Ladies and gentlemen, good day, and welcome to CSB Bank's Q3 FY 2026 earnings conference call, hosted by Yes Securities. As a reminder, all participant clients 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 zrro on your touchtone phone. 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, Mr. Shivaji.
Thank you, Ikra. 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 good evening to everybody who's on the call. Thank you for joining this CSB Q3 call, analyst call. Let me start with a little bit of a background of the global scenario, because, obviously, there are lots happening there. And then, we'll come to space, CSB specifics quickly. So on the global trade scenario, by and large, it remained the same, and in fact, the trade negotiations have deteriorated since last quarter on the U.S. side. But of course, we had some good news coming from the E.U. front, and hopefully, that will neutralize some of the impacts which is happening. It has created volatility in the financial markets, impacting currency and equity flows into many countries.
The issues related to the Fed chairmanship, control over Mainland, and unrest in Iran have all added to the uncertainties and heightened the global risk. This has resulted in unilateral appreciation of commodities in the last quarter as well. Indian growth forecast has been revised upwards by economists, and multilateral agencies, like IMF as well, has the similar kind of an opinion. The inflation is expected to remain below the lower threshold of RBI, which is below 4%, and despite the expectations of it moving up a little bit now from its current level. The deposit growth continues to lag credit growth quarter after quarter. The CD ratio of banking system is above 80% now, stressing the deposit rate. The continuous lag in deposit growth has impacted the banking sector NIM significantly.
The banking system is likely to continue to face deposit stress, which will keep the deposit rates high and prevent NIMs from improving immediately. Coming to CSB specifics and more relevant to us, on the profitability side, we ended the quarter at INR 153 crore, kind of a flat compared to last year's same quarter. Operating profit of the bank grew by 32% on a YoY basis for Q3 and stood at INR 292 crore. NII grew 21% YoY and stood at INR 453 crore. Other income grew by 26% YoY, constituting 19% of total income for Q3 of FY 2026. Cost-to-Income Ratio was around 60% and lower both on sequential as well as YoY basis.
NIM for the quarter was highest for the current fiscal and stood at 3.86%, supported by marginal reduction in funding costs. ROA for the quarter ended at 1.22%. Contingency provision are held intact, and bank is continuing with accelerated provision policy, which will enable the bank to move quickly towards the ECL as and when it is implemented. On the liability front, the funding base continues to improve. The deposit registered a robust growth of 21% YoY, much faster than the industry level. CASA grew by 3% YoY, and CASA ratio was around 20.5%. Sufficient liquidity buffers are being maintained. On the liquidity front, we had a reasonably good, efficient liquidity risk management.
While CD ratio stood at 92%, average LCR for the quarter was 114%, and NSFR was 118%. On the asset side, the growth of advances registered the YoY of 29%, again, almost double the system, and yields on advances in Q3 stood around 10.82%. In terms of asset quality metrics, there was a slight deterioration. GNPA and NNPA ratios, although within guidance, because our guidance has always been below 2% and 1% respectively, were slightly elevated, though, for the quarter at 1.96% and 0.67%, respectively. PCR now stands at 66.32%. Bank is holding a provisioning buffer of around INR 193 crore over and above the regulatory requirements.
On the capital side, we continue to have robust capital, with 19.41 ratio, and, as on, sorry, the overall capital was 19.41. ratio, as on 31/12, stood at 17.66%. Proportion of risk-weighted assets continued to be lower compared to the industry. Shareholder value creation side, book value per share was at 269. EPS for the quarter is 34.91, and ROE for the quarter is 13.38%. On the distribution side, we have a network of 846 branches, 818 ATMs, as of 2021-2025. In conclusion, we continue to outperform the industry growth trends in respect of both deposits and advances.
We could grow our deposit portfolio by 21% and advances by 29% as against average industry level, which is almost half at this level. Both our gold loan and wholesale banking verticals contributed significantly to our advances growth, registering a growth of more than 40%. We continue to be cautious in terms of unsecured book and have reduced our exposure there. In view of systemic uncertainties, we are exercising vigilance while growing the BLG portfolio, which is SME portfolio, where quality and pricing are of utmost importance. In line with the regulatory prescriptions, we have allowed the loan against security, which is primarily gold, to de-grow, which is the re-pledge business, and negatively impacting the overall growth in the retail portfolio. Our operating profit is robust, with a 32% growth on Q3 and over Q3, FY 2025, and 5% sequentially, quarter on quarter.
The strong operating performance can be attributed to NII growth of 21%, other income 26%, and disciplined cost management. More than 95% of the income is constituted by core fee income, because this time, non-core, like PSLC and, treasury income, were almost next to nothing. Our net profit for the current quarter is almost flat compared to Q3. We have conducted a detailed analysis of the underlying causes of a slightly higher provision requirement, including certain technical factors, which we can take during the call when there are questions. Corrective actions have been identified, and we're pretty confident that we are on track on the both GNPA and NPA as well, and credit cost side eventually over the next one or two quarters.
CIR improved, as I said before, and all regulatory ratios are maintained at comfortable levels. As we enter the scale phase, the strategic focus is clearly to building a diversified franchise, take different expansion, granular customer franchise, and right execution. Before I end my opening remarks, I want to say that we had a fantastic experience on the migration of the core banking with 52 surrounding systems and many other systems on the transaction banking side. All of that is getting in place, so we are getting ready technologically to launch the bank effective FY 2027 on the scale phase, and we are fully geared up to that. On an overall basis, I think almost on all parameters, except for the slippages and NPA ratios, which we'll explain over the call as and when questions come.
Almost every parameter we have improved significantly over the last two quarters. And as we're talking, we are confident that Q4 and Q1 will also see significant upgrades and betterment on the NPA ratio as well. So with that, I hand it over to you for the questions.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question, may press star and one on the touch-tone 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. The first question is from the line of Parag Jariwala from White Oak Capital. Please go ahead.
