CSB Bank Limited (CSBBANK.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CSB Bank Q1 FY '26 Earnings Conference Call hosted by YES Securities. [Operator Instructions] Please note that this conference is being recorded. I would now hand the conference over to Mr. Shivaji Thapliyal from YES Securities. Thank you, and over to you, sir.

Thank you, Muskan. Good evening, and a warm welcome to all those who have joined the call. The CSB Bank management is represented by Mr. Pralay Mondal, Managing Director and CEO; Mr. B.K. Divakara, Executive Director; and Mr. Satish Gundewar, Chief Financial Officer. We specifically thank the management of CSB Bank for giving YES Securities the opportunity to host their result call. The management will first be making some opening remarks, after which we will throw the floor open for questions. I now invite the management to make their opening remarks. Pralay, over to you.

Thank you, Shivaji. And thank you, everybody, for joining the Q1 FY '26 call of CSB Bank. I will start with the global scenario and then get into CSB specifics. With the global -- global trade is impacted by uncertainties of U.S. [indiscernible] tariffs and other countries. Though USA has announced the new tariffs, individual countries are still negotiating, making the outcome uncertain. This uncertainty is getting reflected in currencies, rates and commodity prices. U.K. and EU have cut rates while USD -- U.S. Fed continues to hold on its rates. With weakening data in the U.S., it is likely that trade will cut rates further in the coming months. Global growth focus have been revised downward by major focus in recent months. India growth has been steady over the quarter. The series of liquidity measures taken and the rate cuts announced by RBI has brought the rates down on assets and liability both, transmission has been good so far. Liquidity in the banking system has remained in surplus, supporting the financial stability. The inflation focus has been revised lower. However, the projections for the next year are above 4%. The deposit and credit growth in the system is evenly balanced right now with deposit growth on the rise and credit growth on the decline as compared to previous year. The pattern has impacted the banking sector NIM significantly. We expect the banking sector NIM to stabilize soon and the liquidity remain comfortably. RBI may cut rates further in this fiscal year in the wake of uncertain trade negotiations with the U.S. Now coming to CSB specifics. On financials, the quarter gone by will be recorded as one of the most exciting quarters in our SBS 2030 journey in view of the challenges through the efforts and dedication we put in what we achieved. I'm happy to share that all of us have successfully migrated to the new CBS Flexcube and rolled out 50-plus around systems with 12 within the CBS system, which makes it to 62 surround systems without losing sight of the balance growth in the bank. It has been an extremely exciting quarter for us from an execution of this long-awaited transformation journey on the technology side, and all of us has been very, very busy focusing on this particular aspect this quarter because based on this only, the future of the bank will be rebooted. Coming to financials, specifically on profitability, net profit for Q1 stood at INR 119 crores, up by 5% year-on-year. Operating profit of the bank grew by 28% on a Y-o-Y basis and stood at INR 220 crores. Other income registered a robust growth of 42% on a Y-o-Y basis and constituted 19% of total income for Q1 FY '26. Cost-to-income ratio was lower at 64.70% as on Q1 FY '26 as against 67.69% a year back in Q1 '25. Despite the interest rate transmission dynamics between advances and deposits in a falling rate scenario, NIM could be maintained at 3.54%. We do not expect NIM to go around further from this level. ROI for the quarter ended [indiscernible] stood at 1.03 percentage. As we know, our bank has a history of continuing to grow the ROA through the quarters and peaks in the Q4 of the year, and this year also we'll see the same trend. Bank is holding the contingency provisions intact and is continuing with the accelerated loan provisioning policy. On the liability side and the funding base, deposit growth momentum continues to be faster than the industry, grew by 20% Y-o-Y amidst an industry growth of around 10%. CASA grew by 13% Y-o-Y and the CASA ratio stands at 23.49 percentage. We have sufficient liquidity buffers and are maintaining an LCR at