Key Takeaways
- Technology reboot completed, scale phase set for FY27: The bank migrated to a new CBS and 62 surround systems in Q1, a transformation management calls ahead of schedule. The real scale-up of the franchise begins only from FY27, making FY26 a stabilization year.
- NIM held at 3.54% and is called the bottom: Despite rising deposit costs from bulk funding and repricing, management expects NIM to stay at or above this level, with cost of funds declining from Q2 onward.
- Profit growth muted by one-off SME slippages: Operating profit rose 28% YoY, but net profit grew only 5% as 3-4 accidental SME accounts slipped. Recoveries have already begun in Q2, and the portfolio is expected to improve this quarter.
- Liability franchise is the binding constraint on growth: Loan growth of 30%+ across all verticals was partly funded by bulk deposits and CDs. Building a granular retail liability franchise is the next leg of the journey, starting once the new CBS stabilizes.
- What to watch next quarter: Whether deposit costs actually decline as guided, the pace of recovery on the Q1 SME slippages, and any early signs of the retail liability build-out beginning.
Technology Transformation: The Quarter's Defining Event
- Core banking migration went live in May: The bank moved to Flexcube and deployed 50-plus surround systems with twelve deployments inside the CBS, making 62 systems in total. The partner described it as one of the best transformations they have seen.
- Legacy constraints are now removed: The old system could not support adding even one more product without breaking. The bank now has two data centres with two DR sites, moved from Oracle 11G to 19C, and can finally introduce transaction banking, CMS, trade, and supply chain products.
- Stabilization will take a couple more months: Given the complexity, management expects systems to fully stabilize over the next few months. The sustain-and-build phase should wrap by the beginning of FY27.
- Scale phase is a FY27 story: FY27 through FY30 are the four years management says will take the bank to a "completely different spectrum." The reboot of infrastructure, systems, processes, people, and products will be complete, and the real scale journey starts from FY27.
Pralay Mondal: "The real scale phase, which is the most exciting part of the journey is going to start from FY '27 beginning. FY '27, FY '28, FY '29 and FY '30, these 4 years, we will take the bank to a completely different spectrum."
Margins & Cost of Funds
- NIM held at 3.54% and is guided as the floor: Management does not expect NIM to go down further from this level. Full-year NIM is expected closer to 3.7%, within a 3.5% to 4% band.
- Two factors pushed up deposit costs in Q1: Bulk deposits taken at end-March to fund 31% asset growth incurred a full quarter's cost (5-6 bps impact). Separately, the bank stopped taking long-term deposits expecting rates to fall, so maturing deposits repriced higher than their original contracted rates.
- Cost of funds decline expected from Q2-Q3: Incremental cost on term deposits, CDs, and bulk is already doing better. Bulk and CD rates are falling, and bulk is around 40% of deposits. Management aims for at least a 20 bps drop in cost of funds from current levels by exit.
- A 25 bps rate cut is factored in between September and November 2025: The impact on MCLR will flow to the next financial year.
- Current account franchise is being rebuilt: Some current accounts were tactically moved out to build a proper transaction-banking-based CA franchise, which increased cost of funds a little in the near term.
Pralay Mondal: "Yash, I can only tell you that we live in a world today where we do not know what happens after few days. In that kind of a scenario with global turmoil and global uncertainties, it is better to be safe than feel sorry later."
Asset Quality: Accidental Slippages, Secured Book
- SME slippages were idiosyncratic, not systemic: 3-4 accounts drove the higher slippage, described as "pure accidental kind of a situation" with nothing to do with credit underwriting, trend, or industry conditions. The bank was busy with migration and could not manage NPAs well in SME during the quarter.
- Recoveries have already begun: 2-3 of the slipped SME accounts have been recovered in Q2. One large account, where a key person passed away and the next generation is taking over, will take time but is almost fully secured.
- Unsecured slippages are contained: Slippages in unsecured personal loans, MFI, and credit cards will not exceed INR30-35 crores. FLDG is available only in the MFI business.
- Portfolio is overwhelmingly secured: Retail unsecured is only 3% of the overall book. SME does not normally do unsecured business. Management emphasized that slippages are all well-collateralized and money will not be lost; in SME, the approach is to help rebuild the business rather than immediately call back the loan.
- Asset quality guidance is for improvement: GNPA, NNPA, and credit cost are all expected to be lower than Q1 levels by year-end. The long-term vision through FY2030 is GNPA below 2%, NNPA below 1%, and credit cost below 50 bps. Global uncertainty from tariff announcements is not factored into this guidance.
Pralay Mondal: "Yes, we had 2, 3 strange situations in the SME portfolio, which had nothing to do with credit underwriting, trend, or an industry situation. It is just pure accidental kind of a situation."
Loan Growth & Portfolio Mix
- All three verticals grew 30%+ YoY in Q1: Gold, corporate, and SME portfolios each registered above-30% growth. Retail loans other than gold grew 19%, with deliberate moderation in agri, MFI, and other unsecured loans over the last 18-24 months.