Yeah, thank you. So Pralay, I have two questions. One, with respect to, you know, if you look at your business model on the slide number 17, retail and BLG has been down considerably. Plus, you know, if you look at even during the quarter, the ex of low, ex of gold, the loan growth. So, you know, we've been talking about, you know, scaling up the non-gold business. What has—I mean, was it a collaborated decision because gold was growing very fast during the quarter, so we decided to, you know, slightly keep other segment under check, or what exactly was the thought process here? So that is number one.
Secondly, on the slippage of around INR 200 crore, can you give us some more granular detail with respect to, you know, how many accounts are there? What led to this technical slippage? And you also said in your opening remarks that you expect upgrades and recoveries in the following quarters. So what gives you that confidence that, you know, you'll be able to normalize these accounts in the coming quarters? Thank you.
Thanks, Parag, for your questions. So I will respond to the first question first, which is business mix and growth in gold. So if you look at it, now, two businesses are growing very well for us. One is wholesale side of the business, and in wholesale also previously used to do primarily NBFC and financial markets, but now we are doing all the businesses. In fact, financial markets is a mix. We are keeping it lower, and hence we are not growing that much on the financial markets because we already had a large portfolio. Still around 35%-40% of the portfolio is financial markets, but corporate banking and mid-market, which is the commercial banking, both these businesses have started doing extremely well for us....
In terms of quality, in terms of pedigree of these businesses, it's very good quality, and we are expanding the teams across the country, north, west, south, west, everywhere. We have built a very, in a very quick time, very good wholesale banking team. With the kind of pedigree we have, not only in the management team, but also in the board, and also our chairman for MCB credit committee is Deepak Maheshwari, who anything above INR 50 crore goes through his, and the committee's, supervision. So we are pretty confident that business is going pretty well. Coming to the gold, of course, we can always say that, price is going up for the gold. At the same time, our LTV is constantly coming down.
While the quarter-end LTV was, I think, around 63%-64%, now it has become, gone well below 60% right now, overall LTV. So we are not taking the price risk on the gold side. Even tonnage has grown slightly, marginally compared to last year. So to that extent, that's... And also the other thing which has happened in gold is a new segment which we are focusing on, which is helping us, because what has happened this year is the re-pledge business, which used to be classifying under retail, used to be having gold as a collateral. That business, based on regulatory guidance, effective first of April, we cannot do that business anymore.
So what we did is, since we can't do it anymore, we have started running down, and it's almost come to a trickle of around INR 700-odd crore there. It was INR 2,400 or INR 2,300 crore, around that. And that is what has brought down the retail. Retail as such has not de-grown, except for we have de-grown two-wheeler, unsecured and MFI because of obvious reasons, because there was stress in that portfolio, and we saw it prior, so we didn't expand that portfolio, and hence we actually got saved in that portfolio. Whatever slippages are happening there right now is on a very small base, and the tail is only left for that. But otherwise, I think, retail, everything else has done the way it was happening.
But the real part of retail will happen only when the liability franchise starts picking up. We are waiting for the core system migration to happen. Now we are launching the product, and retail assets will happen in parallel to retail liability because it's two sides of the same coin. That's how we will build the granular retail franchise over a period of time. Meanwhile, we are doing okay on CV/CE, healthcare, you know, lab, all these businesses on the retail side. On your second question on slippage, yes, around INR 197 crore is the slippage. Out of that, a large part is on the SME side.
Our retail is starting to come, and now it has become flat in terms of slippage or sales, and it is going to come down next quarter because the portfolio itself is kind of eroding. So we are not adding, and hence on the unsecured side, which is somewhere around 2.3%-2.4% of our overall portfolio. So the denominator itself is reducing, so even if delinquency percentages are high, eventually it will not be that material in another quarter or two. So to that extent, retail, we are getting into a safe zone just because the portfolio size is not that much. And some of the other business on retail is doing well in terms of quality of the portfolio as well.
In fact, one account we slipped in CV and one account on HCF, both of them we have sort of corrected. So, so we are doing okay there. We had a challenge on SME because of two reasons. One is, I think the segments which we are operating in SME, and certain locations, because of the, kind of uncertainties, global uncertainties, et cetera, I think there is some uncertainty on the business which is happening. But the good news is that most of these are not very old, vintage, legacy customers. So to that extent, most of the, collateral valuation, et cetera, is pretty good and well managed. So, and these are all, well collateralized. So to that extent, slippages, because of business challenges which they are facing, the intent is not wrong.
So we are confident that we are able to, we'll be able to upgrade most of these accounts. As we are talking, actually 4 accounts-5 accounts we are planning to upgrade in the last quarter, but, for some reason, here and there, it got moved into this quarter. But we are confident these 4 accounts-5 accounts will definitely get upgraded this quarter. As we are talking, till yesterday, we have already upgraded INR 30 crore of this SME business. And we don't see fresh SME because we don't have an SME account, SMA 2 account in any business at this point of time, other than gold and all that, which does not lead to final losses.
So, we think that we will have a positive surprise in terms of what we do in terms of slippages this quarter leading to NPA. And that will also help us in getting our PCR, provision coverage ratio, better. So other than slippages, if you look at line by line, all the components up to PPOP level, the bank has done very well, much better than what we did last quarter or last quarter. So in Q2, you remember that we had NIM of 3.51, and the expectation was that it will constantly slide down like that.
I had said that, "No, we will go up," and a lot of people doubted that commentary, but we have eventually shown in two quarters from 3.51, we went to 3.81, and now up to 3.86. In our scenario, we have NIM in under pressure in the ecosystem, which means that we are in control and we know what we are talking.... Having said that, I think NIMs sort of will not move beyond this, so we will be somewhere within 3.7-3.9, in that range. I don't see it crossing four right now, given where we are today. I mean, given the overall ecosystem deposit challenges and liquidity challenges which are there in the market.
