CSB Bank Ltd

NSE:CSBBANK

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to CSB Bank's Q2 FY '25 Conference Call hosted by YES Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shivaji Thapliyal from YES Securities. Thank you, and over to you, sir.

[Shivaji Thapliyal, analyst]

Thank you, Sidhant. 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. Satish Gundewar, Chief Financial Officer; and Mr. B.K. Divakara, Executive Director.

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.

[Pralay Mondal, executive]

Thank you, Shivaji, and good evening to everybody. I would like to specially thank everybody for joining our call today because there are so many results today, including BFSI. So people have taken time out to join our call. We are very thankful for that.

So I will give a very brief understanding of what's happening globally and in our domestic market and then quickly move into our results. So globally, the economy is heading towards the year-end with unexpected tailwinds as slowing inflation clears the path for a soft landing. However, the impact of geopolitical hurdles that lie ahead is a key monitorable.

Globally, oil prices have also eased a bit despite the ongoing global tensions. And U.S. 10-year yield has also gone back about 4%. Gold prices are touching new highs and is trading reasonably above $2,700 levels in terms of dollar terms. The biggest support for the dollar over the last few weeks has been a shift in the Federal Reserve policy expectations to a more moderate easing phase after a slew of solid U.S. economic data. And markets are widely expecting Fed to further cut rates by 25 basis points in November.

On the domestic side, after the Fed rate cut of 50 bps in September, dovish outlook had [acclimated] the financial markets in India as well. However, RBI maintained the status quo on the rates, while changing the policy stance to neutral. Though retail inflation in India has been volatile and industrial output was marginally negative, growth outlook remains steady. With such economic and geopolitical background an immediate rate cycle by easing by RBI is not expected. And we have to wait and watch for any reduction by RBI in the next few MPC meetings. The recent statement by RBI Governor probably leads to status quo for some more time. However, the surplus liquidity condition may prevail for a while.

Coming to CSB specifics, highlight of performance of Q2 FY '25 are on the profitability. Net profit, INR 138 crores, up by 22% Q-o-Q and 4% Y-o-Y. Bank continued with the accelerated NPA provisioning policy of making provisions over and above the RBI requirements and holding the contingency provisions intact.

NIM sustained at 4.3% for the quarter despite the cost of funds going up universally, and regulatory guidance on penal charges. ROA was around 1.5%. On the liability side, we improved the funding base significantly. Deposits grew by 25% Y-o-Y as against the industry growth of around 12%. CASA ratio stands at marginally above 24%. Asset growth made advances grew by 20% Y-o-Y against industry growth of approximately 14%. Gold portfolio registered growth of 28% Y-o-Y. Yield on advances for Q2 FY '25 is at 11.21% with an improvement of 33 bps from Q2 FY '24.

On the asset quality metrices, I think it has remained reasonably flat quarter-on-quarter on most of the parameters. So slippages has been -- those slippages has been significantly lower compared to the last 2 quarters. And GNPA has been 1.68%. NNPA has been 0.69% and almost sustained at June level. PCR now stands at 81.49% and if we consider the PWO. And if we don't consider it's 59.45% Bank is holding a provisioning buffer of around INR 183 crores over and above regulatory requirements. And this is a very key point because we -- I mean, there are ways and means by which we could have used some of these things to improve our PCR, but we decided that we will have a conservative policy on this, and we continue to hold additional provisioning in addition to what we are doing on the provisioning side.

On the robust capital base, we sustain that. Our CAR is 22.74% and Tier 1 is 21.37%. Low proportion of risk-weighted assets has been sustained compared to the industry. On the shareholder value creation side, book value per share is at 229. EPS for the quarter is 13.65, and ROE, we almost touched close to 15% at 14.53 percentage. On the distribution, we have a network of 102 branches -- 802 branches and 770 ATMs as of quarter end. We have added 23 new branches during the first half year. And on a year-on-year basis, I think we have added more than 90 branches in the last 12 months.

On the branch expansion side, I think for the fiscal, we are on track, and the same will be completed as a plan in the second half because generally, second half is heavier in terms of branch expansion like it happened last year. In conclusion, I would like to say that the good thing about this quarter gone by is we are back on track as far as the guidance on the business growth is considered which is growth of 30% to 50% higher than the system trend. Actually, we are significantly higher than that this quarter. The strenuous effort taken towards maintaining a balance in terms of various regulatory ratios like CD ratio, LCR, NSFR et cetera, and keeping sufficient liquidity for advanced growth has paid off.

