.
• What to watch next quarter: Whether the wholesale book actually starts picking up as guided, the pace of gold loan growth toward the 25%-30% target, and any further slippages from the legacy corporate book being wound down.

NIM & Margin Structure

• The 25 bps that will not come back: Management calls the penal interest impact a permanent damage to NIM for banks with CSB’s business mix, because the competitive environment prevents passing the full cost increase to borrowers.
• Bottoming-out call: NIM has bottomed out at 4.3% and should start improving from Q4 onwards, helped partly by potential NPA recoveries from Q4 and Q1 slippages and partly by any rate-cut cycle that begins mid-next year.
• Long-term NIM settles lower: The bank’s long-term NIM expectation is 4.0% to 4.3%, with the next two years closer to 4.5%, but the original 4.5%-4.8% band is now out of reach until rates fall faster than yields.
• Fee income as the structural offset: Core fee has risen from ~5% to 17%-18% of income under current management, driven by wholesale syndication, transaction banking, processing fees, and insurance distribution; four large insurers are now tying up with the bank because of process quality and low complaints.
• ROA defence: The bank aims to manage ROA in the 1.5%-1.8% range by improving fee businesses rather than chasing NIM through rate increases, and expects to do better than 1.5%.

Mondal: "I think it is a permanent damage to the NIM of around 25 basis points for banks with our kind of a business mix. We will figure out a way to manage the ROA by improving our fee businesses, but increasing NIM by increasing the interest rates, I do not think the whole market will operate like that."

Asset Quality & the Legacy Clean-Up

• Slippages trending down: Gross slippages fell from ₹122 cr (March) to ₹103 cr (June) to ₹64 cr (September), with some contribution from shrinking retail books (MFI, unsecured) where stress was identified over a year ago.
• Credit cost conservative and falling: Credit cost dropped to 15 bps from 22 bps last quarter, and the bank has now added standard provisions into the credit cost computation for more conservative reporting.
• Provisioning philosophy is to build buffers, not release them: Management could have written back a large amount to improve PCR but chose instead to add more accounts to contingency provisions, so that unknown future accidents are already provisioned.
• Wholesale book being deliberately reshaped: The bank is exiting large corporate relationships that are perfectly regular (not NPA, not even SMA) because they do not fit the desired wholesale franchise; the DA portfolio has only ~₹400 cr left and will run off in four months.
• No crystal ball on future corporate slippages: Management declined to give a definitive answer on further corporate slippages, saying nobody can do crystal-ball gazing and surprises are always possible, but asserted they are doing whatever best they can.
• NPA targets within reach: Gross NPA will be below 2%, net NPA below 1%, and credit cost below 0.4%, with management confident of being well below each parameter; a slight downward NPA trend is expected over the next year.

Mondal: "We just exited a large relationship and which is not NPA or even SMA, because we think that that is not the line of businesses we want to follow. We are completely changing our wholesale franchise in a different way."

Portfolio Reshaping: What Grew, What Shrank

• Three businesses deliberately de-grown: Personal loans, two-wheeler loans, and microfinance were shrunk over the last year after management saw stress emerging more than a year ago.
• Growth redirected to secured and partnership-led segments: CV/CE, LAS (gold-collateralized loans against securities), healthcare finance, credit cards (partnership model), and inventory funding were the chosen growth avenues.
• LAS reclassification reshuffles the reported mix: The ~₹1,600 cr LAS portfolio moved from gold loans to retail this quarter, inflating the reported retail book; excluding LAS, retail is ~15% of the book and needs to reach 30% by 2030.
• Gold loan growth target intact at 25%-30%: Management is confident of hitting this growth rate, supported by what it describes as probably one of the best compliant gold loan businesses in the country after two years of heavy process investment.
• SME growing at 26% and can sustain or improve: The SME book is performing well and management expects the growth rate to hold or accelerate.
• Wholesale book to restart from next quarter: After two quarters of exiting relationships, fresh credit disbursements are already happening significantly in wholesale, and the book will start picking up from Q3 with significant pace next year.

Technology Transformation: Building a New Bank

• A complete systems replacement is underway: The IT strategy approved by the Board in March 2022 involves replacing almost every system in the bank, from core banking (Oracle Flexcube, halfway through implementation) to payments, mobile and internet banking, trade finance, general ledger, risk management (OFSAA), and HR.
• Infrastructure built from the ground up: Four data centers (two in Mumbai, two in Chennai) are operational; a private cloud is ready; all branches run on high-resilience bandwidth; all server hardware across data centers is being replaced with modern technology.
• Digital and security capabilities being layered on: A new digital customer onboarding system, digital call center, Service Now platform (first bank in India to implement the finance FSO module), API ecosystem with Enterprise Service Bus, and new security operations centers monitoring external threats, perimeter, internal, and dark web are all live.
• The payoff is back-ended: Management expects the bank to be a completely new bank by mid-FY26 to FY27; only then will the CASA franchise start picking up, retail assets start building, payment products launch, and granular fees begin flowing.
• Current business is not yet the franchise business: Management is explicit that what the bank is doing right now is managing the bank as it is; the real franchise business starts later, and all current investments in people, technology, leadership, products, and distribution are for that future state.

Mondal: "Come FY '27, may be by mid of '26 we will be a completely new bank. That's the time what you are asking will go to play out... We are putting all of those investments today in people, technology, leadership, products, and distribution."

Gold Loan Business: Controls & Ambition

• Process transformation claimed as a competitive moat: Management says an unbelievable amount of work has been done over two years to move from being an average gold loan player to probably one of the best compliant gold loan businesses; when the RBI circular came, the bank found it had already ticked most boxes proactively.
• Execution is at 70%-80%, not 100%: From an intent perspective the bank is 100% there, from a process/policy/controls/audit perspective 100% there, but from an execution perspective maybe 70%-80%, and the remaining 20% can never be 100%.
• Zero fraud cannot be committed to: While controls are strong, management will not commit to zero fraud or zero scale-of-finance issues, only to strong intent and process.
• Growth ambition remains aggressive: The bank targets 25%-30% gold loan growth, and is trying to inch execution quality up from 70%-80% over time.

Mondal: "From an intent perspective, we are 100% there. From a process perspective, we are 100% there. From an execution perspective, maybe we are 70%-80% there. Rest 20%, it can never be 100%."

Deposit Franchise & CASA

• CASA ratio under pressure: Savings account growth of ~9% is not good enough when overall deposit growth is 25%, so the CASA ratio is declining; term deposit growth is well above 30%.
• Management will not buy CASA through pricing: The stated philosophy is that CASA is a franchise that helps build the assets business; paying up for CASA is equivalent to buying businesses through DSAs, which the bank will not do.
• CASA pickup is tied to the technology rebuild: The real CASA franchise is expected to start picking up only from FY26-FY27 onwards, once the new technology stack, digital channels, and payment products are in place.

Guidance & Commitments

Key Metrics