Similarly, I'm saying that on the slippages side and the NPS side, we are pretty confident that between Q4 and Q1, we'll sort of be back to where we used to be before in 2 quarters-3 quarters back. So that's broadly what my response to your questions.
Yeah. Thanks, Pralay, for the detailed reply. Just one or two question. I mean, these are how many accounts? You said that, you know, maybe four to seven accounts will be able to upgrade, but total slippages is, are around how many accounts? And is it fair to say that large part of these accounts are mainly to do with tariffs, or they are, they must be in textile, footwear or such kind of, industry? Is that a fair understanding?
Parag, I mean, number of accounts sometimes is irrelevant, because sometimes these are very small amounts also. But relevant number will be around 10, 11 accounts, okay?
Sure.
In SME side. Retail, I'm not talking about. Retail is a portfolio level, but I'm talking about SME.
Mm-hmm. Yeah.
Then wholesale, we don't have slippages. We have only one 4 crore or something on the wholesale side. So, I think around 11, 12 accounts on the SME side. Out of that, we are confident that around 40, 50% of this will do it this, this quarter. Some will move to next quarter, and not that everything will get reversed, so not everything will get upgraded, but a fair bit will get upgraded. Because some of these are technically moved into this quarter, unfortunately, which we also didn't expect, but it happened. And proof of that is that we already have upgraded 2 accounts amounting to INR 30 crore.
Hmm. Sure. Just one thing, if I can squeeze in. You know, there was a one or two delinquent account in first quarter of FY 2026 as well. I mean, is that account now upgraded or still we are-
Yeah. So that was not... Yeah, no, that was not in SME, that was in, that was a legacy wholesale account, if I, if I remember. One-on-one, we had discussed this.
Mm-hmm.
It is in the process, so we are expecting results in Q1 of FY 2027. Because now it is coming to a level where, more or less, we are sanguine that we'll get something out of it in Q1 FY 2027. Because this went to the entire legal directory and all of this route, so hopefully we'll be able to get it in Q1. If the full thing cannot be recovered, but some fair bit of recovery will happen in Q1 2027.
Perfect. Thanks, Pralay, for the detailed reply again.
Yeah.
Thank you. The next question is from the line of Nataraj Sankaranarayan from DSP Mutual Fund. Please go ahead.
Yeah, just a contextual question. In this journey before we scale from 27 onwards, that we talk about, how do we manage these bumps? How do we—you know, are the system robust enough to, you know, to weather this entire journey? At this stage, we are having bumps, so just wanted to contextually understand the risk processes, first. And second, you talked about SMEs and stuff like that. Could you just take two parts of that question? One, the overall context of the SMEs, what you're observing in general, which pockets, in general, you're seeing some bit of stress coming out. And secondly, within your cohorts, how are you placed within that? Thanks.
Sure. So, now just to contextualize, when you're talking about bumps, we have two bumps. One is NIM going to 3.51, and one is, sorry, this, gross NPA, GNPA going to 1.97. Okay? Now, both of these are well within the range which, especially that GNPA, we always said will be below 2. So in spite of the bump, we are below the range where we had guided in terms of this thing. But that's not where we want to be. So there is no major kind of roadblocks for us, for our SBS 2030 journey, is what I wanted to say, and FY 2027 onwards, we'll see the scale phase.
So from that perspective, and, and NIM, we have already said that we have gone back to where we want to be, closer to 4%. So really, if you look at most of our ratios, there are not too many bumps, and those bumps are also within the range which we have guided to a great extent. Coming to the SME and rest, I think I explained enough to Parag in his question in terms of the slippage and the NPA question, so there's no point repeating that. On the question of SME, yes, one of the things we'll see that we have grown SME year-on-year 20%. Last year, we grew almost by 30%.
One of the reasons we are growing slower, because we acknowledged in the beginning itself, at least one good thing we have done is whether it was unsecured retail, whether it is MFI and whether it is an SME now, whenever we have seen and read the scenario, we had slowed down the business, so we don't keep accelerating the business and, and increasing the denominator. So this year, and by the end of this year, when we close, we will grow even slower than 20% on a year-on-year basis in SME. And that is a deliberate kind of a strategy which you have worked out.
Having said that, SME is our growth engine, and once a little bit of our, of these issues get sorted out, we will be back to growth, growth-oriented SME business from FY 2027 onwards, as quickly as Q1 FY 2027. So, and of course, SME, we all know that there are certain segments which has been little stressed because of, not stressed, but they had some issues because of the exports, because of the global challenges, et cetera, which hopefully with the new deal coming in, things will look better. But that will take some time to settle down. It's only a conversation right now or a sign-off, after that, this will happen. But, you know, sentiment is very important. Sentiment starts getting positive once people sees hope, because SME business is a lot about hope.
And given that perspective, but what I can tell you is that most of our SME customers, A, very highly collateralized, and more importantly, intent is very good. So there is nothing wrong intent. None of these guys are putting their business back and diversifying or kind of siphoning off the money here and there. That also happened in some SME businesses. These two primary problems happened in my learning I've seen in SME. One is quickly moving out of the business or co-collateralized, which is not properly collateralized. So on both these counts, we are doing okay. So we will see, I think, earliest by Q1 next year, and latest by Q2 next year, I think we should be back in the growth orientation on the SME business as well.
Meanwhile, asset growth is not a problem for us because growing by 25% plus growth in asset is not a problem. Of course, how do we fund that in terms of deposit is something we have to figure it out. So we know how to grow at 20%, but beyond that, how do we grow? We have to see on the deposit side.