comfortable levels. We have been efficiently managing the liquidity risk because in Q4 of last year when liquidity was significantly negative, the bank took a call to manage the liquidity risk carefully. As that risk is coming down, we now see our CD ratio at around 92%. Average LCR for the quarter has been around 123%. NSFR ratio is around 120%. On the asset side of the business, net advances grew by 31% Y-o-Y, again significantly higher than industry growth of close to 10% Y-o-Y. All the verticals have started contributing towards the asset growth with gold, corporate and SME portfolio registering a Y-o-Y growth of above 30% at 36%, 32% and 31%, respectively. Retail loans other than gold grew by 19% despite a deliberate moderation in agri, MFI and other unsecured loans, and we have been doing it for the last 18 to 24 months. Yield on advances for Q1 FY '26 is 10.73 percentage. Regarding the asset quality metrics, GNP and NNPA ratio for the quarter was at 1.84% and 0.66%, respectively, as against 1.69% and 0.68 percentage for Q1 FY '25. PCR now stands at 80.46% with PWO and 64.52% without PWO. Bank is holding a provisioning buffer of around INR 194 crores over and above regulatory requirement out of this, around INR 105 crores is contingency provision. We have a robust capital base, CRAR of 21.71%, Tier 1 ratio of 19.92%. Low proportion of risk-weighted assets compared to the industry, which is 40 odd-percent. Shareholder value creation, the book value per share is at INR 258 right now. EPS for the year is [ INR 27.42 ]. ROE for the year is 10.9%. Like ROA, ROE also progressively grows for us quarter-on-quarter, kicking in the fourth quarter and which again, this year will be no exception. On distribution, we have a network of 834 branches now and 800 ATMs as on [indiscernible] '25. In conclusion, I'd like to say that our topline, both deposits and advances has shown strong Y-o-Y of 20% and 31%, respectively. Compared to Q1 FY '25, our CASA book grew by 13%. All the 3 asset verticals with retail, including gold loan, SME and Wholesale Banking grew by more than 30% over Q1 FY '25. On the profitability, while our operating profit grew by 28% on a Y-o-Y basis, net profit increase was at 5% due to slightly higher slippage and resulting provisions. However, we have recovered a decent amount subsequently, and we have already recovered a fair bit already in this quarter in Q2 and expect portfolio quality to improve in this quarter itself. If I look back and review the journey we completed in Q1 FY '26, I proudly say that the CSB team has done a remarkable job in truly short span of time, duly balance in the tech transformation and growth. We have achieved what we expect for in building the platform for future. We have built a solid foundation for scaling the bank in terms of business and customer experience as we go along. Given the complexities involved in such a massive project, it will take a couple of months more to fully stabilize everything. Once the systems are stable, we will kickstart the scale phase with a lot of confidence as we'll be in a better position to serve our customers by providing innovative customized products, straight-through processes, seamless digital experience, higher operational efficiencies, et cetera. We'll also be benefited at lower cost points and additional revenue streams. Thus we'll start the journey of becoming a respectable [ mid-size ] bank by 2030. And hopefully, we can execute to reach that mission ahead of our targeted timeline. As I have told in the past that as a part of our SBS vision, our sustained phase and build phase is expected to get over by FY -- beginning of FY '27. And the real scale phase and the most exciting part of the journey is going to start from FY '27 beginning. And FY '27, FY '28, FY '29 and FY '30, these 4 years, we'll take the bank to a completely different spectrum. I'm happy to report that based on the technology transformation journey, we have done successfully. And one of the best which our partner says they have seen, we are actually ahead of curve in terms of what we had planned and targeted. And hence, rebooting of the bank from our infrastructure capability, systems, processes, technology, people and products will be complete, and our scale journey will begin starting FY '27, and all of us are excited for that journey. With that, I hand it back for questions. Thank you very much.

[Operator Instructions] The first question is from the line of Bhavesh Kanani from Svan Investments.

