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

Ladies and gentlemen, good day, and welcome to the CSB Bank's Q2 FY '26 Earnings Conference Call hosted by YES Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shivaji Thapliyal from YES Securities. Thank you, and over to you, sir.

Thank you, Bhoomika. Good afternoon, 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 good evening, everybody, and thank you for joining the call. Firstly, I will cover briefly about the economic scenario and then quickly move on to CSB specifics. As we all know that the global trade negotiations across various countries have shown significant improvement in the recent past. It gives financial market some stability and hopes of returning to normalcy in a couple of months. FOMC has cut U.S. rates by 25 basis points. However, the commentary by the Fed Chairman was more hawkish than expected, leading to U.S. depreciation and some correction in the gold prices. Global growth focus remains subdued. Indian growth is expected to add approximately 20 bps over previous projections due to GST rate cuts and steps taken by the Central Bank. The inflation focus has been revised downwards. However, the projections for the next year are around 4%. The deposit growth lagged the credit growth in the system in September '25, showing signs of credit pickup. The CD ratio for the banking system went above 80% after around 6 months. The continuous lag in deposit growth has impacted the banking sector NIM significantly. We expect the banking system NIM to stabilize soon. And we also expect the liquidity to remain easy once RBI takes decisions on cutting rates further this financial year. Coming quickly to CSB specifics on our quarterly financial results for Q2, I feel that we have registered an impressive all-around performance on our Y-o-Y as well as Q-o-Q basis, both in terms of top line and bottom line. On the profitability side, net profit for Q2 FY '26 stood at INR 160 crores up by 16% -- 16% Y-o-Y and 35% Q-o-Q. Operating profit of the bank for Q2 FY '26 grew by 39% on a Y-o-Y basis and 27% on Q-o-Q basis and stood at INR 279 crores. NII up by 15% and 12% on a Y-o-Y and Q-o-Q basis, respectively. Other income registered a robust growth of 75% on a Y-o-Y basis and 43% on a Q-o-Q basis and constituted 24% of total income for Q2 FY '26. Cost-to-income ratio was at 63.86% as on Q2 FY '26, a tad lower than Q2 FY '25 and Q1 FY '26. NIM for the quarter improved to 3.81%, up 27 bps over Q1 FY '26. ROA for the quarter ended September stood at 1.33%, up 30 basis points over Q1 FY '26. Bank is holding the contingency provision intact and is continuing with the accelerated loan provisioning policy, which will enable the bank to move quickly towards ECL. On the liabilities front, we are improving the funding base. Deposit growth momentum continues to be faster than the industry and registered an increase of 25% Y-o-Y vis-a-vis a 10% on the industry. CASA growth was 9% Y-o-Y and the CASA ratio stands at 21.17%. We have sufficient liquidity buffers and are maintaining LCR at comfortable levels, average LCR of around 126%. Liquidity on the -- it's quite efficiently managed the liquidity risk. CD ratio stood at 88%, average LCR for the quarter is at 126%. NSFR ratio is at 116%. On the asset side, total advances grew by 29% Y-o-Y, significantly higher than industry growth of 11.4% Y-o-Y. All the asset verticals continue to contribute to the portfolio growth, the necessary groundwork for diversification of loan portfolio has been initiated and will pave way for balanced growth in the days to come. Yields on advances witnessed an uptick of 22 bps over Q1 FY '26 and currently is at 10.95 percentage. On the asset quality metrics, GNPA and NNPA ratios for the quarter was at 1.81% and 0.52% as against 1.84% and 0.62%, respectively, for Q1 FY '26. And PCR now stands at 84.14% with PWO and 71.62% without PWO improving over Q1 ratio of 80.46 and 64.5 percentage, respectively. Bank is holding a provisioning buffer of around INR 199 crores over and above regulatory requirements. Robust capital base is what we have been consistently following. So