And just one last quick follow-up on the deposit angle. You talked about system stabilization and stuff like that. I'm glad that it is going well. When would you actually start seeing that, what would it take for that to actually fall through in place, the deposit growth that you're talking about?
Yes. So we are looking at three levers on deposit growth, okay? One is a long haul, which is creating retail products, creating CASA, creating retail, yeah, customer acquisition at every branch level, granular, for which you need the right products and the systems and the customer, service modules, okay? So far in the MAARVEL system, we could never do that, but now we have the best and the latest system, so we are quickly going to build products. This will take anything between 12 months-18 months. Having said that, obviously, this is a journey. It's not that it will wait for 18 months. This will continue. We'll continue to see some improvements over every quarter. More importantly, what we have done is, we are making both all the businesses accountable for self-funding.
So whether it is wholesale business and, that much I can tell you that last year so far, wholesale, SME, retail, all of them contributed towards the liability growth. In terms of quantum, of course, SME was lower, wholesale was also a little lower side, retail was larger. But in terms of percentage, all of them are growing equally well. And we have kind of mandated the teams that you have to do so much percentage of your business to self-funding, on, on this thing, through OPDT and other routes, et cetera, you know, owner promoters, SME owners, or on the corporate side. So different kind of funding, but we will get those fundings as well. TASC, so we have to address separate model for TASC, which is the trust, associations and all that.
So given that, we are using various modes, but beyond deposits also and beyond CASA and the customer acquisition, we are also doing okay on the FCY borrowings and refinance. That also has grown for us last one year. And we are looking at all sources of funding to fund our growth. So the LCR, we are pretty confident. Last quarter, we ended at 114%, and we should be able to do this year, end this year with above 110%.
Thanks.
Thank you. The next question is from the line of Akshat Agrawal from SMIFS Limited. Please go ahead.
Good evening, sir. Thanks for the opportunity. In terms of OpEx-
Hi, Akshat.
In terms of OpEx, other OpEx declined 22% QOQ. Is it because of technology investment coming out of the base? And was there any headcount reduction? And, CTI is at 60% now, so do we think we can maintain this level going forward? That will be my first question, yeah.
Yeah. Yeah, yeah. Do you have any other questions, or I answer this?
I have other questions, sir. So I can ask now, or I can just come back after you-
No, let me respond to this first. So, what had happened this quarter is, of course, as a bank, when deposit costs are going up and, yields are, falling, one has to be conscious of cost management. So we put special cost management practices in the bank. Having said that, none of that shows up so quickly, and it's not the technology reason, because technology costs have gone up, it has not come down. Because technology CapEx going to OpEx and then, AMC and all of that starts kicking in. So as a percentage, technology costs, I've always said, will be between 8%-9% of OpEx, so that will not come down.
What specifically happened this quarter is, in fact, we did a detailed analysis of the PSLCs income, because the PSLCs income is a part of our fees. And after doing an analysis of last two, three years' trend, we saw what is the best time to book income and what is the best time to buy PSLC, what we need. For example, even we need MSF, so we bought it at the right time, which was last quarter, and this quarter, we didn't buy anything. And when you buy MSF, it goes into your cost line, okay? Similarly, last quarter, we had a good PSLC income.
Again, in Q4, we'll have a good PSLC income because as per our analytical tools, which has told us, is which time to book and which time to sell PSL, or which time to buy PSL, okay? So based on that, last quarter, we bought a lot of PSLC on the MSF side, which hit our cost line, and this side it was zero. Similarly, on the income side also, we have PSLC was effectively zero this quarter. Last time, we had a good income. So these are one-off, and these are not really franchise businesses. These are very tactical play. And what it means is, while next quarter, again, we'll have a good PSLC income on the fee side, but on the cost side, again, PSLC will may go up little bit, leading to cost to income going slightly above 60%.
We may not go back to where we were, but it will probably go up quarter-over-quarter a little bit more. So these are one-off tactical kind of this thing. And overall, had we sold PSLC and bought PSLC also, we would have shown better profits. But we said, "No, we'll keep it for next quarter," because we know that next quarter it will be a better income. Lastly, we... Well, that's not your question, but on the fees, we obviously, like everybody else, we didn't have treasury income this quarter because obviously, the bond yield is where it is. So, and we are not even factoring in our treasury yield, sorry, treasury income in fourth quarter. If it happens, it's a bonus. Right now, we have not factored that in.
Right, sir. But the benefit of scale for the-- as far as costs are concerned, are we going to see it something like on the second half next year? Or is it like, maybe from FY 2028 onwards only?
2028.
Okay, so,
FY 2028.
So this, technology stack costs, which would have started coming off at some point, right? Because, for last two, three years, it was elevated because we were doing a lot of technology investments, aside from the BAU tech costs, right? Like 8%-9% or 10% odd for every bank, which, which they do, right? So is it, is it not coming off now, that, incremental, cost, because the tech, stack costs for the whole, whole, investments for the technology, I mean, shouldn't it come off at some point in the next one or two quarters?
No, it doesn't. The accounting doesn't work like that, unfortunately. So, the tech cost eventually will probably be slightly lesser than what it is today. Right now, it is slightly elevated because at one go, we had to make full transformation. But because it is a CapEx, OpEx game, finally, it will flow through along with AMC. On the AMC also, the OpEx starts going up. So to that extent, the-- I think a better way of looking at it is that 8%-10% of our overall OpEx will be technology. Maybe it will go down by one odd percentage. That will not be material in terms of overall P&L. But what, what-- the reason, and even if it goes down, the real cost that will now incur in terms of customer acquisition.
Because one of the reasons why our CASA or our granular deposits has not been great so far is because we didn't have the products and the systems to get those customers in. Now that the system is there, products will be there, and then the cross-sell of retail assets also will happen to those customers. All this will play out in the next 2 years or so, 2, 3 years. So given that, I've always said that our cost to income will start the glide path will be FY 2028 onwards. It's not the same, first time I'm saying. And once it starts gliding down, it will be pretty fast in terms of cost to income. I think we should be able to go to 50% by FY 2030.