Borrowings are also resorted to an additional window of fundraising based on cost considerations. So while we -- actually, we didn't need to have more borrowings, but we did it just to ensure that we have a long-term sustainable growth on the credit side because we cannot keep looking at the rear window and keep seeing that how much we need to grow because that way we cannot build a franchise. That's why I said that, even if it is cost inefficient, we'll continue to have a lesser liquidity risk in the bank for the long-term growth perspective of the bank.

On the profitability side and asset quality numbers ratios are pretty stable, though the liquidity conditions have improved a bit, the interest rate on deposits continue to be at elevated levels, and we believe that, that will continue for a while more at a systemic level. The attractive term deposit rates and inclination towards other investment opportunities like mutual fund, stock markets, gold, et cetera, continue to put pressure on the cost of funds of the banks at a systemic level, and we are no exception, and we are not able to fully pass on the same to the borrower given the competitive environment in the market. This, along with the regulatory guidance on the penal interest continued to impact the NIM this quarter as well.

But I personally feel NIM have sort of bottomed out for us, okay? And we should start seeing better days maybe Q4 onwards on the NIM as well. We expect NIM, which is almost sustained at June '24 level, all other critical ratios like ROA, ROE, EPS, credit costs, book value per share registered improvement in Q2. Growth on other income was also good to negate the quantum increase in OpEx, resulting in better operating performance.

The build phase progress is going to accelerate in the coming quarters with the planned implementation of CBS migration and resulting improvement and stabilization in the products, process systems, et cetera. You would see one slide in the investor presentation when you have an opportunity to look at it, that we have put one slide on technology, which is basically giving clearly the rollout plans and the dates because that is our biggest story, how we are rolling out the technology piece and how businesses from the current business mix, how it will go to the 30-30, 20-20, which you keep talking about, and how it will transform will depend on this technology rollout. That's why we deliberately put one slide on the technology rollout piece for the first time in our investor presentation.

While these investments will have an impact on the cost in the near term, which we can see, and we have been able to sustain around 65%. And in the long run, I have said that we'll bring it below 50% by 2030. Our endeavor would be to ensure results to act in the long-term run in line with the payback period estimated for each of these initiatives.

With the continued cooperation from all stakeholders, we'll strive to deliver quarter-on-quarter in line with the expectations. So here, I stop. This is broadly where our quarter went. I look forward to your questions from all of you. Thank you very much.

Over to you, Shivaji.

[Operator]

[Operator Instructions] Our first question is from the line of Chinmay Nema from Prescient Capital.

[Chinmay Nema, analyst]

Just a bookkeeping question from my side. If I look on the retail book in the presentation it's at INR 5,332 crores but -- and the last quarter, it was at INR 3,541 crores so that's a debt of about INR 1,700 crores. The disbursement number is at INR 300 crores for the quarter. So am I reading something wrong? just want to check that, sir.

[Pralay Mondal, executive]

So there is a little bit of echo. If I understood your question right, what you're saying is while disbursement on gold has been a little lower, but book growth has been faster. Is that your question?

[Chinmay Nema, analyst]

Yes, sir. On the retail book.

[Pralay Mondal, executive]

On the gold or retail book, which you're talking about?

[Chinmay Nema, analyst]

The retail.

[Pralay Mondal, executive]

So in the retail book, it also includes the LAP portfolio. Tier 2 earlier, this LAP portfolio that is loan against securities whether secondary securities, gold was part of the gold loan book. From this quarter, we have included that as part of the retail book, and that's the reason that you are finding the difference.

[Chinmay Nema, analyst]

Got it, sir, got it. So could you share the breakup of the retail book between gold loan and unsecured portion and what's the asset quality trend that you're seeing on the unsecured side, if you could share the page 3 numbers?

[Pralay Mondal, executive]

So as we -- I mean, in our retail book, our -- now break up I'll try and give, but typically, we have de-grown our 3 businesses over the last 1 year. One is personal loan. One is 2-wheeler and one is micro finance. These are the 3 businesses. And hence, some of the stress which you are seeing in the environment now, we saw it coming more than a year back. That's why we have this year consistently de-grown these 3 books. Why it has grown is, we have grown CV, we have grown CE. We have grown, as they said, that we have reclassified the loan against security which mostly is gold as a security collateral.

