CSB Bank Limited (CSBBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Catholic Syrian Bank, hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Praveen Agarwal from Axis Capital. Thank you, and over to you, sir.

Thank you, Stephen. Good morning, everyone, and welcome to this earnings call. From the management team, we have Mr. C.V.R. Rajendran, MD and CEO; Mr. Pralay Mondal, President, Retail SME Technology and Operations; Mr. B.K. Divakara, CFO; and Mr. Ganesan V, Head of Credit Monitoring and Recovery. And we also have a few other members of the management team, like Anthony, [indiscernible] and Rajesh. So I would request Mr. Rajendran to share his initial remarks on the results, and then we'll take the Q&A. Over to you, Mr. Rajendran, please.

Thank you. Very good morning. And this is our first interaction in 2022. Let me start by wishing you all a very Happy New Year rather [indiscernible] New Year. While the economies were gradually recovering from the COVID shock, now we are witnessing a rapid surge in infection due to the Omicron, Delta variant. The fact that we have progressed well on vaccination and the reports that the infections are less severe with the lower need for hospitalization gives us some respite. For the domestic economy, the prospects are bright as evidenced by the increasing demand, good agriculture production, uptick in bank [ recovery ], et cetera. The regulator's decision in continuing with the accommodative stands will support in reviving and ensuring sustainable growth in the country. So let us be optimistic that this quarter will be one of action under this. Now we have sorted this financial year with some portfolio strengths, especially in gold loans, consequent to the reversal of high LTV regime. We have been consistently improving in the recovery from quarter-on-quarter, and Q3 is of no exception. If you remember in Q1 con call, I have told that the worse will be over on NPA front by Q3 and happy to note that gross NPA percentage is now lower than that of 31/3/2021. Our concentrate approach towards the problems of gold loan customers using the [ rating ] time, so we see the loan was beneficial to both the customer and the bank. Once the COVID situation improves, the customers' earnings also improve, enabling them to repay the loans and get back [indiscernible], which had a significant value attached to it. Now our gold loan NPA for quarter 1 was [ 6.45% ], surprising of [indiscernible] accounts, amounting to INR 353 crores. We resorted to auction more only for [ 387 accounts ], with an approximate value of [ INR 29 crores ] and private sale was conducted for [ 4,215 ] accounts involving a quantum of INR 85 crores. The total deficit amount is about INR 9 crores, which has been fully provided for and [ recovery ] processes through. This is treated as an unsecured loan in our books. We expect that we have [indiscernible] recovery from these accounts based on our process period. On the other hand, the delayed auction benefited the banks by way of recovery of interest income to a tune of INR 11 crores in the current quarter. This quarter has also witnessed credit growth, including in our mainstay business of gold loans. We could record a year-on-year growth of [ 11.42% ] advances and [ 22.04% income ]. Gold loans also have started to move up both the Q-o-Q growth of about [ 7% ]. Coming to profitability, Q3 continues to be a robust quarter registering a growth of 179% year-on-year quarterly basis and 87% for the 9-month period as at 31/12/21. This was the corresponding period last year. We posted a quarterly profit of INR 148 crores, which [ INR 53 crores ] in Q3 of financial year '21 and INR 119 crores in Q2 of financial year '22. A net profit for 9-month period effect 31/12/2021 is INR 328 crores, resulting INR 176 crores for the corresponding period of last financial year. Thus surpassing the full financial year profit for financial year '21. Let me now take you through the main highlights of the published results. Quarterly NII has grossed INR 300 crores for the first time in the bank history at INR 303.34 crores. It is 9% increase from the previous quarter number of INR 278.38 crores. This has contributed by both the spread and volume mix. [indiscernible] in NIM improved by 25 basis points, 5.46% from 5.22% [indiscernible] on volume [ front ]. Our average advances have grown by 5%. Yield on advances have improved from 11.38% to 11.59% or by 21 basis points, contributed mainly by a recovery of interest on gold loan NGS. So cost of deposits have been flat. 9 months to 9 months, NII has shown a growth from INR 666 crores to INR 849 crores or by a robust of 28%, aided by improvement in average CD ratio from 72% to 75%. Increase yield on advances from 10.90% to 11.20%. And decrease in cost of deposits from 5.18% to 4.34%. So the yield on advances have gone up by 30 basis points. The cost of the deposit have come down by 72 basis points. it helped us in finding our needs and then down to [indiscernible]. Noninterest income, [indiscernible] market has been unidirectional, giving the global scenario of increasing yields and heightened inflation combined with the domestic scenario of the improved growth and [indiscernible] inflation. We will give a little room for treasury profit booking, which was a key contributor to equity last financial year. Thus, while we could book [ INR 118 ] crores of treasury profits in 9 months of previous year, the corresponding -- for the current 9-month period is only INR 13 crores, which is down by INR 105 crores. But we could compensate it from other noninterest income stream in great extent as the same surge from INR 121 crores, [ INR 170 crores ] or by [indiscernible] on a 9-month basis. We had the [indiscernible] premium booking in the first 2 quarters in the financial year, which is 12.5% in the