This one is on the noninterest income. So essentially, last 4, 5 quarters, we have seen NII remaining flat. And it is the noninterest income, which is allowing us to do higher OpEx and still report the growth at the bottom line. However, for some odd reason, the disclosures on noninterest income split has been discontinued in FY '25 itself. So would appreciate if that is available to the public in general. That was one. And two, within that, if you can add some color on specifically the fees and commission line. While in past, you have shared that a large part of that is driven by insurance distribution income. Some color on the potential penetration that is still pending as we reached out all the branches with ability and skill set to sell insurance or there is still some room left, which can be helpful in FY '26 in terms of growing the fee income? And lastly was on liquidity. While excess liquidity has come off sequentially, one would have imagined a little more reduction given that our loan book growth is quite healthy. And instead on the liability, we see that other liabilities have gone up sharply. So some color on that would be helpful.

Bhavesh, last question, I didn't understand. What does it mean?

So sir, essentially, when we met last time, the story was that we had amassed excess liquidity in Q4 given the situation back then. And now that the liquidity situation has improved at system level, that would allow us opportunities to normalize the excess liquidity which will allow us to fund growth without really taking hit on the NIM. That reduction in excess liquidity is quite small. I think, about INR 200-odd crores compared to a loan book, which has sequentially grown by a larger extent. It appeared to be the case where we have funded the loan growth by increasing liabilities and that too is coming from -- not from borrowings or deposits, but there is a staff increase and other liabilities, which has reached -- which has crossed some INR 2,000 crores odd. So I was just wondering what is leading to that increase? And incrementally, your sense on -- to what level liquidity can be paid down without really disturbing the 5% or 6% kind of liquidity we have usually maintained.

Got it. Got it. I understood, Bhavesh. So let me try to respond each of these questions. On the NII which is noninterest income and overall income, as you rightly said, that we -- when we met, I have said already that as a bank, we are not very focused on noninterest income in this bank around 2, 3 years back. And last 2 years, we have put conscious effort to put focus on noninterest income. It's just a matter of cycle that, including noninterest income, overall income, then other part, which is the interest income has not been growing very well which is part of the cycle because as we grow at such a rapid pace, there is some contraction of NIM, which you can see. And because, as I said before, that liquidity, given where it was in fourth quarter, we said that we'll not take any liquidity risk. And from that perspective, we did take excess fund, which ensured that we didn't know that time that liquidity situation will change in the ecosystem. So to that extent, we are carrying that cost through and which is to some extent impacting on NIM to some extent. So that is correct estimate. Coming to noninterest income kind of a color, insurance income continued to do well. Generally, our PSLC income in the fourth quarter goes up a little bit, and then it normalizes first quarter onwards. Our core fee income, which is typical if you look at it -- if it's overall noninterest income is 19% -- it generally varies between 17% to 19%. Last quarter it was 21% last quarter to last quarter means Q4. But generally, it's somewhere around 17% to 19%. But core income is around 14% to 15%. We don't keep the PSLC in the core income. That's why you will see that this quarter, our overall noninterest income has come down a little bit compared to Q4. Coming to your question that would we be sustainable? I think it is going to be more than sustainable because once we have given the technology transformation news to you, you know that next year onwards we'll start scaling up our transaction banking business and our retail assets business, which are all fee-oriented businesses based on fee -- based on transactional fees and processing fees and many other fees so that will grow. Insurance is a function of penetration into customers. And next year onwards, we'll start building our customer acquisition significantly because huge amount of focus will be on customer acquisition. And as more customer comes in, penetration on a larger base will be higher. So we will continue to do well in insurance business. And we are going to implement after this, CMS, trade and supply chain systems immediately after the talking, we are working on that. And all of that will help in transaction banking business because we have built up a very good wholesale team and wholesale portfolio. So the transaction banking business will also have 2 phase. So I think as we grow the overall basic core book, our fee business will continue to grow, and there is no really one-off on that. We are sitting on a very large, given our size, fairly large AFS book, and we didn't max it out this quarter, because we know that yields will come down eventually through the year. And from that perspective you will continue to see noninterest income continuing to grow. On your second question -- second question, I've already answered on insurance, that we will continue to do well on insurance, you'll see that. And on the liquidity question, I agree with you. What I said is also right, what you are saying, let me respond. If you look at our CD ratio this quarter, it has come to 91%. And generally, it was around 83%, 84% in that range -- 84%, 85%, 86% in that range. One of the reasons exactly what you're saying we have done is we've said that the liquidity risk in the system is lower, and hence, we must start efficiently using the liability better, and that's why we said that with the limited risk on the liquidity side, we will use it better. That's why the CD ratio has gone up a little bit, but we'll bring it down to somewhere between 85% to 90%, but we'll -- somewhere in that place. Previously, my guidance was between 80% to 85%. Now my guidance is between 85% to 90%, in that range will keep it at the size of a balance sheet and with the liquidity comfort, which is there in the ecosystem. And I've always said that our liability franchise is not yet to the level where we want it to be. And that journey will start. We are waiting for the serious migration to happen. After this, the products will get implemented. And next year onwards, we'll see the liability franchise growing at a very rapid pace. That will really not only help our liability book, more importantly, we will have more customers through who we will acquire and build the businesses. That's why we are starting to build our retail asset products and more retail liability products, current account products, trade products, all these things, which are building CMS, all these things we are building to build that franchise. Until that happens, we are -- last year, we did depend on FCY borrowings, we did depend on CDs. And to that extent, that support will required for another 1 or 2 years, while in parallel the liability franchise build, because you know that liability franchise takes 2 to 3 years to build. So that's broadly what my response to your question, sir.