We have grown health care, and we have grown little bit of a credit cards that's on a partnership basis. And also, we have grown inventory finance. So these are the businesses which are pseudo SME kind of businesses, which we have grown. Pure-play retail, we have definitely not ventured in troubled waters right now because of that new entrant, we didn't want to be taking unnecessary risk. So we have done businesses which you understand and which our franchise can do, taking relatively lesser risk.

In spite of that fact, we slowed down these businesses, but whatever business we did, we have seen a little bit of a slippage on the MFI side and on the on unsecured side. But while for the system, it may not be picking out. For us, it will be picking out sooner because we had started degrowing these businesses quite some time back.

[Operator]

our next question is from the line of Mona Khetan from Dolat Capital.

[Mona Khetan, analyst]

Firstly, on the margins. So for H1, we have seen margins of about [4.3%]. So do you still believe that we'll be able to maintain the guidance for this year, which is 4.5% to 4.8% or -- and if at all, what will drive this improvement in H2?

[Pralay Mondal, executive]

Very relevant question. So what has happened is, I mean, we knew that cost of deposits are going up in the ecosystem. So this is not happening to us only, it is happening to the entire system with other banks also. But -- and we have not been able to pass on the -- this thing, yields to the asset side of the business as much.

But in spite of that fact, we could have done 4.5-ish we had guided. But the penal interest, which is impacting us by somewhere around 25 basis points has continued to impact us. So if you add that, 4.3% plus another 0.25%, it would have been 4.55%. So I think that's going to permanently impact us to a great extent because we are not seeing -- and even if we are able to recover that will come back in the -- with a lag on the fee side. So technically, NIM will have this impact.

Having said that, if you are able to recover some of our NPA portfolio over the period, we can't commit that, but we will continue to try that. And if we are able to reprice some of the books here and there, I think we can try and come closer to 4.5%, but I think we have sort of bottomed out in NIM, but I am not seeing too much of upside from here as well. So I think I will say that guidance will be between 4.3% to 4.5% primarily, because of the penal interest. I mean simple thing is that 25 basis points have been shaved off because of the penal interest risen. That's why it's not in the guidance, so was wrong, but the guidance has to be relooked at in view of the regulatory reasons.

[Mona Khetan, analyst]

So not just for this fiscal, but even going forward, you feel that 4.3% to 4.5% will be a fairer assumption for margin?

[Pralay Mondal, executive]

I will reserve my comment on that right now because I'll tell you, my -- I'm hoping that come next financial year, we should be able to do better on the NPA compared to this year. because either some of the NPA, which we have booked in the Q4 and Q1, either we'll recover some of that or we'll write off some of that, okay? .

And if we do that, we will be probably able to get some NIM back into the system. But yes, I think 4.5% to 4.8% looks to be difficult unless it can happen only sometimes mid of next year onwards once the interest rate starts coming down. And coming down faster than the yield going down. We have one advantage because I see for another 15 to 18 months gold loan continuing to be more than 40% of our book. And gold loan yields is not elastic. Our EBLR-linked book is not very high. And hence, as and when the interest rate cycle reverses, probably banks like us, we'll be able to retain larger NIM compared to banks, which are more wholesale-oriented kind of a bank where EBLR-linked or MCLR-linked businesses are higher.

And even retail businesses, even if they are fixed loan, but new businesses gets booked at lower prices, but businesses like credit cards, gold loans, et cetera, the elasticity is lower. And to that extent, we hope that once the interest cost starts coming down, if at all, sometime mid of next year, we should be able to get some benefit out of it in our NIM.

[Mona Khetan, analyst]

Sure. And so with the margins revised lower by 20 to 30 bps. How would the ROA guidance stand now, which is between 1.5% to 1.8%. Would that also be lowered down by the same extent or some of it is recovered in other income and OpEx?

[Pralay Mondal, executive]

Yes. So if you see our other income has retained around 18%, 19% of our overall income. So to that extent, I believe that -- and also in spite of heavy cost investment that is going into technology and distribution and people and everything. In spite of that fact, we have been able to increase our ROA this quarter to 1.5%. My feeling is that we should be able to do better than this. And hence, in the range of 1.5% to 1.8%, the guidance sustains because we'll be able to build up other income, and we'll be able to manage costs better.

So between these 2, I think we should be able to maybe lower end of this in this range. But I think in this quarter, we could go to 1.5%, I think we should be able to do better than this. I'm not making a forward-looking guidance, but I'm just going to push the system for that.

