Ladies and gentlemen, good day and welcome to the CSB Bank Q2 FY 2023 results conference call hosted by Axis Capital Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Manish Shukla from Axis Capital. Thank you, and over to you, sir.
Thank you, Kathy. Good evening, everyone. On behalf of Axis Capital, I would like to welcome you all to this call. From the management team, we have with us Mr. Pralay Mondal, MD and CEO, and Mr. B.K. Divakara, CFO, and other colleagues from the management team. I would request Mr. Mondal to make a few opening remarks, and after that, we can open the floor for Q&A. With that, over to you, Mr. Mondal.
Thank you, Manish, and thank you everybody for joining Q2 earnings call for FY 2023. I wish to, you know, start with wishing a very, very happy Diwali to everybody and their family in advance. Coming to our bank results, I would like to just talk a little bit briefly about how or what's happening, what kind of an environment we are in both globally and in India, and then straight get into specifics of our results. Also give a little bit of a brief of what our medium-term and long-term vision is because more than a quarter result, I think for our bank, the key story is about what we want to do in the medium and long term.
Starting on the global side, we all know that we are going through post-COVID, a very different kind of a challenge, with global growth being anemic, with all the you know all kinds of issues there. This interest rates are just skyrocketing. Inflation is skyrocketing, whether it is in U.S., whether it is in Europe. The U.S. ten year yield has crossed 4%, 2%. That two year yield has skyrocketed yesterday. Also seeing U.S. dollar index is volatile but very, very high. Indian rupee has also now crossed 83, which is a concern. It also issues on CAD and things like that. I think we are passing through a fairly volatile, uncertain kind of a situation globally.
While India is relatively in a better place to be in, and more stable, but we cannot be completely away from some of the global challenges. That is shown once the FOMC raises interest rates, which again is expected to be anywhere between 75 to 100 basis points, and they have given. They constantly keep on raising the bar in terms of where they can go. The RBI also to some extent has to follow suit. Though our inflation, I think, Advait has already said that just sort of peaked and various MPC commentary has been, you know, showing that things are sort of stabilizing on a higher base. I think growth is coming back as we see that the banking credit growth this quarter should be somewhere around 18%-19%.
As RBI governor has already said that going forward, monetary policy will remain watchful on stability while supporting growth. Having said that, India always has a challenge of this oil price, and oil price is right now stable, but there are various OPEC announcements pending. The US oil results are expected to you know be not so high at this point of time. We have to wait and watch how the oil price and its impact comes. We had significant outflow from the country. In terms of FII, it came back, and again, this quarter, this month outflow has also been slightly high. To that extent, I think we have this volatility.
In this volatility, I think the banking ecosystem has done extremely well for us as a country. More and more results are coming. I'm seeing that broadly this has been a good quarter for most of the companies a nd hence we remain very, very positive and hopeful that we are in a good place at this point of time. With this macro, I will just get into CSB specifics. You probably have already got the numbers, but I'll state, go through them, the key numbers little bit. We had significant improvement in net profits, 31% year-on-year. Mr. Divakara will explain later on as and when those questions come up on our operating profits and things like that.
There are certain factors which kept our operating profit little muted. For the quarter ended, net profit is 5% higher than last quarter at INR 120 crores. Provisioning buffer of around INR 200 crores over and above the regulatory requirements, because we take accelerated provision. We also have COVID provision, which you call it, INR 106 crores. We could maintain again a NIM about 5% on a yearly basis, 5.6% and 5.38% on a yearly basis, and quarterly basis, 5.6%. Last quarter was one of the highest NIM for us at 5.66%.
I'll come back to this, that obviously this is not sustainable. ROE improved from 1.53 in H1 2022 to 1.81 in H1 2023, while sequentially it improved from 1.75 to 1.87. Broadly, we are in line with what I keep talking that we'll be between 1.5-1.8. We are in that range. Liability growth is gradually coming back. Asset growth was 16%. Overall deposit growth was little more than 10%.