That's certainly helpful, sir. Just repeating the same request that if the mix of noninterest income is disclosed like we used to do in FY '24, that would only add to the wonderful plans that we have, and it will add to the confidence. And...

Sure. I'll check with our CFO on this. Okay.

And the last data keeping one was the other liabilities. Is there anything to look into that number which has seen sharp increase sequentially?

No, there is...

The other liability, what we are talking about is the INR 2,600 crores that you see on 30 June is transitionally balanced, because the reconciliation happens with a one day lag and then it get adjusted with our balance with RBI. So it is not something which is a permanent nature. It is just a 1-day thing when the reconciliation then happens, then it gets settled.

Okay. That's helpful. I hope you will share the disclosures on noninterest income on exchanges or on your website?

Okay. Thank you very much for your question Bhavesh. Next...

The next question is from the line of Mona from Dolat Capital.

So firstly, I missed your opening remarks. So sorry if I'm repetitive. On the slippage base, INR 139 crores, what would be the quantum of unsecured loans out of this, if any? [indiscernible] MFI, yes.

So I don't exactly remember that number. But broadly, I can tell you that our unsecured book overall is around 3% of the overall book. So it won't be more than INR 20 crores, INR 25 crores, Satish is seeing -- looking for that number. But it is there, but -- as a percentage, it is high, but the book itself is 3%. So it is not significant. But yes, it has increased the 3 businesses, which is unsecured personal loan, MFI, a little bit of credit cards, agri and MFI. These businesses had a little bit of a slippage, which is around, I think, somewhere close to -- I was right around somewhere around INR 25 crores to INR 30 crores, okay? So our largest slippage, I think to address your question, our largest slippage has been in SME this quarter a little bit. And that's primarily due to 3, 4 accounts. And also, let me also say that what has happened this quarter is because we are very busy on the migration there was the -- availability because you know that to manage the NPA and to understand everything we need data every day. Those data were taking a little time for us to completely reconcile and get it. So by the time we got it, we didn't get enough time to manage the NPA well in SME business. As we talk while SME business had a slightly larger slippage, but one account with INR 25 crores, we have already -- not one account, but one or two accounts with INR 25 crores we have already recovered as we are talking today. So -- and there are 2 accounts which happened where there were some challenge, somebody, the owner died and something happened, et cetera, where the next generation is taking over the business. But all these are good news in SME is that all these are fully secured, and this will not really go bad at any point of time. So as the business starts going back, this does not worry me. So through the year, this should be able to recover. Otherwise, I think overall, there is not much of any exceptional slippage in any other portfolio. This has happened only in 3, 4 accounts where already a INR 25 crores has been upgraded. So that's the answer to your question.