[Mona Khetan, analyst]

Right. Perfect. And while you partly touched on it, just wanted to check on this -- the corporate slippages that we've had last 2 quarters. What are the recovery prospects? Would it be possible to recover them this year? Or I mean, generally, what are the prospects of it?

[Pralay Mondal, executive]

See, if you look at our slippages, trending on a quarter-to-quarter is looking better. The March slippages was INR 122 crores, June was INR 103 crores and September is INR 62 crores -- INR 62 crores and even if you add additional NPA and all that, it is INR 64 crores. So from that perspective, I think the slippages are coming down.

And some of the slippages, which has got added now in this quarter, I can see are something which is trending downwards, like retail loans, agri, MFI. Their the books are shrinking. And if books are shrinking, shrinking means the portfolio, which is leading to slippages is unsecured MFI, agri, those kind of businesses, they are shrinking. So to that extent, I see slippages coming down. Some of the slippages also don't lead to necessary costs because that's the kind of arrangements we have. Some of the businesses have those arrangements.

So given that, it will be net ROA neutral. Some of the slippages do not lead to NPA also in our bank. So given all of that stuff, I see from an NPA perspective, unless there is something which is a surprise, which is not known to me at today, I should be -- we should be able to retain at this level. And once we start booking a migration provision for some of the slippages, which has happened or recover them, we should be able to see a slight downward trend on NPA over the next 1 year. Again, this is not a forward-looking statement. This is something which we'll work towards.

But I don't see -- and I've always said the gross below 2. Net, below 1 and credit costs below 0.4 we'll be well below that. That much I can say with a lot of confidence we'll be well below each of these 3 because you saw that this quarter, we have reached credit cost, 15 basis points. This was around more than 20 basis points last quarter, 24 or something like that, 22, I think.

So -- and also, I want to tell you that unlike last year, we never -- we have made one small change, which is the standard provision we have added into the -- this thing, credit cost. The last year data, which was there standard now that can be not too much, but I'm just saying that we have been more conservative in reporting on our credit cost now. So in spite of that 15 basis points, which is well below what we have been giving guidance on. So I think on a slippage, on a NPA, on a credit cost, we are looking good. And I hope that what you are asking me, question, we can recover some of that, it will even look better.

[Mona Khetan, analyst]

Got it. And just one last question. So it looks like we've had some reclassification in the book this quarter. So if you could give like-to-like loan mix for Q1 as well for [reference] between corporate, SME gold and other retail that will help.

[Pralay Mondal, executive]

Yes. So I'll tell you -- I'll give you a detailed answer on this. So more than what you are asking, I'll give you. The wholesale book has shown degrowth, primarily, because the DA portfolio is running off. A small portion is left now around -- close to INR 300 crores is left. That will also run off in the next 4 months. .

So some LCBD businesses have come down, and we have also exited some of the -- we are exiting some of the large corporate accounts, which we don't like. They're not NPA accounts, but we don't like them, so we're exiting. And as we are talking, we have just exited one this quarter, a large account. So given that, in spite of the fact wholesale book is kind of flattish. They are around 23% of our overall book, okay, which was, I think, it was 26% -- or 25%, 26% before.

But now all that is done. So now next 2 quarters, now last quarter, which is Q4, you will see wholesale books starting to pick up from there because trade disbursements are happening significantly in wholesale and the kind of businesses we want to do because now we have built up a good team with a good coverage team across the country. And you will see next year, wholesale book will grow at a significant pace.

On the SME side, it has sustained the kind of growth which we are doing, which had committed last year, that all cleaning up we have done already. So they'll continue to sustain. They're growing somewhere around 23%, 24%, 25% in that range. I think they will sustain or do better. But on a conservative basis, I think SME book should be able to grow around 25%.

Gold is growing around -- year-on-year around 28%. Last quarter itself, it has grown by 10%. So if I extrapolate that, it is much higher than 28%. And I think we should be able grow by around 25% to 30% on the gold loan side.

Retail, we have been conservative. So as you rightly said, there has been some reclassification -- what -- and it's not done for any other reason. It is done for regulatory and other reasons, that loan against gold, which has taken a security, okay? It has been classified as [LAPs] business and not kept under gold business. But effectively, that collateral is gold, but this is not gold loan business. That's the way. So whatever we said that is collateral gold, but it is not gold loan business, we have reclassified under retail. And that portfolio size is somewhere around how much? INR 1.600 crores.