Right, sir. So my next question is on NIM. So yield on advances declined this quarter, so it is coming from higher wholesale mix at lower yield, MCLR revision and some repo rate impact. And wouldn't higher gold proportion with incremental higher yield at 11.83% versus 11.77% kind of offset most impact on yield on advances?
So, I mean, you are answering most of the questions rightly. So if you look at it, because of the repo rate decrease, almost 125 basis points has happened in the last one, a little more than a year. So all of that has flown through the SME business, right? And some of the other businesses which are in retail side also, which is linked to BPLR. The MCLR, of course, is linked to wholesale business, and that is gradually going down. So you're right, in terms of mix, or, and our almost 60% and above is fixed-rate loans, including gold loans. So to that extent, that's exactly what I said, that when the point was 3.51 and will keep going down on NIM, et cetera, I said it will not happen like that.
But yes, instantly, SME went down, and then we have to work on repricing on the new businesses, et cetera. And also, we didn't grow that much in the SME new business because we were little circumspect of the segments we are in at that point of time, given the global challenges, et cetera. But now I think things are settling down, and hopefully, we should be able to settle down the NIM at a similar level where we are right now.
Right, sir. So on the cost of borrowing, the cost of funds, came down, but cost of deposits, like, was just, down 2 basis points. So is incremental borrowing cost, versus the book borrowing cost, is it still, you know, you're seeing benefit there going forward, or is it already in most of it?
... See, borrowing cost, it is linked to SOFR. SOFR has not really come down that much, unfortunately. Hopefully it will come down over a period of time. But definitely, borrowing cost has come down marginally compared to where we had taken. In between, also what happened is this, hedging cost went up, so incremental borrowings, the net landed cost was slightly higher than what we had first estimated because the hedging cost went up. It went, close to 3%, actually, for a one-year hedging and things like that. So it's, it's a combination of all of this, but yes, borrowing costs didn't come down that much, but it came down marginally. All of this helped us in managing the, cost of funds.
I think it was a few basis points lower than last quarter, and that has helped us in maintaining the NIM.
Right, sir. And, sir, so on the asset quality, is this incremental flow from any new accounts? I mean, is it, I mean, is it all in this quarter, and we are just expecting recoveries? Or is there, we can expect some more, accounts to slip on the SME? And what kind of coverage do you have? You did say that it was well collateralized, but if we can get some color on the overall coverage, including collateral on the SME account.
So if you're talking about SME, we are very well collateralized, around almost 80% and above is collateralized. But obviously, if you look at corporate banking, it will not be well collateralized, but we don't even have a SME account in corporate banking, for example, okay? We don't expect it to have. So as I said before, I'm repeating probably the same thing, and it's worth repeating because this quarter, only one question is slippages, why it is high? Everything else is looking positive, right, for the bank.
Right.
So, the point is that, yes, it happened, A, because certain challenges were there in the ecosystem, with the customers, okay? None of them has left their businesses and gone. They are all working on it. They are paying us little bit, in spite of the fact they are in NPA, they are paying us. And, some of them are getting upgraded this quarter. One I said already upgraded, two, two accounts upgraded to INR 30 crore. And, I think we'll positively surprise the way we show our upgrades and, recoveries this quarter and Q1 as well. Yes, many of them are not early mortality, but these are not like 10 years old accounts. These are all last 3, 4 years accounts, so we know those customers.
We cannot disown them also because we acquired those customers, and hence, the responsibility is squarely on the relationship managers and the businesses to get the money back where we have. But so far, we have not seen people running away with the money. They are trying very hard to get their businesses back on track, and happy to report that things are looking a lot better. Unfortunately, 3, 4 accounts we wanted to upgrade last quarter, for some technical reasons, didn't happen in the last week. Otherwise, I was expecting - I was not even expecting to have these discussions on this call, frankly. But I think we are pretty much confident that we should be able to upgrade them this quarter itself.
Right, sir. And just,
Sorry to interrupt, Akshat. Please rejoin the queue for more questions.
Okay, thank you very much.
Akshat, in short, I'm telling you, it's business as usual for us. We are not so worried on this slippage, frankly, internally in the bank.
Thank you. The next question is from the line of Amar Thakkar from 360 ONE Capital. Please go ahead.
Yeah, hi. Thanks a lot for the opportunity. Sir, when I look at your slides presenting, you know, the mix between bulk deposit and retail deposits, large part of the growth within the quarter has come from bulk deposits. Now, with, you know, bulk deposits or CD rates going up, at least by 10 basis points-20 basis points in January, you know, should we expect the cost of funds to be so sort of flattish from here on? That's my question one. And second is, some of the peers have raised the term deposit rates, that's the retail term deposit rates, so are we also considering anything like that? Thanks. Yeah, those were my two questions.
Yeah. Sure. So on your deposit mix, as you rightly said, that our bulk deposit percentage is slightly higher than the ecosystem from the market. If I remember the number correctly, we are around 46%, 47% of the overall deposits, and that's high, right? So but only thing is the overall balance sheet size is so small, the day the retail journey starts taking off, this will drastically change in a very quick period of time. That's number one. Number two, on your specific question whether this is going to impact our cost of funds or it will remain stable, the answer is that we didn't lock in long-term deposits anywhere. Every bulk deposit is one year or below.
What it means is in a falling interest rate, as and when the liquidity situation becomes little better in the ecosystem, and we have more certainty on that, we will probably see bulk deposit rates falling faster than the retail deposit rates, okay? And hence, in the short run, it will help us. In the long run, obviously, nothing to beat a good quality retail franchise, so we'll, we are on that building block. If you had that option, we would have used that option more, but right now we are building that, so we don't have that option. And if you continue to grow at much faster pace, pace than the industry, almost at twice the pace, then we don't have a choice but to fund this through these various routes.