Cost of deposits reduced from 4.39% in H1 FY 2022 to 4.14% in FY 2023, though gradually we are seeing that this will start picking up now, which will impact to some extent the NIM over a period of time. Net advances growth has been positive. It has been 24% YOY and 8% QOQ. This is one of the things which I've been telling everybody that we will focus on growth and quality growth while we keep a sharp reserve focus on our credit quality. Year-on-year 24 and QOQ 8% says that we are being consistent in terms of what we are promising, that we'll continue to try and grow faster than the system.
Gold portfolio registered growth of 47% and yield on advances was at 10.7%. On the asset quality side, things improved further. GNPA was 1.65%, NNPA 0.57%, PCR 90%. PCR this of course includes the write-offs. If you take that out, it will be marginally below 70. Contingency provisions accounted in the books is higher than NNPA, continuing with the accelerated NPA provisioning, as I said before. Robust capital base, there are very few banks who has a capital base of more than 25% and ROE more than 18%.
This of course is possible to a great extent because of our large size of the gold loan portfolio, and this again is not sustainable as we grow the mix of other businesses over a period of time. Shareholder value creation from that perspective, book value per share has reached INR 158, EPS INR 27.1, ROE of 18.49%, which I just mentioned before. We continue to open our branches. This year also we open 100 branches, 81 locations already approved, work in progress. We are confident of opening 100 more branches this year, and we'll continue to grow at least by 100 branches every year, if not more.
There's a significant investment planned, and the execution has started in a big way on technology, whether it is LOS, you know, core system, migration processes, thinking, LMS, you know, the entire loan system. We are thinking significant investment into the technology stack. Those are for the numbers. Slightly on the midterm to long-term, what we are planning, again, I don't think the commentary is changing, and I hope it doesn't change in the next three to four years because one thing what I've learned in banking is, be consistent, and ensure that we deliver every quarter what we promise. We continue to invest. As per our SBS strategies, sustain, build and scale 2030 vision.
We have clear vision where we want to reach, how we will reach that in 2030. We want to have sustained growth. I said that before that in the next three years, CAGR of 25%, give and take little bit here and there. Post that, higher growth hopefully, because that time we should have all our technology stack, credit processes, entire collections ecosystem w hich helps us in building our retail businesses, the payments ecosystem, the SME. We are also starting to invest into a little bit of transaction banking, both in terms of leadership, processes, technology, everything. By 2024, FY 2024, we should be ready with all that. Then next two, three years we will start building those businesses.
Last three years of this decade, which is SBS 2030, we should have a hockey stick approach in terms of retail growth and SME growth. Because by that time we'll have everything ready, technology, distribution, leadership, processes. Then it's a multiplier effect because one leads to the other, as we all know what happens in a banking ecosystem. We are looking for that hockey stick somewhere between 27 and 30. Hence, directionally, while our cost to income, where it is today, I've always said that it will be between 55%-60%. I don't mind it taking closer to 60%, provided most of those are happening because of investments and not because of costs. Costs will be managed through productivity. Investments will be managed through, you know, payback period of those investments.
If we do the right investments in the cost to income, in cost, I mean investment, not income, right investments, then we hope that by end of this decade, we should be able to bring the cost to income below 45%. That's the plan. We'll also ensure that the business mix is more balanced. Again, exit 2030, we should have highest portion of the book should be retail, more than 30%. And then between gold, SME and wholesale. The rest will be shared equally or little with one or two, three percentage here and there. That's the thought process.
Right now, as you see that, as I said before, that gold proportion is only going up, and it can go up to 45% before we start rationalizing. It will not go beyond 45%, because we also need the income. The other important thing is, we will continue to focus on other income to non-interest income to total income. There, our proportion is very low and we want to take it up.
This quarter there's a specific reason why it's low. Because if you take out the year-on-year PSLC income, which is a special income, and the treasury income, which is negative this quarter for various reasons, including SR and including some of the other reasons, treasury bills and things like that, we book some losses strategically. Our actual core non-interest income actually has grown by 48%, I think. Which is a mission, right? That will continue to grow because as we add more products, more transaction banking products, retail products, payment products, third-party businesses, more customers coming into the system, and customer acquisition is going to be one of our key focus areas.