So I'm giving full disclosure so that there is no confusion. This INR 1,600 crores have moved out of gold loans. If we had not moved it out, gold loan business would have been somewhere around 50% of the book, 52% or something like that. Just add INR 1,600 crores to that. But it is not done for doing anything else. It is just done to be on better side of the compliance, okay? And rest is -- or MFI book is around 2%, agri book is around 3% and 15% is retail. And 15% of this retail includes this INR 1,600 crores of loan against security. So this is the full disclosure.

[Mona Khetan, analyst]

Right. Just one thing. So on this kind of disclosure, what is the sequential growth in each of the 4 portfolios, if you could just tell us between Q1 and Q2?

[Pralay Mondal, executive]

Yes, I'll tell you that. So on gold, we have grown by -- Q-on-Q, we have grown by 10%. Wholesale Q-on-Q, we have grown by 5%. I'll give Q-on-Q and Y-o-Y both together. That will help you. Gold Q-on-Q have grown by 10%. Y-o-Y, we have grown 28%. Wholesale, we have grown Q-on-Q 5%, Y-o-Y minus 1%. And hence, you can see already in wholesale, we are reversing the trend. You will start seeing it from next quarter onwards. .

SME, MSME 5% Q-on-Q and 26% year-on-year. Retail, 7% Q-on-Q, 45% year-on-year, but there is a noise in this, as I said before, because here, we have the loan against security as gold. Agri, 4% Q-on-Q, minus 5% year-on-year. MFI minus 6% Q-on-Q, minus 13% year-on-year.

[Operator]

[Operator Instructions] Our next question is from the line of Sonal Minhas from Prescient Capital.

[Sonal Minhas, analyst]

This is Sonal Minhas. Am I audible?

[Pralay Mondal, executive]

Yes, yes, absolutely, sir. Yes.

[Sonal Minhas, analyst]

Sir, I am looking at your GNPA movement table. And 2 things around this. Wanted to request you that if from a disclosure perspective, going further, you can actually classify these additions by the 4 sectors that you're primarily working in, which is gold, corporate, SME and retial, so that we get a sense of incrementally where these additional slippages are coming from. So that's one. .

And the second one is linked to this that if we consider last quarter, this quarter, you could throw some color on where largely these additions are coming from -- from the segments that you talked about, from the retail, from gold segments. That will be great. That will just help us understand the business, gross NPA movement.

[Pralay Mondal, executive]

Yes. Now to answer your question, I don't think any bank gave that level of details. That is not in public domain and mostly. But to give you a color and a flavor because this is a call which is open to all is we had a little bit of an extra slippage on one account in Q4 and Q1 for the same customer in wholesale.

But after that, it has been pretty much consistent. See gold doesn't -- slippage doesn't happen much, right? Gold SME happens, but they eventually recover. So it doesn't -- slippage. So gold is very limited. Wholesale after that, nothing much has happened.

In SME, SME varies this thing. There has been little bit of a slippage, which has happened on the retail and agri and MFI, but that is going to be on a declining trend for us now onwards. And given the arrangements we have on MFI and the credit cards, I'll leave it at that. But the slippages does not necessarily always lead to -- it leads to NPA, but it doesn't lead to loss, okay?

So given all this perspective, I'm not so worried on slippages on credit cards or MFI. But yes, some of the retail loans and agri what leads will -- lead to loss but that is sort of stabilizing. It will stabilize from next quarter onwards. So to that extent, I'm pretty confident of my slippage number and the GNP and NNPA and credit cost number. From now onwards, I feel that this is where we will be, unless there is some big ticket, which hits us, which is not -- today, we don't know of that, okay? So that can happen always one case here, one case there and on a small balance sheet we have, one case can create some noise. But right now, we are not aware of anything right now.

[Sonal Minhas, analyst]

I understand that, sir. Sir, the second question is a little bit longer term, 2, 3 years out kind of a question, which is linked to your CASA which is, if you, like you understand better than that. The deposit franchise is largely a deposit -- term deposit linked. There is an incremental level of cyclicality in your business compared to large banks, which do CASA. And so just wanted to understand like what does it take on the ground for CSB to mobilize that? Is that a part of the agenda? And where are the constraints? Just trying to understand the subjective part of it as you see yourself growing on becoming like a new age bank going for the next 2, 3 years?