CRAR of 20.99% and Tier 1 ratio of 19.1 percentage, low proportion of discrete assets compared to the industry for us, primarily due to the gold loan. Shareholder value creation side, book value per share is at INR 261. EPS for the quarter is INR 36.67 and ROE for the quarter is at 14.46%, which is again a significant improvement quarter-on-quarter. On the distribution side, we have a network of 838 branches and 810 ATMs as on 30/9/2025. In conclusion, I'd like to say that we are approaching our scaled journey schedule for FY '27, targeting to emerge as a responsible midsize bank by FY 2030. I had mentioned in my last call that our team's highest priority during the previous quarter was on stabilization of the systems and processes that followed our complex CBS migration in May. Now we have almost stabilized and in fact, coming second phase of the tech transformation with renewed rigor with majority covering of OFSAA, OBDFBM, OBDX enhancements and various other projects we are starting to run like CMS supply chain, trade and all those kind of surround systems, additional surround systems that we are building. In addition to the 52 surround systems, we've already integrated with the Fc with the Flexcube system, which means that this is one of the major transitions and transformation we have seen in the industry over many years, coming from highly legacy system to the most modern system with all good surround system around it. So this will pave the way for our future growth. The results for Q2 reflects a strong momentum, both in terms of business and profitability, signaling the right advancement towards our vision. Our top line, both deposits and advances showed a strong Y-o-Y growth of 25% and 29%, respectively. The improvement in profitability is visible with a 39% and 16% increase in operating profit, net profit, respectively, over Q2 and FY '25, whereas Q1 FY '26, the growth was 27% and 35%. While our NII grew by 15% on a Y-o-Y basis, the other income ratio is 25% increase, which I have already mentioned before. As we move forward, the development of a profitable customer franchise is essential for the success of our vision. We are actively working to align our teams, products and processes to support this strategic priority, which will be critical in driving growth. Our key focus will be on rolling out now the detailed journey with the systems and processes in place now and it will enable us to achieve granular portfolio and unlock valuable cross-sell and upsell opportunities. As part of the preparedness, we have already implemented LOS for majority of the retail assets products. LMS is already in place. Automation scorecards are in place for credit decisioning wherever we're feasible. We are enhancing our BIU, which is business intelligence unit. Digitization of loan journey, products offerings like loan against securities, end use best consumer loans, et cetera, are work in progress. While we remain focused on our long-term strategic priorities, we are equally committed to achieving this year's target and we'll continue to work diligently to deliver on those expectations. Finally, I'll say that our 5 pillars on which we are building the Bank for the long term, starting with governance, compliance, customer orientation, technology and people and culture are firmly in place, and I'm very, very happy to report that some of these pillars are getting stronger and stronger, especially technology compliance, the culture and the governance. On the customer service side, with all the support systems we are building, in fact, we got awards, 2 consecutive quarters as the #1 bank in terms of best customer complaint management. So these are small achievements at this point of time because the size is small, but we think we'll be able to sustain this based on the technology transformation and the culture which you're building at the bank. With that, I'll stop here and we'll take questions. I'm joined by our Executive Director, Mr. Divakara and our CFO, Satish. So I have requested Satish to take a lot of questions this time because I think he has better grips on numbers than me. Over to you, Shivaji.