We expect our ability to grow the non-interest, core non-interest income to the total income. Even if our NIM comes down, which will happen, our ROE will sustain between 1.5%-11.8%, primarily because of some of these fee income that will continue to grow. That is typically how the market operates. We cannot be an outlier. As we grow, we have to be part of the system, so we'll continue to grow. The other important focus, and this is my last statement before I open it up for questions and so Divakara's comments, if any, is growth can only happen provided it is quality growth. It is, and I don't see a challenge at all in the asset growth.
We have to fund it, so we have to have a significant focus on liability, whether it is CASA, whether it is. Actually it's customers. Along with that, FD is general, everything will come. We'll create focus structures on TASC, which is trust, associations, et cetera. We obviously do not want to depend too much on wholesale deposits, though we are giving targets to our SME and wholesale team to also be as self-funded as possible. Liability, quality liability and customer acquisition and personal franchise is key because even if, when we tomorrow have the assets products ready and we have the processes ready, we need a significant base to cross-sell this to.
Also today we need to ensure that to retain our LCR and to sustain to support a sustainable growth of faster than the system, we need a sustainable liability franchise. Hence a lot of our focus is going into building the approach towards liability and how we talk to customers and get those deposits. In conclusion, I'll say that you know we are very bullish about how we want to grow. We will be consistent. Hopefully, there'll be no surprises and shocks. When you look at the NPS slippages again, a word on the credit cost, it looks negative, but obviously negative credit cost is technically too good to be true.
Obviously we will have but some credit costs eventually coming in as slippages, as we grow. We will continue to have our gross and net NPA below 2% and below 1% over a period of time. This quarter has been a testimony to that we can hold on to our good performance on that and make it even better. With that remarks, I would like to hand it back to in case Mr. Divakara has any comments, otherwise we'll hand it back to for questions from all of you. Thank you very much.
No, you have covered Pralay. I don't think anything needs to be supplemented. During the course of question and answer session, if something needs to be supplemented, I will do that.
Sure. Thank you. Let's get into Q&A then.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Mona Khetan from Dolat Capital. Please go ahead.
Yeah. Hi, sir. Good evening.
Good evening.
Yeah, hi, and congratulations on a good set of numbers. Firstly, my question was on the PSLC market. What exactly is going on? You mentioned in your comments about draining of opportunities. What exactly is happening there that's lowering the PSLC income for us?
It's very simple, Mona, that we had booked PSLC income last year by now. This year, what we have seen is that pricing is not attractive right now to sell the PSLC, but pricing is very attractive to buy anything which you need for micro and things like that. We have just done the reverse. We have bought what we needed to for the year, hopefully, and we have not sold anything because we think by Q3, Q4 we will get a better price. That's earning which we expect to come, and that's the buffer which we are holding at this point of time. At the same time, I think last year, Mr. Divakara can confirm, I think we are around INR 34 or 35 crores.
INR 33.4 crores.
INR 33.4 crores. Yeah. That is something which we have not yet booked this year because the pricing is not attractive right now, but we have the pool which we can use.
As I understand, in Q3 and Q4, the pricing anyways becomes less attractive. Is it fair to say that the full year profit from PSLC book could be lower than, you know, what we have been seeing?
The cycles are different now. What else? Either everybody is done very well on PSL suddenly, or we can only know in the Q3 and Q4 what the story is. We believe that we should be able to get better pricing in Q3 and Q4. It's a call which we have taken.
Sure. Coming to the gold loan book, we have seen very strong growth, much higher than what we have seen for, say, other banks and even mainstream NBFCs. What really is helping such growth trends? If you could give some sense on how much of these could be balance transfers from other entities, especially NBFCs that help.
Sure. Our segment of customers is slightly different to the NBFC segment of customers. Like as I said before that, the bigger banks work in a different segment and in a different yields kind of. Our yields are different, our segments are different, and business. Even after obviously there will always a 20% overlap and things like that. Not too much. I know why you're asking this question because there is a lot of noise on this right now. Frankly speaking, two things are happening in our portfolio. Our tonnage is increasing because prices has not really been very, very volatile. You know, it has remained similar kind of a price. Obviously tonnage has improved to that extent.