[Pralay Mondal, executive]

No, thanks for the question because I try to respond to this in almost all the calls. And this is our biggest part of the strategy of the bank. So if you look at it, our growth in SA has been around 9%. Our growth in deposits is well above 30%. So 9% is not bad, but it is bad when it comes to looking at overall deposit growth of 25% when you have taken and hence, the CASA ratio do come down.

So -- but -- none of this is franchise business, if you ask me. Franchise business will start and I would -- after this call, most of the questions we have answered, I would like our Technology Head, CTO to come and spend 5 minutes on giving what we are doing in technology because now we are definitive about what we are doing and how it will help us the bank because we are creating a new bank.

What we are doing right now is managing the bank as it is. Come FY '27, '26 -- mid of '26 onwards, will be a completely new bank, okay? And that's the time what you're asking is exactly will go to play out. And most of the people who are in the bank right now, who have joined the bank in the last 1 or 2 years, they've all been part of building large franchise in very large organizations like HDFC, Axis and things like that, ICICI. So we know what it takes to build that franchise.

And the reason I'm saying that our retail, which is today 20%, but not really 20% because what question Mona asked, that loan against security, which is gold. If you take that out, it is not even 20%. That has to go to 30%. So effectively, a 15% has to go to 30%, and that can happen when you build a CASA franchise. CASA retail assets cannot be built without a CASA franchise because you need customers. And that is something which will happen FY '26, '27 onwards, where significant focus on customer acquisitions will be there. And that's why we know that the larger franchise has to be pan-India. That's why we are creating distribution.

And a lot of those branches are not still fully productive because we don't have the systems, which is required to be making them productive in building the CASA franchise, but we have to put all investments together so that all of this has to culminate into results FY '27 onwards. So we are putting all of that investments in today, people, technology, leadership, products, and distribution. So once the CASA franchise starts picking up FY '26, '27 onwards, and then retail assets will start picking up. Then products will be picking up. Granular fees will start picking up. And then the real retail franchise will start building up. So that's the plan.

And we are just waiting for our -- I will not preempt this. I will like Rajesh Choudhary, who's our Head of Technology, to give a briefing on this. But what we are doing on the technology side and what we need to -- and -- but we are keeping the entire readiness for the rest of the bank to leverage the technology to build that retail franchise in the CASA franchise.

So I'll give you a road map. So the reason that the retail franchise and retail businesses will pick up from 15% to 30%, will be a little back-ended from FY '27 onwards. Wholesale is a relationship business. We of course need technology there. We of course need transaction banking there. We need lot of products, fees and everything. But still, it is a relationship business. So next year onwards, you will see the wholesale side will start picking up faster because even without full play technology, they can build businesses.

SME business already with our full play technology, they can start business because they are already picking up. Retail we are skipping for the last not only because we are not fully ready on the technology. Also, we want the peaking of the cycle to happen in retail, and that can only happen when the overall growth in the system comes down below 10% on retail. That's the time we will enter the market in a big way and that will happen in both in terms of liability, customer acquisition, retail assets and all of that because we don't want to go out and build businesses through DSA and purchasing asset businesses and all that. That's not the way we'll build it.

And gold business will chug along the way it is growing around 10%, 20% growth. And -- but as a mix, it will come down because rest of the businesses will grow much faster. The [picking] of retail asset businesses will happen at the end of the decade, last 2, 3 years. Wholesale will start picking up from next year. SME will chug along and gold will chug along. That's the way the entire franchise is going to be built.

[Sonal Minhas, analyst]

Got it, sir. Sir, I have a follow-up question on CA and SA. Just splitting with this into, as you were talking, wholesale doesn't require technology. Splitting CA and SA, do you also require heavy lifting on technology for CA or because you are fairly ingrained in the south market, in the micro markets you have been. So that's one.

And same is for SA because you've been in Kerala for more than 100 years. So I thought the deposit side is more a trust-based business than a technology business. So correct my understanding on that, if I'm wrong on that. Just on the liability side.

[Pralay Mondal, executive]

Yes. So let me tell you, you can either buy business by giving higher rates in SA, okay? Or you can build businesses by making SA as a float based on various activities he's doing with you. So the first is not the best way to do business. The second is something which we will attempt. That's why you'll see our savings account rates are lower than -- are not very high. I mean effective rates are also not very high, somewhere around 3% net-net rates across the portfolio.