quarter 1 and 13.9% in quarter 2 of financial year '22. As there was no more booking in quarter 3, noninterest income profit has decreased from INR 70 crores to INR 51 crores. Staff cost. Q2 to Q3 staff cost has increased from INR 119 crores to INR 122 crores. The increase has been contributed by increase in [indiscernible] provision from INR 38 crores to INR 40 crores due to increase in [indiscernible] decreased marginally from 4,817 to 4,845 with IBA employees decreasing from 1,436 to 1,391. On a 9-month to 9-month basis, staff cost has increased from INR 318 crores to INR 338 crores or by 6%, while headcount has increased from 3,970 to 4,845 or by 22%. [indiscernible] booking provisions have decreased from INR 115 crores to INR 95 crores on a 9-month to 9-month basis. Other OpEx. Other OpEx has increased from INR 70 crores to INR 86 crores sequentially due to shortage in micro enterprises lending target [indiscernible] certificates [ paying ] INR 12 crores, which is a main contributory to investors. On a 9-month to 9-month basis, other OpEx have increased from INR 152 crores to INR 222 crores. The increase has been contributed by increase in rent to the extent of INR 11 crores, depreciation to the extent of INR 8 crores. Number of branches have increased from 448 to 559 on a 9-month to 9-month basis, first 9 months if you look at it. We have opened 111 branches during this period. Operating profit. Operating profit are almost flat on a Q-on-Q basis and is at INR 148 crores for Q3 of financial year '22. ECLGS premium had a total negative impact of INR 33 crores on operating profit, with other income down by INR 21 crores and another half is up by INR 12 crores. On a 9-month to 9-month, operating profits have increased from INR 435 crores to INR 472 crores or by 8%, despite the [ saving ] profits down by INR 105 crores due to robust growth in core income. Cost-to-income ratio has increased from 56% to 58.5% Q-on-Q, on a 9-month to 9-month basis of 52% to 54% [indiscernible]. Net profit has increased sequentially from INR 119 crores to INR 148 crores Q-on-Q. There has been [ INR 52 crore ] net reversal in the provision in Q3 of '22, powered by NPA recovery on both the board and onboard portfolios. Despite this reversal, provisioning coverage ratio has improved from 73% to 83%. But despite reduction in operating profit, [indiscernible] recovery of [indiscernible] have enabled higher in profits. 9-month to 9-month net profits have increased from INR 176 crores to INR 328 crores or by 87%. Return on asset have increased from 2.02 to 2.43 Q-on-Q and return on equity from 23% to 27%. On a 9-month to 9-month, return on assets have increased from 1.07 to 1.83 where return on equity from 14% to 21%. As far as asset quality is concerned, this was a prominent quarter in terms of the NPA recovery where we could contain both gold as well as non-gold NPAs. Out of gross NPA of INR 388.95 crores, INR 102 crores is gold NDA with higher [indiscernible]. In fact, more than INR 25 crores of recovery has happened in [indiscernible] crores during the 21 days so far in the current quarter. Gross NPA, net NPA ratios have improved to 2.62% and 1.36% as on 31/12/21, 2.62% GNP, 1.36% [indiscernible]. It is from 4.11% and 2.63%, respectively, on 30/9/21. Gross NPA and net NPA ratios, excluding gold, works out to 1.87% GNPA and 0.85% as net NPA as on 31/12/21. Capital adequacy continues to be comfortable at 20.74% as on 31/12/21 as against 20.12% as on 30/9/21. [indiscernible] to record the 9-month profit of INR 328 crores as part of capital that [indiscernible] would be 24.5%, which shows that we have ample scope to grow the balance sheet and further improve return on equity without any further [indiscernible] of external capital. We have opened 53 branches in this financial year so far and merged [indiscernible] branches, thus taking the total net worth of 559 -- branch network, 559. Considering the present [indiscernible] and a slight longer-than-expected time taken by the new branches in our selling the breakeven business, we will not be as aggressive in the last financial year in branches franchise. However, we have plans to open another 30 to 40 branches in the current quarter for which the work is on. Since the opening of [indiscernible], we have been following an asset-based provisioning policy for successes, the NDA and the SME account other than gold, including those 1 day before. Same was followed in the current quarter as well. However, as many banks have started reversing the extra provision, let me also give you a summary of our pro forma results as per RBI provisioning now for enabling better [indiscernible]. If we have reversed the accelerated provisioning amount of INR 235 crores, consisting of INR 131 crores of provisions -- additional provisions of the NPA or accelerated services for NPA and INR 104 crores of provision for standard assets [indiscernible] the balance sheet of 9-month period, our net profit would have been INR 504 crores, up by INR 176 crores from [indiscernible]. It is only [ INR 175 crores ], net profit could have moved to [ INR 504 crores ]. Our pro forma versus published ROA and ROE are 2.81, instead of 1.83. And 13.59 should have been [indiscernible] instead of 20.88 if you're adding that. Pro forma EPS and book value for share would have been [ 38.83 ] and 146 as against the published value of 20.27 and 136. Pro forma [ PRAR ], including 9-month PAT was up 26.43% on asset quality. Without acceleration, the NPA [indiscernible] and BPR at 71.77%. Most of the ratios are still better than the industry averages published in the R&D [indiscernible] report. The details will be summarized in the document to be published in the website. And the tabular format is also presented, this will be available in our website. Turning to guidance. Normally, we don't give