- Mix shift is underway toward wholesale and SME: Wholesale may rise another 1-2% this year as quality corporate and mid-market business comes in. SME may move up 50 bps to 13-14% of the book. Gold gained 1% this year, funded by reductions in MFI and agri.
- Retail reclassification may shift reported mix: A recent RBI circular may require loan against securities (where gold is collateral) to be categorized differently, which would bring down the reported retail share and move it back to gold.
- The real retail journey starts next year: Management will not take risk in the current environment. Once the liability franchise builds, credit growth, currently 20-25%, may go well above 25%.
- Growth is constrained by liabilities, not capital: CRAR is on the higher side. Sustainable asset growth cannot rely indefinitely on bulk deposits, CDs, and FCY borrowings. The liability franchise build takes 2-3 years, and bulk support will be needed for another 1-2 years.
Fee Income & Non-Interest Income
- Non-interest income is 19% of total income, with core fees at 14-15%: PSLC income is not reckoned as core and normalizes after a Q4 spike. Insurance income continued to do well.
- Fee growth will accelerate from next year: Once the CBS stabilizes, the bank will scale transaction banking, retail assets, and customer acquisition, all of which are fee-oriented. CMS, trade, and supply chain systems will be implemented shortly.
- Treasury gains provide a tailwind: The bank sits on a fairly large AFS book and did not fully sell it this quarter because yields are expected to come down through the year, implying mark-to-market gains will support non-interest income going forward.
- Three syndication deals were completed so far: Management declined to disclose income from these deals but noted a fourth is in progress.
Guidance & Commitments
| Commitment | Specifics | Timeline |
|---|---|---|
| NIM floor | NIM not to go below 3.54%; full-year closer to 3.7% | FY26 |
| Cost of funds decline | Minimum 20 bps drop from current level | FY26 exit |
| Asset quality improvement | GNPA, NNPA, and credit cost all lower than Q1 levels | FY26 exit |
| Long-term asset quality | GNPA <2%, NNPA <1%, credit cost <50 bps | Through FY2030 |
| Cost-to-income glide path | Down to 50%; sharp glide path begins | FY28 onwards |
| ROA and ROE floor | 1.5% ROA and 15% ROE as "Lakshman Rekha" | Not specified |
| Scale phase start | Real scale journey begins after systems stabilize | FY27 beginning |
| CD ratio range | Brought down to 85-90% | Ongoing |
| Corporate net banking launch | New platform rollout | Next 6-9 months |
Key Metrics
| Metric | Q1 FY26 |
|---|---|
| Net profit | ₹119 cr, up 5% YoY |
| Operating profit | ₹220 cr, up 28% YoY |
| Other income | 19% of total income, up 42% YoY |
| Cost-to-income ratio | 64.70%, vs 67.69% in Q1 FY25 |
| Net interest margin | 3.54%, maintained; management expects no further decline |
| Return on assets | 1.03%, vs 1.27% in Q1 FY25 |
| Return on equity | 10.9% |
| Earnings per share | ₹27.42 |
| Book value per share | ₹258 |
| Deposits growth | 20% YoY, vs industry growth of ~10% |
| CASA ratio | 23.49%, CASA grew 13% YoY |
| Net advances growth | 31% YoY, vs industry growth of ~10% |
| Gold loan portfolio growth | 36% YoY |
| Corporate portfolio growth | 32% YoY |
| SME portfolio growth | 31% YoY |
| Retail loans ex-gold growth | 19% YoY, with deliberate moderation in agri, MFI, unsecured |
| Yield on advances | 10.73% |
| Credit-deposit ratio | ~92% |
| Average liquidity coverage ratio | ~123% |
| Net stable funding ratio | ~120% |
| Gross NPA ratio | 1.84%, vs 1.69% in Q1 FY25 |
| Net NPA ratio | 0.66%, vs 0.68% in Q1 FY25 |
| Provision coverage ratio | 80.46% with PWO, 64.52% without PWO |
| Provisioning buffer over regulatory requirement | ~₹194 cr, of which ~₹105 cr is contingency provision |
| CRAR | 21.71% |
| Tier 1 ratio | 19.92% |
| Slippages | ₹139 cr, vs ₹103 cr in Q1 FY25; ~₹25 cr recovered subsequently |
| Unsecured retail portfolio share | 3% of overall book |
| Branch network | 834 branches as on 30/06/25 |
| ATM network | 800 ATMs as on 30/06/25 |
| EBLR plus T-Bill linked loan share | ~17% of portfolio |
| Gold loan yield range | 11.5% to 12% |
| Operating expense growth | 12% YoY |
| Full-year NIM expectation | Closer to 3.7% |
| Full-year ROA target | 1.5%, described as Lakshman Rekha |
| Full-year ROE target | 15%, described as Lakshman Rekha |
| Credit cost guidance | Less than 50 bps, vision till FY 2030 |
| Cost-to-income ratio target | 50% by 2030 |
| Cost of funds expected decline | Minimum 20 bps drop from current level |