So given that, our thinking is the second model is what we'll build and it's just not trust based. It is usage based. It is float based. It has to -- you have to have your EMIs. You have to have usage of that account. And for that, we have to launch salary accounts, we have to launch various payment products. We have to launch various asset products. We have to get those EMIs through it, we need to grow those transactions through it.

In a way, CA is no different because you need technology because you need CMS, you need supply chain, you need transaction banking, you need the rationale for usage of those accounts by your customer. And you have to have those kind of franchise, those kind of customers penetration. That will happen through wholesale and SME.

Of course, we'll have retail kind of a CA also in branches. But unless we are able to give a better service, unless we are able to give a better turnaround, unless we are able to give a better transaction banking kind of products, the retail or SME or wholesale, it's not sustainable. So that's the way the CASA businesses are always built and will be built. We'll not play the price game ever in CASA.

CASA, anyway CA you cannot play the price game. And SA will not play the price game. Because CASA is just not a liability. CASA is a franchise which helps us in building the assets business. Otherwise, you have to go out and buy businesses through DSAs, which I will not do. So customer acquisition is going to be the biggest play in this bank starting FY '27 onwards -- '26, '27 onwards.

The start will happen in '26 and '27 onwards, it will take off like anything in terms of customer acquisition. And then onboarding those customers, deepening those customers for that we need the right solution, right products, right systems, right turnaround time and light products, okay? So that is something which is the CASA franchise, which you are probably asking the question.

And CA is no different to SA. It's just a different kind of a segment which you need to focus on. So that's what the strategy is. We don't want to take a shortcut to any of this right now. That's why we are saying that we'll do businesses, what we understand what we can do. And hence, wholesale will start picking up next year, SME has already picked up. Gold we understand will continue to do well. And retail is something will pick up only when you have the CASA franchise momentum picking up.

[Sonal Minhas, analyst]

Got it, sir. If I may just ask a short question, the last one. Who is your credit card partner? You mentioned you partnered with them -- with somebody?

[Pralay Mondal, executive]

Yes. We started doing it with both OneCard as well as Jupiter. Right now, we are servicing the portfolio, which we have done with OneCard. We are not adding anymore cards with OneCard right now. And with Jupiter, we are continuing to add more cards. But it's not a huge portfolio. Let me tell you, credit card, microfinance and personal loan all products together is somewhere close to INR 1,000 crores, okay? So it's a very small business for us, and we are not growing any of these businesses that much.

[Operator]

[Operator Instructions] Our next question is from the line of Shivaji Thapliyal from YES Securities.

[Shivaji Thapliyal, analyst]

Yes. So I just had some basic questions around guidance because I think basic numbers are always helpful to learn about. So just wanted to -- I mean, we have already got a sense of the margin, but what would be the overall loan growth guidance number one for FY '25 and if possible for FY '26. And these are all sort of near- to medium-term guidance that I'm seeking. So firstly, on loan growth.

Secondly, credit cost, obviously, is evolving and some of the loan books are not seasoned. So just wanted to understand where the number you think will end up for FY '25 and if possible, it can get a sense of FY '26.

And thirdly, on cost-to-income ratio also, of course, again, very -- number that is evolving as we speak. This year and next, your sense on these 3 aspects, loan growth, credit cost and cost ratio.

[Pralay Mondal, executive]

Yes. So Shivaji, first, let me start with -- thanks for your question. Let me first start with what guidance -- not guidance but what ballpark strategic vision which you have in the bank. .

[Shivaji Thapliyal, analyst]

Sure.

[Pralay Mondal, executive]

I'll just repeat it and then answer your question. The strategic vision is that -- or what we are aiming to is GNPA -- and this is by 2030 GNPA 2%, NNPA 1%, credit cost 40 basis points. Cost-to-income below 50%. Then SME, wholesale, gold and retail, I've already said, 30%, 30%, 20%, 20%. 30%, retail; 30%, wholesale; 20%, gold; 20%, SME.

NIM, I've always said that medium term will be between 4.5% to 4.8%. And longer term, will be 4% to 4.3%, okay? I'll tell you the reason for this. But now -- based on Mona's question, I've said that because when we gave this guidance, we didn't know the impact of the penal interest. Because of the impact of the penal interest, we have to wait and watch how this plays out. And hence, it could be coming down between 4.3% to 4.5% or 4.6% because of this reason. So we have to see how this plays out now.