guidance. It's takes lot of calls for [indiscernible] about the sustainability of the net investment margin. Thus quarter-after-quarter, we were [indiscernible] that net interest margin may not be sustainable at this level. Our target net interest margin is above [indiscernible]. Net interest statement, which is made sure that [indiscernible]. But internally, we are facing a big possibility to get better return on equity as return on asset services. What could be the drivers for the net interest margin expansion? For the past 5 quarters, we have been able to maintain NIM of above 5%, and this is the new normal. Given the sustained quarter [indiscernible] was benefited by recovery of gold loan interest by around INR 11 crores, an increase in standard gold loan portfolio by about [indiscernible]. It may be noted that even Q1 financial '22 when we were in part of gold loan NPA and interest reversal, we could maintain a NIM of 5.04%. I'd like to elaborate on the future drivers of the improvement in [indiscernible]. You would have noticed that our yield on investment have come down from 7% in Q3 financial year '21 to 5.54% in Q3 of financial year '22 or by 146 basis points. This mainly become [indiscernible] invested in the corporate bond of the borrowing money from TLTRO. We have booked profits on this profit in the quarter, and we have replaced this investment [indiscernible], as we took a call that [indiscernible] are likely to go up further. We are [indiscernible] position in the long-term paper and convert everything into paper. Today, we have INR 2,659 crores boosted by INR 9 crores, deployed especially in beating around 8.5% as on 31/12/2021. We have around INR 1,000 crores of headroom available in HPM that can be filled by long-term paper and [indiscernible] also by shifting from [indiscernible] together as we are now paying increasing long-term rates by the wage. As we will be looking against above [ 7% ], there will be incremental spread up around 3.5% on [indiscernible]. Also, we have seeing growth picking up in Q3, a network that failed to sustain in Q4 also. We will be funding the incremental credit opportunity costs as low as 3.5%. Now coming to the improvement on the yield on advances, we could increase the yield on advances from 10.98 to 11.59 or by [ 21 ] basis points on Q2, Q3 even in an interest rate falling [indiscernible]. This is a large extent due to high proportion of gold loan in our total portfolio. Going forward, as [indiscernible] write up as this pricing comes back to the effect, we will be able to increase yield on our SME book also. Similarly, we have significant [indiscernible] on corporate loans, direct attainment and PTC price. And here also, the effect on better pricing and [indiscernible]. Even in gold loans, there is still scope to increase the yield as the repricing will happen in the products where we are now getting only 7% in the fee service to [indiscernible]. Then again, the third driver could be low duration of the asset book. Our modified duration of our total asset book is around 1 year. Including the investment and the loan book, our asset book duration is only 1 year, and this makes us perfectly placed. So placed upwards of the yield curve, [indiscernible] drivers of the decrease in the cost of deposits. Our ratio has improved to 35% this quarter. And more importantly, we are able to maintain cost of savings deposits consistently at around 2.50% to 2.65% level. This may not be the case for many banks who have attainted the growth in savings deposit portfolio at cost above 5%. There is scope for further reduction in cost of deposits from a different source, cost of deposits. Right now, cost of deposits are deposits of original [indiscernible] less than 1 year, [indiscernible] near 7% of total term deposits. While for many banks, it is above 50%. We have now formed a separate team targeting institutional clients, most of such deposits, which will help to improve our overall cost asset deposits [indiscernible] costing as low as 4% in the days to come. Cost income ratio. Cost income ratio has been one area, which refers to improvement as the 9 months in December '22. It is 54% as against 52% of the comparable period over the last year. Reduction in percentage points, INR 118 crores [indiscernible] has contributed to the increase, and we could make good [indiscernible] reduction to a great extent by growth in core income, investment income and some extra. In coming quarters, we will be able to improve further on the core income as we are sitting on a huge fixed deposits. Our business or brand is only INR 50 crores, still [indiscernible] is in the range of INR 150 crores to INR 250 crores. Given our capital adequacy position, we can easily double our balance sheet and still maintain comfortable CAGR without any external capital inclusion. Also, the 150-odd branches we have opened in the past 2 years do not have any legacy issues. And most of them, especially those [indiscernible] without adding to the cost. [indiscernible] have been negatively -- [indiscernible] has been negative continuously for the past 2 quarters, while for the 9 months '22, it is only 0.2%. And for sustainability, it may be noted that we have a provisioning policy whereby we provide NPA fully in a matter of 3 years, even if it [indiscernible]. We will post significant recoveries and onboard NPA as well, though the enrollment was [indiscernible]. Going forward, given the secure nature of most of our NPAs in SME, we've seen credit cost of near 0 level that will be sustainable. Return on assets and return on equity. 9-month return on assets has been [ 1.83 ] and 9-month return on equity is 21%. Given the scope of further improvement in May and fee income and the ability to contain credit costs, we think this will be perfect. Over to you for your questions.