We have very tactically handle it with a lesser tenor so that we are not locked into this. Thirdly, your question was on the. What is the other question?
Cost of funds.
No, no, you said, cost of funds, I think we should be going down by a few bits here and there. But as you rightly said, the third question was about retail deposit cost, going up in the market, rates going up. Not only retail, even bulk deposit rates, which was coming down, is not coming down anymore, you know? Because primarily because of the liquidity issues which are there in the market right now. So that can change, and if it changes, bulk deposit rates will come down faster than retail. And because retail, you lock in for a slightly longer period. In the short term, that will help us. But, I think if the liquidity situation don't change, I don't see how cost of funds will change drastically from here.
It all depends on liquidity in the market.
Sure, sir. Thank you.
Thank you. The next question is from the line of Ishmohit from SOIC Research . Please go ahead.
Hi, sir. So my question was related to our return on equity. I think in the past, you've always talked about that 15% is our Lakshman Rekha. I think, quarter four is always our, quarter where our ROE is bumped up. But, this time, first nine months, our ROE is close to 13%. So are we confident of maintaining those 15%, guidelines?
Yeah, we'll try to touch the Lakshman Rekha, but let's see. We'll definitely be better than where we are right now.
Right. Right. And the second question was related to the credit cost, I think, I think in the past we have also spoken about, like, credit cost being close to 50 bps, and I think this quarter has been a multi-quarter high in credit cost because of one of the reasons that we had. So we see the credit cost also falling down as we go into Q4 and Q4, are we expecting the credit cost to normalize from here?
Our endeavor is to do that. I think, we should do a lot better than where we are today. I cannot make a forward-looking statement on a call like this, but, I'm pretty confident of our overall, GNPA and NPA and credit costs going ahead from where we are.
But, will it be, like, fair to understand that this quarter marks the peak of the credit costs, like, not getting-
Yes, yes, absolutely. Absolutely.
Okay.
Like I said, 351 was tough, and maybe this is peak in credit cost.
Okay. Thanks, sir. Wishing you all the best.
Thank you.
Thank you. The next question is from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.
Yeah, thanks for taking my question. So one thing on the slippage side, you know, given the fact that, you know, macro, global macro is still uncertain, how are we confident that, this Q3 slippages, you know, will not continue in Q4 and going forward? And, secondly, what is the broader call in terms of advances growth that you are anticipating in FY 2027, and any internal target for ROA, ROE for FY 2027?
So, on the growth, we, as I said before already, we will be growing asset book somewhere 25% and above. Okay? And whatever it takes to fund that growth, we'll do it through the funding route. Part of that will be deposit, and hence deposit has to grow by 20% and above. Coming to the slippage and quality of portfolio question, see, we know exactly where our customers stand, and we know every case in details. And because we slowed down our businesses this year, we don't even... In fact, we are monitoring our SME portfolio also very well, especially for SME. So, we know exactly, you know, what can happen, right?
So, and because our disbursements has been significantly lower this year compared to last year on the SME side, we have full control on that. The good thing about our bank is we take proactive actions and don't keep doing things when we see there is a challenge in the market. Having said that, this is not like a microfinance or unsecured loan where the challenge continues for a while. I think things will start getting better, so hopefully only once we are confident that things are comfortable, we'll start growing this portfolio. Because we have the entire machinery to grow this portfolio. It is a very, very strategic call not to grow this, given the overall market scenario in our markets.
In short, to tell that we are not only confident of the slippage and NPA, we are also confident of the SME book, which we have at this point of time.
Okay, sir. Any ROA, ROE targets, you know, for FY 2027?
Yeah, yeah. I mean, targets are always, I've always said that we want to be somewhere around 1.5, and ROE somewhere around 15%. That will be our endeavor to cross that. This, this year we should be coming close to that, and next year we should cross that.
Okay. On one last thing on the slippage side. So out of INR 197, INR 197 crore that slipped this quarter, what could be any rough estimate, what quantum can get upgraded in Q4?
Well, that we can't comment on this, but if you—but we are pretty confident that we'll do well there, you know, because we know how many accounts will upgrade and what will happen, but we can't really-
Mm-hmm.
Comment on that right now.
Mm.
But it will be, it will be good.
Okay. Thank you. Thank you so much.
Thank you.
... Thank you. The next question is from the line of Shivaji Thapliyal from Yes Securities. Please go ahead.
Yes, thank you for the opportunity. Just one question from my side. So, just to understand the underlying, you know, asset quality a little better, you know, could you help us all understand what could be the exposure, you know, to some of these, you know, sectors which are, you know, potentially impacted by tariffs? I mean, you know, the textile sector in, you know, Tamil Nadu or elsewhere in South India or some of these other sectors like fisheries, et cetera, shrimps and so on. So, any, you know, sense of what that portfolio is, or is it not sensible to look at it from that lens and, you know, just you only it is better to look at it from an account-specific perspective. Any thoughts around that, basically?
Shivaji, what happens is, we are not a very large bank. When you are a large bank, you have to look at the systemic issues. For us, a much more prudent way of looking at it is every account basis, but we cannot overlook the overall ecosystem also. So for us, it's a combination of both. But we are more focused on every account level, every customer level, what is going on in his life, how his cash flow is coming, how he's expanding business, if he was diversifying some money when there, how he's getting it back to the core core business, and all of that stuff. So that, that's what we are focused on right now, and all of that is looking positive now. Having said that, on the macro, we did a detailed analysis.