[Operator Instructions] The first question comes from the line of Akshat Agrawal from SMIFS Institutional Research.

Congrats on a strong set of numbers. My first question is on margins. What is driving this sharp uptick in yields on advances surging 22 bps sequentially? Is it all because of higher gold loan growth? Or were there higher yields in the segment? And cost of deposits just came down 9 bps. So what kind of deposit repricing is left for third quarter? In terms of NIM trajectory, how do you see it moving in next 2 quarters? And then there will be a continued expansion if there are no further cuts? And do we see exit NIM by Q4 to be above 4%? That was my first question, sir.

So, Akshat, this is Satish here. In terms of -- so you have multiple questions bundled into one single question. I'll try to address one by one. If something is left then you can again come back and ask a question. In terms of the advances yield, we have -- largely our business is divided into 4 large segments, the gold being the largest one with 47% composition in our advances. And we have seen not only that the portfolio has increased very strongly. At the same time, there has been improvement in our gold yields as well. So that is also one of the contributor. Apart from that, our wholesale segment has done exceedingly well in terms of the book also has grown very strongly, and we have been able to marginally improve the yields also in the Wholesale Banking segment. The next larger book is our BLG that is business lending group or the SME. There again, we have been able to maintain our yields. So basically, with the combination of these portfolio is doing well in terms of the top line as well as the margins in terms of the gross yields, we have been able to improve our overall yield trajectory. Secondly, in the overall portfolio, around 38% of the portfolio is only linked to some form of a benchmark, which is either MCLR or EBLR. So whenever the rate cut happens, the impact, especially on the gross yields is a little limited for our overall portfolio compared to other banks where this external benchmark linked portfolio is much higher. So almost 60% of our portfolio is largely fixed rate portfolio. So we get insulated from there. Coming to the cost of funds, within cost of funds, like we have multiple sources of funding, deposits, then we have refinance. We have also resorted to CD as well as FCY borrowing. Overall, our bulk deposit composition is little larger compared to the industry. And across each of our funding sources, we have seen signs of reduction in our cost of funds. In fact, what we have seen is that the falling -- the interest rates on the bulk funding are far -- fallen much -- I would say that sharply compared to the retail deposits. So that has also benefited us. In terms of the bulk deposits as well as the retail deposits, we have seen that incrementally that we are borrowing today, we have seen a fall in the cost of funds. So successfully -- basically, that impact has been on both the sides that in this quarter, we have been able to improve our yields. And at the same time, we have seen an improvement in the cost of funds, and that has got an impact on our net interest margin. Last quarter, we had made a comment in terms of that our NIM have bottomed out and that has really played out properly. So at the moment, we are at 3.81% of NIM. Going forward, probably we will be in this range of about 3.7% to 3.9% for the rest of the year, it may move from a quarter-to-quarter basis. It will be very difficult to really pinpoint exactly what is going to be the NIM for the full year. But for the rest of the year, we feel that we will be in the similar range of 3.7%, 3.9% kind of NIM.

So on that NIM, I just want to add that what's happening now, as you know, that the deposit, while natural repricing is happening, because of tenor and things like that, depending on what is the tenor and we strategically took -- move from a high tenor to low tenor over the last 18 months in the bank. And hence, our average tenor has reduced and it was a strategic call which had taken because we knew interest rates are going to fall eventually. That will help us. But as we know that the fixed deposit rates are not coming down at this point of time anymore. Maybe it's a temporary phenomena or permanent, will know because of the liquidity and other various reasons, which is there in the system. And -- but yields are falling on, the -- especially on the wholesale side and things like that, right? I mean, there has been a very highly competitive market. Probably that's bringing the growth also back into the system. So from here on, I think broadly, the repricing that is going to happen on deposits, we were tenor. And yields on the MCLR has also started kicking in now because now it is almost 6, 7 months when the time has passed. So MCLR reduction has also started happening. Given that I think it will broadly be in the same range of 3.7% to close to 4%, 3.9%, that range will be there. So -- and it has exactly played out the way we had told last quarter that our NIM will improve, but now we are saying it will stabilize at these kind of levels.

Very well, sir. And sir, on fee income, it was very strong this quarter, doubling year-on-year and 80% Q-o-Q. So can we get some color on key drivers? And is it sustainable? And treasury income was very weak. So do we see some recovery going forward?

So in terms of the fee income, we have got multiple sources of fee income. And if you track for the last several quarters, our fee income trajectory has been pretty strong. This quarter also, our disbursement track was very good. Our disbursement during this quarter were very strong, and that has risen to good processing fee income also, which on a year-on-year basis also, the main source of our fee income is processing fee income that has grown by almost 83% has increased. Second is in terms of our insurance business is doing very strong, both in terms of the number of policies, the premium income. And that's the reason that, that has also grown very strongly. Other aspects of fee income because we are now well establishing our wholesale banking business, so transaction banking is a vertical, which is also giving us a good fee income. So across various lines, we have seen that the fee income has grown. And these are all granular kind of fee income, which we expect it will sustain over a period of time. And your next question was in terms of the treasury income. So treasury income is again a derivation of what are the yields in the market, and we have seen that during this quarter, we have seen some hardening of yields and that's why for most of the banks, you wouldn't find much of a treasury income. But we had certain -- some treasury income in the first quarter. In this quarter, there was not much of a treasury income. Going forward, based on the yields we'll be able to -- at the moment, it's very difficult to comment in terms of the yield trajectory. But let's see how the yields move and this is that treasury income may come in the next quarter, yes.