So fair to say that out of this INR 139 crores, INR 25 crores got upgraded so far already?

Yes. Yes.

And also just on the unsecured, is it partly led by FLDG cover against some of these assets, which is resulting in delayed recognition or something, if I'm reading it right?

Which one?

On the unsecured loans, which is, I guess, [ PL ] and some of the MFI portfolios are probably had some FLDG cover. And is it the delayed recognition coming because there was some cover initially and now it's above that cover, which is why the recognition?

So no, I don't think that is an issue. In general, what happens is FLDG is only in one business, which is in MFI. In no other business, we have FLDG. But we have collection efficiency related incentives linked to that. So some costs will come down. In case they cannot, but they're trying hard to get it right. But otherwise, if you look at it, we have been consistent in retail loans, if I look at it over the 4 quarters, 5 quarters actually. June 21, September 24, December, March and June 25, every quarter is between INR 23 crores to INR 27 crores, okay? So it's not that we have seen any major escalation happening suddenly. Also, agri and MFI has also been more or less similar across the last 3 quarters. So there is absolutely no aberration in any other product. And if you look at it, our slippage in June 24 was INR 103 crores, and now it is INR 136 crores. Out of the INR 136 crores, already INR 25 crores recovered. So to that extent, there is no exception, exception in anything anywhere. Yes, we had 2, 3 very strange situations in the SME portfolio, which had nothing to do with credit underwriting, which has nothing to do with trend, nothing to do with an industry situation. It is just pure accidental kind of a situation where somebody died or something happened. So we are working with them, and these are all very well covered. So I'm not so worried about the slippage this quarter, frankly. But yes, on the -- on the retail loans, what goes, a lot of that will not come back, but that has been the story for the last 5 quarters.

Got it. And secondly, when I look at the cost of deposits, I understand a large part of it was bulk deposits. And given the sharp decline in rates on the bulk front, I believe the expectation was the [ cost of deposits ] will come down and yet seeing it rising, which is unlike what we are seeing for the rest of industry in general. So how do I read this? I mean we -- I was really surprised to see the cost of deposits rise during the quarter, because I would expect on the bulk deposits to reprice at lower levels, right? And your deposit growth has declined. So yes, how do we read this?

No. So, Mona, you're absolutely correct in your question. So you will see that playing out in our portfolio as well from Q2, Q3 onwards. So 2 things happened here on the deposits. One is that a lot of these bulk deposits and a lot of these businesses we did because a lot of our assets business growth last quarter because we are not growing at 10%, we are going at 31%. So a lot of this business grows, especially on the wholesale side. Retail comes every day. Gold loans comes every day, but wholesale SME comes a little bit rear-ended. So to fund that deposits, we had taken a lot of bulk deposits in the last end of the quarter which was in March. After -- and by that time, there is no clarity about the liquidity positions, what the RBI was looking at. So given that, that cost in that quarter came only for 10 days, 15 days, 20 days maximum. That cost has taken us through the whole of quarter over the 90 days. And that partially has done. We have got a 6 basis point increase in cost of funds, that primarily has contributed to this. The other thing which has happened, I was analyzing this, that a lot of older deposits because before -- once the interest -- we knew that interest rates are going to fall, we stopped taking long-term deposits like 3 years, 4 years, 5 years, et cetera. But we had some deposits which are old which started maturing and hence, got repriced even if it is a lower rate -- started repricing at a higher rate than what they were initially booked their contracted rate a few years back, okay? So these 2 events happened. Having said that, I think all the -- but if we had a parameter by which we could show you that how our contracted rates from -- for the last quarter, incremental year, okay, either in term CDs or it is on bulk deposits, you're absolutely right. We are doing better off. What it means is Q2, Q3 onwards, we'll start seeing a drop in our deposit costs.