Our risk department did a detailed analysis of our exposure to some of these affected kind of industries in the SME side. They had come out with stress testing formula that what could be the potential challenge, et cetera. We figured out that it's not something which is earth-shattering, and not all of that will play out also, and none of that is also playing out, not all of that. Having said that, certain places where you do not analyze, there it's playing out. For example, if the same person who's supposed to do exports, he is not doing exports in a particular country and selling that goods within India cheaper, then he becomes competitive and somebody else becomes impacted.
So sometimes some of these formula don't work that way, and hence we have to see the bigger picture and say that, leave the bigger picture aside and look at specific customers. So we have now count of customers where the challenges are and what the solutions are. We have worked out the solutions, and at least 50% of the cases, we have visible solutions in our hand at this point of time. So, we have been. See, ultimately, banking is a business of focus and, getting it right. See, if you do business, there will be certain times such certain challenges will come. How to resolve that challenge gives the marks to the department or to the institution. That's what we are focusing on.
And at the same time, we didn't believe that we should expand the general manager and do this and do that. We withdrew from some of these markets and businesses right now, but without losing the relationship, so that whenever we want to go back, we can go back and do those businesses, full, full-fledged. And sometimes when you hold hands of people, it's very easy for us to just go and say that I'm auctioning a property. Then you lose those customers forever. So the intent part in SME side is very important to see. And when you support them, they remain your customer forever, okay? So I think it's a balancing act. It's not one formula that works everywhere.
I think overall, we have got a hang of the whole thing, and I don't see the SME portfolio going any worse than where it is today.
So, yeah, thank you for that. I mean, just a quick follow-up. I mean, so, no further, I mean, material slippages of this quantum, you know, which can take gross slippage to 2% levels, should be emerging in the upcoming quarters, basically. I mean, whatever stress because of tariffs, et cetera, had to emerge as mostly, those slippages have been created.
Yeah, yeah. It, it has, it has been played out, and even if there is a global stress, it will not impact us anymore because we have taken prudent calls on all those things, okay? So at the cost of business, at the cost of business, we have taken prudent calls. So, you know, I'll be extremely surprised if in the next three years we see a 2% ever, okay, in, in, in the gross NPA. Though we have given a guidance below 2%, but we'll remain below 2% forever. And I think we, I told it in to one of the persons before that, I think we have—this is the peak of our slippage and NPA, in my view.
Understood. Thank you.
Thank you. The next question is from the line of Yash Dantewadia from Dante Equity Research. Please go ahead.
Am I audible?
Yes, you are audible. Please go ahead.
Yeah, I just have one clarification. I think with the recoveries, you gave a number, I think INR 30 crore-INR 40 crore. Did I hear that right?
Yeah, INR 30 crore. Not recovery, upgrades.
Okay, perfect. And, you said 80% of the NPAs are sort of accounted for, right? You have assets up to 80% of what you've lent. Is that right?
Collateralized. What we meant was collateralized.
... Yeah, perfect. So, now since your gold portfolio-
No, I'm not only talking about, I'm only talking about SME. I'm only talking about SME, not wholesale.
Yes.
Wholesale is high-end corporate cannot have such high collateral. Yeah.
No, no, that's understood. Coming back to your Gold Loan business, how do you see this kind of the momentum in the next one or two years? Like, say, the gold prices, let's assume that the gold prices sustain where they are currently. How do you see the gold portfolio growing as a percentage of your total book, maybe one or two years forward?
See, see, the gold prices, every day I get up and see the gold price, I myself get surprised, okay? So obviously, it is how long it is sustainable, we don't know. So we cannot build our business model based on gold price going up or remaining at this level. We are also taking best case scenario where it will come down also, okay? Based on that, all our projections are there, okay? If it goes up, it's an opportunity, why not this thing? But that's an opportunity also to improve the portfolio and bring down our LTV ratio. And hence, as I said before, it's well below 60% right now, our LTV ratio.
So even if we do sensitivity analysis, if it goes up by 5%, if it goes up by 10%, if it goes up by 20%, what happens? The sensitivity analysis is also showing a very rosy picture, okay? So, and because these are short-term loans, six months, one year, less than one year, unless one fine date falls by 50%, there is no challenge, okay? That's on the risk side. On the opportunity side, I think the biggest opportunity that is coming on the Gold Loan is not necessarily price, but a segment which is opening up, where it's no longer just loan against gold jewelry of, you know, for consumption or something.
It is a 5.7% segment which is opening up, which is for working capital, and their ticket sizes are much larger than you know what we have done in past. So we are creating a separate focus on that with specific service and focus area. And that is one business, irrespective of gold price going up or going down, that will keep going up because they have those collaterals, and they will get it cheaper compared to if they go to take unsecured loan or they may not get also loans as such, so they are going to use it for their working capital requirements. So that is one segment which is good. Second thing I want to say, that a lot of times we think that if prices have gone up, the portfolio has gone up in ratio of prices.
It's not like that, because ultimately, propensity to consume is important, right? So people will take what they need for their, for their working capital, for their consumption, et cetera. So tomorrow, if the need remains the same and gold prices comes down, they top it up with more gold if they have, okay? So it's not a direct correlation between price and growth. There is an indirect correlation, and hence, obviously, with gold price going up, gold portfolio is also going up for everybody. And for to that matter, our portfolio growth is much slower because we have been very careful in terms of LTV and other things. But not that if gold loans, gold prices starts going down, suddenly everybody's portfolio growth will start coming down. It's not like that. So I think it's a combination of all of these.
Anyway, in a long-term scheme of things, we want the gold to be lesser in terms of business mix. And it plays out well because we are not... As a base case, we are not saying that gold price will remain here.
Yeah, but you still haven't shared a number, maybe as a percentage of your total loan book, if, if, if it's-
Right now, it is 50%. Right now, it is 50%-51%. If the opportunity is there, it can go up also a little bit, but eventually by 2030, it will be between 25%-30%.