And if I can just add, I think fundamentally, treasury income, obviously, it's a function of yield. But in case there are further rate cuts in Q3, Q4 whenever. So I don't see too much of MTM-based treasury income in Q3 also. So, maybe some will come in Q4, if we're lucky. But we are not depending on noncore income like treasury. So significantly, the -- almost 80%, 90% of our fees are granular in nature and hence, sustainable for the long term. And with retail assets and other businesses going to take off next year FY '27, FY '28 onwards, sustainability of this fee income will only improve. The other thing I want to mention is businesses like gold loans because the short tenor of the business. For example, if we have a book of INR 16,000 crores rough and ready, our disbursements is upwards of INR 10,000 crores. So fees is on disbursements. Similarly, some of the other businesses. So we had a very strong disbursement quarter across all businesses, whether it is SME, whether it is wholesale, whether it is gold and things like that. So given that, that also helped us in improvement of the processing fees in a big way. So there are multiple avenues. There are 5, 6 plus, of course, there are liability fee income. There are other trade tier fixed income, which is also there, which also has done well and it will continue to do well. Bank, of course, Satish has covered. So from all of that perspective, I think whatever fee income you are seeing, it may not grow every quarter by 40% and all that. But I think we'll sustain the kind of at least we can bake in around 19%, 20% of our overall income as fee income safely right now. That's the momentum we have picked up.

Right, sir. If I could just squeeze in one more question. So OpEx growth was very high, driven by non-staff expense while cost-to-income ratio looked okay. Cost as a percent of assets increased to 4%. So with technology transformation now broadly complete with focus on stabilization and branches just increasing much forward in the quarter. So what's driving this elevated OpEx? And how do we see for the rest of the year? And in terms of the branch ramp-up, I mean, will we resume like 100 branches a year kind of thing for next year with slow branch expansion this -- like the rest of the second -- rest of the year for the second half?

So I'll take this one. So see, I think -- Satish, correct me if I'm wrong, I think we are somewhere around 20%, 23% OpEx growth on a year-on-year basis, okay, on a year-on-year basis, which is pretty par, of course, because when you are growing the balance sheet by 27% to INR 50,000 crores, a 22% kind of growth in OpEx is par of course. And let's not forget that we are investing into the bank at this point of time. And full payback will start happening in FY '27, FY '28 onwards. So the cost to income as per our previous guidance, will be between 60% to 65% for another year or so. After that, it will start coming down and FY '28 onwards, it will sharply start coming down. So given that perspective, I think we are -- on the operating cost side, I think 22% quarter-on-quarter, okay? So yes, it is slightly high. Also, let's not forget that some of these technology costs are also OpEx costs. They are not all of it as CapEx. A large part of this is OpEx, not large -- a fair bit of it is OpEx, including the AMCs and all which has started kicking in for some of the stuff. So typically, somewhere around 8% to 9% of our overall OpEx will always be technology because until we start picking up the income and leveraging the systems. So I think it is sort of part for cost because on a year-on-year basis, yes, operating cost is around 35% growth, 22% is quarter-on-quarter, but I think we'll stabilize that. On the branch, we will add around 50 to 60 branches at this point of time on an average every year because we are pretty much reaching the critical mass around 1,000 branches, which we wanted to reach and then take a stock of situation and then we'll think from there. So we are thinking of around 50 to 60 branches every year.

The next question comes from the line of Mona Khetan from Dolat Capital.

Yes. So firstly, on -- again, on the fee side, if I could understand how much is the cost...

Mona, I'm sorry to interrupt you, but when you are speaking, there is a airy distance. So can you please make sure that you are speaking in a better network area?

Is it better?

Yes, ma'am, it is better.

Okay. Yes. So I was on the fee income part, where, I wanted to understand the contribution of processing fees to this overall fee. The reason I'm trying to harp on this is because at 2.8% of assets, it's way higher than what we see in the industry, even for some of the large banks? And also, does it include any syndication income as well this quarter?

Mona, Pralay here. No, as I said before, 80% to 90% is granular and sustainable. Maybe we may not be able to grow this much because I answered your question partially by saying that disbursement has been very high this quarter and fee is a function of disbursement. And also, let me tell you that because the regulatory guidance on [indiscernible] repledger has kicked in for the banks, we have taken a very conservative view. So we have started reducing that portfolio. And that will see that our retail has come down. One of the reasons I've already disclosed before that retail includes a fair bit of the [indiscernible] repledger business, which used to call it loan against security, okay? Now once we're replacing that portfolio and our conservative view is of the RBI policy interpretation is that we'll like to bring down the portfolio as much as possible by April, and we are not rebooking any, on renewal, we are not renewing anymore, okay? So it will run off on its own, and it's already started running off. So we have got a growth on -- of 37% on gold loan in spite of the fact, a fair bit of runoff has started happening on the repledger business, where you don't get much fees and what we are replacing it is by granular businesses where the fees are much higher. So that is one. Secondly, I think our TFX business has started doing extremely well because of transaction baking on the wholesale side, I think we have started getting a lot of business now and some of the other granular fees, so again, and treasury fee is not there. So primarily, it is granular fees and it is sustainable. On your specific question on syndication, we are working on some, but we have not -- this quarter, we have not done any syndication.