Lot of existing customers are bringing new tonnage to the bank, as well as we've added lot more customers. It's a function of execution, what we have done well, and this gives us the confidence that branches are getting ready. Tomorrow you will see that even liability, the branches are able to execute better. Question is, if somebody can execute better the gold, they can execute better the liability. Tomorrow when we have the assets or SME or whatever else, they should be able to execute better. I think we are able to get better productivity out of branch right now because of execution focus, monitoring, leadership, on ground, you know, excitements and things like that. That is what is helping us.
I think it's business as usual for us at this point of time. Our portfolio is small. I mean, percentages don't say everything. Say our portfolio is small. Even if you focus on it and do little better, the growth automatically comes. We are ensuring that we are not depending on this growth. I have told very clearly because with this quarter we want to grow slightly better on SME, little more on the wholesale side. Retail will take time because retail is a high road, it will take some time. We don't want to depend on gold so much at this point of time. I think that gold will be steady. Don't expect that. There's a lot of disturbance on the line. I don't know why.
Sir, there was an audio break from your end. Could you repeat the last,
Oh, is it?
Yes, yes. Now we can hear you.
Okay, cool.
Follow-up question on this. You know, on gold side again, with growth trends getting better across segments, you know, the general credit environment getting better, do you see the competitive environment in this space getting better versus, you know, the last two, three years?
When you say better, what does it mean?
In the sense that pricing is less competitive.
Yeah. It is bound to happen because once the liquidity has dried up in the ecosystem and cost of funding starting to go up, so some of the NBFCs, some of the banks, et cetera, will, you know, easy liquidity is not there anymore. Pricing will have the right pricing for the right risk return and right operating cost will be put in place. Yes, I think that eventually, whether it is SME, whether it is gold loan, I think even on to some extent, to some extent the mid-market where we operate on the wholesale side, we are seeing pricing rationality coming back.
Sure. Just finally on the SME book, again, despite the small base, we are not seeing any, and a focus area for you where some are not seeing growth coming. What is the outlook there? You just mentioned we are seeing growth from this quarter also, but what sort of growth trends could we build in? Or what sort of disbursements are we seeing in the last few quarters, even if there are some run off? Yeah.
What happens is, when I know this, that, both our retail and SME has a large component of our old book. Okay? Some of them, I mean, some of them naturally runs off the term loans and on the other-
Excuse me. This is the operator. Sir, are we connected?
Tell us.
Yeah. Yeah, we can hear you now, sir.
Yeah. I don't know what is happening. What I'm saying is, we have significantly enhanced our, you know, credit governance on the SME side as well as the wholesale side. We said that we want to do risk-based pricing. We want to ensure that we do businesses at certain ratings and things like that. We always had those policies, but we have implemented with little more iron hands because we want a sustainable growth. To that extent, some of the businesses which are running off, we are happy. The new businesses which we are building is also very good quality. Our ratings, our risk-based pricing, all of that is falling in place. We are putting a lot more science behind it, and hence, I would see that, the second half of the year we have done all that corrections in the portfolio in the last six months. I think the second half of the year you will see a growth in the SME portfolio.
Ma'am, you're done with your questions?
Yeah. I was just asking which should be in line with the rest of the book, the second half growth in SME?
Yeah. I think SME should be having the growth in line with our bank growth second half.
Sure. Thank you, sir. That was very helpful.
Thank you. Reminder to all the participants to ask a question, you may please press star and one. The next question is from the line of Pruthul Shah from Anubhuti Advisors. Please go ahead.
Yeah. Thank you for the opportunity. My question is with respect to the overall industry growth, like if we see that large banks and small banks all are giving decent growth in decent advances growth, but now that the interest cycle is going up, what is your understanding on credit growth going forward? Normally, how much time it takes to impact the economy? Like, what is the lag in impacting the credit growth because of this interest up cycle?
I am not sure I understood the question fully, but let me try. Credit growth is a function of, you know, various things including customer confidence, the salary growth, you know, if you see some of the numbers on the savings on the consumer side, it has actually come down a little bit. The debt to GDP has actually gone up. If you look at some of these numbers, people are having the confidence somewhere and there's a little bit of a pent-up demand as well because of COVID and some of the other stuff. There has been a muted demand both on retail and SME in the last few years.