Okay. And also, if you could share what would be the expectation from a full year perspective on NIM and ROA?

Can you speak a little louder, Mona? Sorry, I can't hear you.

Sorry. If you could share your outlook on the NIM and ROA for this fiscal?

Yes. So for us, typically, what happens is, let me take the ROA point first. If you look at it, year-on-year, our ROA has come down from 1.27% to 1.03%. But on a quarter-on-quarter, it has come on significantly more and that is how it will play out this year also because our ROA keeps increasing every quarter, and it culminates at a much higher level in the end of the year. For example, last year, we -- in Q1, we were 1.27% and we ended the year with 1.79%. So this year also, I think on an average, we should be somewhere around 1.5%. That was my guidance and we will retain there. On the NIM, we have surely bottomed out now. So we will be between 3.5% to 4%. Why -- what gives me this confidence? I'll tell you, I'll give a logic to this is, a, our cost of funds will start coming down because as you rightly said, bulk and CD rates are coming down and our bulk is around more than 35%, 40%. So from that perspective, it will, in a way, help us because retail will not come down that much compared to bulk. So we think that our cost of funds will start showing better trends. The other thing what will happen is -- also on your previous question, I want to also say that we tactically moved out some of the current accounts out of our base because we said that we want to build a proper current account franchise based on transaction banking, et cetera. So that also increased our cost of funds a little bit. Now through transaction banking, wholesale and other businesses we'll start building the current account. That will also give us a little better cost of funds. And thirdly, because of the EBLR portfolio, is around 20%. EBLR plus T Bill is around 17%. And our MCLR is the only thing, which is around 20%, which will reprice through the year -- reprice downwards through the year. Our fixed book is around 60%. And hence, we will have dual advantage on that front that yields will not come down strongly, and our cost of funds will come down a little well. Given that I'm very, very confident that we will be in the range of 3.5% to 4%.

Sorry, how much is the EBLR which you've mentioned?

EBLR is around -- EBLR plus T Bill linked which, from a cost of funds -- sorry, cost of interest -- interest cost is similar -- sorry, interest expense is similar. When it comes down, the interest rate comes down, it is around 17%.

And just one question. So if I look at your fee lines, the core fee lines ex of the treasury gains, are there any one-offs in the last fiscal, not this quarter, but in the last fiscal, in terms of syndication income or something because it looks like fee to assets is settling at a lower level?

Yes. So last -- yes, we had 3 syndications done so far. We have got a very good wholesale team now and very good quality wholesale business has started coming into the bank, and that is shown with the kind of growth, which you have got both on the corporate banking and in the mid-market side this year. In a year when we actually almost run up INR 1,000 crores of DA portfolio. Okay, which we represented the wholesale part of the bank for whatever structural business we have put. So that team did put 3 syndications, one more syndication as we are talking, we are doing. So we are doing those kind of deals, yes, where we -- because given our size of our balance sheet, we cannot take a INR 500 crore exposure, right? So we don't take more than INR 150 crores or INR 100 crores or whatever and rest we sell down to -- and some of the sell down happening to larger banks as well -- top 3 banks and top 4 banks, et cetera. So yes, we had some syndication fees last year. Also, as you know, that we have got -- we are net -- sorry, net sellers in PSLC market and a lot of that stuff we do in the last quarter of the year. And that's one of the reasons our ROA and our fee income is significantly higher in the Q4.

Got that. Just one last clarification. So what would be the income from these 3 syndication deals for last fiscal?

That we can't share. That is too much details. But yes, I shared as much as I could, we have done 3 syndication deals. We are working on the fourth one.

[Operator Instructions] The next question is from the line of Yash Dantewadia from Dante Capital.