Okay. And if I could understand, out of this INR 343 crores, so what is the component of processing fee?

We don't give breakup as I said it before, also, we don't give detailed breakup on this. We don't disclose these numbers.

But sir, because it's such a material part of your ROA, if you could start giving some clarity as part of the presentation on your fee bit as well. I think that will clear a lot of doubts as to where this is coming from.

Don't have doubts Mona. Don't worry. Okay. I said this is granular. So it's okay. Your doubts will be clear. Like a lot of people had doubts that last quarter when I said that our NIM has bottomed out, but we have proved it, right? So have some trust on us, it is granular, okay.

Sure. But I mean, this kind of number, we don't see in the industry. Even for say, stand-alone gold finances, we barely see any material fee line. So it's a little hard to digest. Secondly, on the ECL transition, just some quick thoughts from you. Also, if you could share the 012 book for the -- SMA 012 for the entire book, if possible, that will be useful?

So Mona, Satish here. So the bank policy on NPA, the provisioning policy that we follow for nonperforming asset is much more accelerated compared to the RBI guidelines. And over and above that, also we carry some contingency provision, which we have specified in our earlier calls. So carry a substantial amount of additional provision compared to what the current norms suggest. And we have been also submitting our pro forma financials, which are based on IFRS norms, Ind AS norms to RBI. So from that perspective, if we see -- and the draft ECL guidelines also talk about various minimum base level provision, especially on the SMA book and all that. At the same time, we have some excess provisions. So largely, our assessment is that one will set off against the other. And there wouldn't be any material impact to start with when the ECL guidelines come into play. Even now, these are draft guidelines and the banks have submitted their suggestions to the regulator and the final guidelines are yet to come in. So at this stage, it will be too premature to really quantify in terms of what is the final impact that is going to come. But our initial assessment suggests that, that impact is not going to be material for our book.

And also, Mona, if I can just add that SMA book, I mean, whatever stage 1, stage 2 whatever you call it, you must understand that we have a large gold portfolio in that, right? So that if you go theoretically and put exact numbers to the SMA book, primarily based on gold loans, that will not give the real picture. And even if you take the real picture theoretically what it is, it has no -- materiality of that impact is easily covered by our contingency provision, okay? Having said that, obviously, once this rule kicks in, we'll not have large SMA books in gold because if you can collect on 80th day, we can collect it on 30 day also, okay? So from that perspective, depending on what the priority of the bank is based on regulation, we'll do it. So we are still not seeing any major impact on ECL based on our internal calculations here. But let the guidelines get formally firmed up and then it will be a better time to discuss that.

Sure, sure, okay. And also, we had 3 MSME slippages last quarter. And so is it fair to understand that two of them have already been recovered and just some color on that from your side?

Yes. No. So I had said last time that one of the two slippages, which we had last time was more technical in nature. So within the first 10 or 15 days of the quarter, we already recovered some -- a large amount of that, right? So to that extent, and that's why you're seeing that our NPA numbers and all of that stuff has looked a little better. And this was -- we are quite comfortable and confident. And I don't know whether I told you in the last analyst meet or not, but I think I told that we will be able to recover because one was a little more technical in nature, which happened. So from that perspective, yes, we have recovered one of the two slippages which happened last quarter. The other one was conversation is going on, and we are pretty positive about it.

Okay. So there were 2 accounts that slipped last quarter.

Yes, that's right. [indiscernible]

Got it. And just finally, on the PCR, there was a sharp rise. So is it more driven by higher provisioning requirement for unsecured loans or unsecured delinquency or how do we read the rise in PCR?

So if you see our -- in the overall portfolio, our overall unsecured portfolio is, I would say, less than 3%. We have a small portfolio say, MFI, personal loan, education loan, they are very insignificant portfolio. So this is not on account of that. But as a bank, we have taken a call to accelerate our provision on some of these accounts. So it was a management decision to accelerate this provision, and that is the reason the PCR has improved.