Wholesale has been absolutely muted because, and still investments has not come back, CapEx has not yet come back and things like that. Project finance, et cetera, are starting a little bit here and there. Generally the feel is that, everybody's seeing that there is a growth picking up almost everywhere. I mean, the private investment should start coming in. The CapEx should start picking up. I think generally the view is that, a credit growth, upwards of 15%, because it's typically, India has always done, credit growth, more than the nominal GDP. Today, even if you have a, nominal GDP, if you have a credit higher than nominal GDP, you have to be somewhere around 15%.
Given that perspective, I think we see a minimum of 15% growth, credit growth going ahead. Interest cycle, sometimes what happens the other way around, that interest cycle starts going up, it impacts the credit growth because sometimes the ability to repay or ability to consume is little lesser in the customers because there's lesser money in the customer hands to pay EMIs and things like that. And also, with liquidity, which is not abundant right now, banks also has to be careful in terms of how they build the liability balance sheet and how they fund the credit growth. It is going to be interesting to see how it works.
Good part about all this is that there is a rationalization of pricing and the classical banking practices are coming back, between NBFCs, banks, SFBs, et cetera. Because in between there was a scenario where the interest rates are so low that, you know, sometimes, it was below savings rate also, you know, some of the rates. Now I think the classical banking is coming back and hence I think a normal credit growth is expected. I'm quite confident unless there is a significant global headwind, which is possible because we are not completely shielded from that. We should be able to see a reasonable credit growth in our industry.
We as a bank, we are not such a large part of the ecosystem, our growth is so much more dependent on what we execute. Our credit growth may or may not be so much dependent on what is happening in the ecosystem. Ours is more execution, product, processes, building scale, building distribution. We are more confident of the kind of credit growth which we'll bring in.
Okay. Okay, got it. My next question is with respect to the increase in NIM. YOY, if we see that our advances has grown up by 24% and absolute NIM is up by 17%, despite NIM percentage increasing from 5.22% to 5.6% in this quarter. Can you explain why this difference is there? Like, advances are up by 24% and NIM is up by 17%.
Yeah. Let me try this, but this is a more technical question. Mr. Divakara will answer better, but let me see if I know a little bit. I think it's also see that our CD ratio has gone up to 87%. And our CD ratio is significantly lower than this, and this is a story of the industry. Also our investment book you know has you know rationalized a lot more and hence, on an overall basis, the NIM looks better at this point of time. Mr. Divakara, you want to respond to this?
Yeah. It will not grow in proportion to the growth in advances, so beyond a point we may not be able to increase the pricing, so it has to be at a certain level. From 5.17% to 5.60%, it is in line with what we had expected. I don't think it will grow in proportion to the growth in advances.
Uh, the mix [crosstalk].
Yeah. The mix between investments and advances changing. That is one of the reasons, and the CD ratio.
Okay. Got it. Thank you so much. That's it from my side.
Thank you. Reminder to all the participants to ask a question, you may please press star and one on your touchtone telephone. Participants, if you have a question, please press star and one. The next question is from the line of Anuja from Elara Capital. Please go ahead.
Hello, sir. Congratulations on good set of numbers. I just have one question. At the moment, CD ratio is almost 87%. What is the comfortable level of this? Can you give some guidance on deposit growth? I understand that we are trying to build quality deposit franchise, but is there any quantitative guidance for this?
Guidance is very simple that if you have to grow faster, it's the answer lies in the question that if you are at a CD ratio of 87% and if you want to grow faster than the industry on the credit growth, we have no choice but to build a deposit franchise better than what we have done in the last few quarters. I mean, we don't have a choice and hence we are fully focused on that. When you say deposit franchise, it's basically growing liability because we also have to be cognizant of the LCR has to be between 100%-120% or somewhere there. Given that perspective, granular deposit growth, NRI focus.
Generally, the NRI ecosystem has come down a little bit for various reasons which you all know, but we expect that to reverse at some point of time, and that will give us some growth. There is no substitute for execution, you know, in deposit or liability franchise. Adding more customers, building CASA franchise, also we are looking at government businesses and things like that. 100% LCR we will continue to focus. So from that perspective, I think it's all execution. We don't have a choice. We have to build the liability. Okay. Now, coming to comfort, I think overall the system CD ratio must have gone up significantly this quarter.