[Operator Instructions] The first question is from the line of Mona Khetan from Dolat Capital.

So my first question pertains to the processing fees. So sequentially, despite the healthy growth pain, our businesses has come down. So what exactly leads to this?

Yes. This could be the strain on the [indiscernible]. We are pricing to reduce the extra feasibility in our possible finance. If we have excess utility and deploy in the government security study, interest rates will go up and you have to buy the depreciation. And the current market is not picking up much. The prices are very low as it is not getting priced properly. So our call was not to accept the call, if it is [indiscernible]. They cannot put a full stop to the retail deposit. We continue to have retail deposit at a very low rate. Our rates are as low as any other major markets. And we don't compete in our market. Our market, other companies are paying a higher rates. And in the bulk deposit market, wherever we have a relationship, a strong relationship, we continue to accept the bulk deposits at the cost rates. But outside, we took a call. Even at call tate, we will not accept that bulk deposit, even from our existing clients because there is no possibility of the price. So we requested these clients to shift their accounts -- to shift these deposits. Based on that, there were more. And as a result, even the bulk deposits have come down over a period. So today's PE ratio is almost 78%. I'm confident by March end, it will be somewhere between 82% to 85%. Without raising further resources from the deposits market -- retail deposit market, I can take the PE ratio as near to 100%. There are many refinances available at cheaper rate. My [ CV ] will be rate at a much, much cheaper rate than the deposits. I have seen a program of INR 2,000 crores. I can enhance it. And for money and other -- money market instruments are also there to raise the money at a cheaper rate. We can go for foreign currency borrowing if the landing cost is cheaper than that currency borrowings. So we continuously explore all these possibilities and take the liability to each other [indiscernible]. As a result, liability cost is coming down from 7.85% deposit costs. We already brought into 4.34%. I'm confident it will go below 4%. So it would be not a problem at all, unlike other banks where the asset book duration is very large. That is what I was explaining. If you deploy any infrastructure, if you deploy in retail loans consisting of housing loan and markets and if you've invested in the term loans, and naturally, your asset book duration is more. You have right and long-term [indiscernible]. Whereas in my case, my asset book duration is only 1 year. And yes, 50% of my books consisting of [indiscernible] gold loans, average maturity is only 4 months. So naturally, I'm placed in advantageous position to raise the short-term deposits at a low rate. Today, your EBIT funds are not yielding great returns. Okay. It's around the [indiscernible] rates today. So instead of the 3.5%, even I offer 3.75%, I'll leave a portion to a huge amount of corporate deposit in the short-term market. The focus for the next quarter should [indiscernible]. So we need to increase a proportion of short-term deposits in our liability portfolio. Otherwise, [indiscernible], we are very comfortably placed. Having 200% liquidity ratio is not [indiscernible]. It doesn't give return to the investors. What the regulatory requirement is only 100%, we are at 154%. In my opinion, that itself is enough. So we'll improve efficiency and bring it to a little more than the required level to provide comfort to our [ investors ].