So, when you say 25%-30% by 2030, which part of your loan book are you looking to scale to that extent to bring the 50% down to 25%-30%?
Yeah. So wholesale will cross 30%. Wholesale will be a little more than 30%. SME will be somewhere around 18%-20%. Rest will be retail.
Under retail, I'm assuming gold is 25%, and the other 25%-
No, no, no.
-could you?
No, no, no, no. Gold is not 25%. Retail is separate. So let's say gold, gold is 25%, 30%. I said gold is 25%, 5% is that special segment which we'll create for working capital-
Okay.
Which is collateral as gold, and we'll focus on that separately. So adding these two, it will be between 25-30. SME is, let's say, between 18-20. Wholesale is around 31%. Rest will be retail, which is retail assets, which will be all other products, like your auto, consumer vehicles, HCA, commercial equipments, then your lab, all of this together. Retail lab, all of this together will be rest of retail, which will be on. And mostly it will be done to the existing customers in the bank, and hence, building that liability franchise is very important, which we're focusing on.
Right. I just have one last question. Exit ROE for this financial year. And the second question is, next year, you said you'll be looking to do above 15%, right? So could you-
Yes, that is-
Yeah. So could you please also give us some guidance on cost to income for next year?
I think cost to income will remain elevated, somewhere around 60% for another year. After that, it will start coming down sharply.
The first question, the 15% ROE for this financial year?
That I already said before, that next year we will try to. You know, because if we say 15% is a Lakshman Rekha, and if we come close to that this year, then next year, obviously, we have to cross that.
... So are you telling me you're confident of closing at 15% this year?
No, that I didn't say. I said coming close to there, I said.
Okay, perfect. Thank you so much, sir.
So we'll be more than, we'll be more than where we are today, but beyond that, then almost I'm discussing fourth quarter results. No, I cannot do that.
Of course. Of course. Thank you so much. Thank you so much, sir.
Thank you. The next question is from the line of Arush Gupta from Angel One. Please go ahead. Arush, your line is unmuted. Please proceed with your question. Arush, can you hear us? As there is no response from the current participant, so we'll move on to our next participant. We have the next question from the line of Vansh Solanki from RSPN Ventures. Please go ahead.
Hi, good evening. Most of the questions are answered. Only one question about the slippages, that INR 197 crore of slippages we have in Q3. Management just said INR 4 crore-INR 5 crore was about the wholesale. So can you just give a rough estimate about the rest, 190, that how much from the retail segment and how much from the SME segment?
I think retail are similar to last quarter, okay? And wholesale, there is almost nothing. This is a very vintage customer, et cetera. Because obviously, wholesale, we don't do INR 3 crore, INR 4 crore, INR 5 crore with business anymore.
Mm-hmm.
So, broadly, and then retail, there'll be some in card, some in personal loans, some in agri, some in MFI. So retail is sort of in the same range as last quarter.
Like in crores, if we can say that?
I don't know. We don't give those numbers as such, but I'm giving you a flavor, that a larger part is on the SME.
Okay.
Retail is similar to last quarter, and wholesale, there is almost nothing, so.
Okay. And just one suggestion from my side, that you just mentioned that in last quarter, you had PSLC fees income as well as the expenses in last quarter, and also you are about to happen in the quarter four also. So can you just give a little more bifurcation in your PPT that how much of these expenses are in compared to other expenses and other income? It will be more helpful to understand that how much is, you know, granular income and how much is one-off. It will be very helpful.
No, we don't give those details, but all I can say is that our attempt is to have a core fee income somewhere around 14%-15%, and overall fee income somewhere around 19%-20%. So core will be around 15%, non-core will be around 5%. Sometimes that non-core will come from treasury, sometimes it will come from PSLC. We don't know, okay? On core, we are pretty confident of 15%. Core is without PSLC and without treasury.
Okay.
Rest you can kind of deduct it from here, okay?
Okay, thank you. That's from my side, and all the best for the future.
Thank you very much.
Thank you. The next question is from the line of Akshat Agrawal from SMIFS Limited. Please go ahead.
Sir, thanks for the opportunity again. In terms of coverage, which is down to 66%, this quarter, so you, you plan to build it back to above 70, is it correct?
Yeah, yeah. Yeah, yeah, 100%. Yeah, yeah.
So this higher write-offs will be, you know, next quarter we won't see, that kind of-
Yeah, so it's simple now. Once we start upgrading the accounts, it will automatically come back now.
Right, sir. And in terms of the branches, which is now 8, 8 branches this quarter versus 7 in the first half, so are we going to accelerate in the fourth quarter, or is there any change in the strategy on branches?
I think we are adding some around 40, 50 branches every year. I think we'll remain around that level itself. Right now, we have to first leverage the branches. You know, where we should invest is products and processes and sales machinery. Our next big investment into sales machinery, which will create new acquisition of customers. We have enough branches. With 840 branches, when I just see how much business is to do. So, let us first leverage these branches first properly. But yes, we will continue to add 40, 50 branches every year.
Right, sir. Just if I can squeeze in one more. In terms of fee income, was there any syndication fee, which-
No, no, no, nothing. Nothing, no syndication fees.
Okay, so in terms of run rate from here, it will slightly increase due to PSLC income next quarter, but aside from goal-
That's the aim, hopefully.
Right, sir.
It has to.
Yeah, okay. Got it, sir. Thanks very much for answering all my questions. All the best.
Thank you very much.
Thank you. Ladies and gentlemen, we'll take this as the last question for today. I now hand over to the management for closing comments.
Thank you very much for everybody for joining the call, and, I can tell you that mood within the bank is very positive, and we hope that we will be able to do very well in Q4 and end the year well. Thank you very much, and see you in the end of Q4 results. Good evening.
Thank you. On behalf of Yes Securities, that concludes this conference. Thank you all for joining us today, and you may now disconnect your lines.