I mean, it's automatic because if there's a credit growth of 18%-19% and if liquidity is where it is today, CD ratio has to be, you know, much higher, especially among the private sector banks who are growing faster. Given that perspective, 87% is reasonably comfortable in my view on a relative basis. Anything above 90%, we need to be monitoring it little more carefully. Obviously we don't want to. We are not a NBFC, we are a bank, so we will not depend on CDs and things like that to build. If we have to dip into that once in a while on some tactical stuff, we'll do it, but that's not the strategy. We'll build up a very clear granular liability franchise.
We have people with us who have built granular liability franchise in one of the largest banks, who knows how to build it. Our head of retail, he was actually in the liability sales franchise in HDFC Bank many years back. We have seen that time also, it's all about execution. Let me put it this way. We are clearly focused on building granular liability franchise because doing assets is easy, and the core strength of a bank is the liability franchise. We all understand that, so we'll build that.
Understood, sir. If time permits, I would like to add one more question. At the moment, NIMs are 5.6, which is not sustainable as you mentioned in your commentary. Earlier you used to give guidance of 4.5%-5% for NIMs.
Yeah.
Do we stick to same guidance or are we revising upwards?
It's a difficult question. I'll tell you why. I mean, just because I've given a guidance and if I have ability to do more, why should I say no? Okay. To be very frank, when I said that 4.5%-5%, I was talking about our slightly longer term kind of, because if you have to have a sustainable growth on the with a mix, the mix which I said by 2030 or by 2027 where we'll be there, automatically the NIMs will come down. Typically the way it works, you know that even if NIMs comes down, your ROA won't go down because ROA will be based on customer level profitability. And if you do not.
For example, if you don't have home loans with a customer, if you don't have payment products with a customer, your liability franchise will also not go up. It's such a cycle, right? You have to rotate the money through its liability and assets and EMIs and payments and ecosystem, et cetera. To that extent, we have to start looking at once we have all the products and processes and it's still three, four years away, and that was the guidance that 4.5 to five years that time. We will get customer level profitability and our ROA too by that time. We should be having our non-interest income to total income close to 13%. I mean, somewhere between 10%-15%. Our customer level profitability has to significantly go up.
Cross-sell ratio has to significantly go up at customer level, which today is very low. NIM is not the only way to create ROA. When you are running a niche franchise, that's the only way. In the long run, when you have a 4.5%-5%, there will be many other income streams that will come along, including transaction banking, wholesale and so on and so forth. In the medium term, I think if you look at the next 12 months or so, I think we should be able to maintain between 5%-5.5%. I don't think that NIM is the only judgment of a franchise. Sometimes, 4.5%-5% is better than 5%-5.5%, depending on how we look at the overall franchise.
Understood. That is from my side. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Pruthul Shah from Anubhuti Advisors. Please go ahead.
Yes, sir. In last call you guided that for the full year, we are gonna open 100 more branches. If we see, in current six months, there are five branches which has been opened. Is that guidance still remaining the same for the full year?
Yeah. Yeah. We should be able to give and take five, 10 here and there because of some last-minute execution issues, et cetera. We should be able to open around 100 branches this year as well. It typically happens in the last two quarters, and more it happens in the last quarter. That's the way it works for us. We will be able to do somewhere close to 90 to 100 branches this year also.
Okay. Okay. Got it. Thank you.
We have to give you more granularity on that. We have already identified 80 locations where work is on. Okay.
Okay. Thank you so much. That is helpful.
Thank you.
Thank you.
Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for their closing comments. Over to you, sir.
Thank you. Thank you, Manish and Axis Capital for organizing this call. Again, I wish to thank everybody for joining us on this Q2 FY 2023 call of CSB. Wish everybody a very, very happy Diwali, a long weekend ahead. I'm sure a lot of you are taking Tuesday also as a holiday. Have a wonderful five day long weekend. Thank you very much and have a very, very good festive season.
Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of Axis Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
Thank you very much.