So sir, I was referring to the fee part, which, in my opinion, is not linked to liquidity assets to your processing fee. The non-treasury-related income has declined. So the total fee is still higher from INR 32 crores to INR 33 crores. But within that, the processing fee component has come down despite the rise in loan book. So that was my question.

So that's also what happens. Once fee income [indiscernible] still income, okay? Let me have the approach in the subsequent quarters, which is not available in the third quarter. On the other hand, we were to purchase that, et cetera, [indiscernible]. But otherwise, there is no income from it. As far as the processing fee is concerned, today, because of excess liquidity conditions prevailing in the market with the concession in everything, there's concession in the processing fee, there is a concession in the rate of interest charge, concession in the employee charges, [indiscernible]. So naturally, the fee income related to the gold book as well as the gold loan, we have completely the processing fee. So as a result, maybe we could collect processing fee very low when there is a liquidity steps. I think that is getting addressed now. Over the period, this will come. But overall, my noninterest income is higher than the last 9 months. In fact, our [indiscernible] income has gone down by INR 105 crores.

Got it. And you highlighted a couple of levers for margins going forward. So is it fair to say that your margin guidance or outlook from the 4.5% given earlier, it will be higher at, say, closer to 4.9%, 5% or so?

I won't make a segment like that because it may be against the guidelines. They don't give forward-looking statements. What I was trying to explain is that, you have so many levers available to us, which will effectively relate to improvement further. There could be other factors, which may pull down. As of now, we saw the levers available to us, which may help us to improve the NIM even over the percent level. That is what I was saying.

Sure. And what is the write-back owing to recovery seen in this quarter in the interest income?

The current quarter, we are expecting a robust recovery, both in gold loan as well as non-gold loan. Gold loan is only INR 126 crores in the year-end, which has come to almost INR 85 crores as on date, INR 30 crores is already recovered and further recovery possibilities are there, gold loan will come down further, gold loan and NIMs. Other [indiscernible] also, a lot of [indiscernible] settlements are given. Most of the properties are taken possession of, and we are in the process [indiscernible]. And you will see further recovery happening in the non-gold loan portfolio. So you can expect a better recovery in the fourth quarter also.

Sure. I was also referring to the recovery, the interest write-back seen due to the recoveries in Q3, the interest...

Actually, write-back also happens, whether it is a gold loan or a non-gold loan. And the earlier days, what happened, when the recovery happens, you are appropriating the recovery to the interest first then to the principal, okay? Then they fall in line with the comparative accounting practices as well as the practice in the market. Nowadays, we recover the principals and recover the interest later. So when the NPA is getting closed, most of our story goes to the interest portion as a [indiscernible]. So you will see more and more income coming out of that NPA recovery.

Okay. But this quarter, what would be the quantum that is benefiting the NII line from the recovery, the interest price back?

For the last quarter, only for the quarter, INR 11 crores was from the gold loan.

[Operator Instructions] The next question is from the line of Nirmal Bari from Sameeksha Capital.

Yes, sir. And thanks for the detailed description that you gave about the various NIM levers that you have going forward. So my question is specifically on that, right now, we are anywhere between 100 and 150 basis points above what all the normal large private sector banks would be doing in terms of NIM. So that is a significant cushion in itself. So why not -- and we have been saying in the previous few calls that there's very high competition from those banks, and we are not confident at those price points. So why not cut down our expectation for NIM and maybe even after considering the credit cost that may come in, this 100 to 150 basis points of higher NIM cushion that we have can enable us to grow at a faster rate? So what is our thought process on that?

No, we are not against it. But in which direction we are growing is very important. Today, we have AA-rated SME account. It's getting taken over at 7.5%. Whether we will then be a AA-rated corporate, definitely not. There's nobody in the market who lends our AA-rated corporate. But in the SME segment, I'm saying my BB-rated customers, for whom I'm charging them [indiscernible] are taken over by the leading [indiscernible] at 7.5%. I don't know their strategy [indiscernible]. They look at the overall wallet size and a lot of cross-selling possibilities and make it up somewhere else, okay? But otherwise, pricing those loans at 7.5%, you're not taking into consideration the [indiscernible]. I don't compete with them. We can't take head on with this kind of competition. I'll leave at that [indiscernible].