Similarly, in the long run, it should be remaining between 4% to 4.3% or something like that. And the reason for that is business mix will change because as we move towards -- from our wholesale from 23% today to 30%, obviously, your NIM will start coming down on that. So will cost to income start coming down. A healthy book portfolio will be somewhere around for us, a kind of a franchise by 2030 will be 4% to 4.3%. Cost-to-income below 50% and then ROA will retain the same thing, 4.5% to 4.8% because whatever you do the ROA and ROE has to be sustained. ROE between 15% to 17%, ROA between 1.5% to 1.8%, but some of the components within the ROA actually can make a change based on the business mix that will change.

Your question on near term, next 2 years, I think next year, nothing much will change because none of these mixes are making so much of a change right now. So given that, I think our NIM will be somewhere closer to 4.5%. Once the interest rate starts coming down, the deposit interest rates, as I said, explained before, by elasticity on our asset side, we are lesser inelastic. So we don't have to pass on everything, given our book. And our fee businesses will keep going up. I think we'll do even better than today on the fee businesses.

And hence, I will not be surprised if we go to 19% to 20% of our overall income as fee, and that's what we're targeting. And on the NPA side, I said that we'll not touch 2, 1 and 0.4. We are now around 15, 16 basis points. I think we'll retain below 20 basis points on the credit cost for a while now.

And GNPA, I think sort of we are peaking out GNPA, NNPA, we are peaking out. That's where I think we should be remaining in the next 2 years. But longer-term guidance because once your retail starts picking up and all that, credit cost will also start going up little bit, but it will give other businesses because in retail businesses, what happens is you're -- for the same customer, you get lot more businesses. And hence, the ROA is sustained between 1.5% to 1.8%, this is really sustainable. So that's the way we are planning our overall strategic ratios.

What I'll do, Shivaji, if there are no further questions, is I would request our CTO, Mr. Rajesh Choudhary to -- because we have put one slide on the investor presentation on Technology Transformation at CSB Bank. So very quickly, if we can just take 2 minutes -- 2, 3 minutes, Rajesh to explain what we are doing on the technology side because this is the biggest story going ahead what we are trying to build in the bank. So can I hand it over to Rajesh for maybe 3, 4 minutes to give a brief on the technology side?

[Shivaji Thapliyal, analyst]

Sure.

[Pralay Mondal, executive]

Yes. Over to you, Rajesh.

[Rajesh Choudhary, executive]

Thank you, Pralay. Good evening, everybody. This is Rajesh Choudhary, I'm CTO for the bank. So in March 2022, we put the IT strategy to the Board. And since then, we have been executing that strategy. What we are trying to do is, we are replacing almost all the systems in the bank and the slide which we have put across, there are 4 different dimensions over there.

So one of the dimension on the top left talks about the entire technology infrastructure, what we are changing in the bank. So as part of that, we have built 4 data centers, 2 in Mumbai and 2 in Chennai. All the data centers are ready and operational. We have also set up private cloud for the bank, which is also ready for use now.

All the bank branches across the country are running on high resilient bandwidth, which means that if something goes down, there is a resilient bandwidth and the business will keep on happening. As part of the transformation program on infrastructure, we are replacing all the hardware for all the servers in all our data centers with the modern cutting-edge technology, which very few banks in the country has.

We have also set up a very modern technology command center in our new Turbhe office in Navi Mumbai, which is monitoring the entire bank, the entire technology estate of the bank. So that's our tech transformation from the infra perspective.

Now coming to the 4 systems, which is the big story, which are -- and we also spoke about. We have invested in one of the most modern new core banking system from Oracle, which is called Flexcube. We started implementing this from January this calendar year. And we are currently halfway and sometime in Q1 FY '26, this system will go live.

Along with this system, we are also setting up new payment systems. Our new digital channel system, which means mobile banking, new Internet banking, all of this.

We have got very, very old database in the bank, which is almost like a 17-year-old similar to the core banking what we have. And that has got significant limitation in doing business today. So we are replacing that with a modern database from Oracle that will also help us in going ahead significantly.

Along with this, a new trade finance system, we are setting up a new finance management system from Oracle, which is called Oracle General Lager, which will also go live by Q1 FY '26 -- '26 and the new risk management system called OFSAA that will also go live in the first quarter of FY '26.

So we spoke about the infrastructure, then we spoke about the core system, but there are lot of systems which are surrounding the core systems, and we are replacing almost all of those. Some of those have already gone live. So we are setting up lending systems for all the various products. So gold, 2-wheeler, LAP, these systems are live and remaining are under implementation.

Our lending system for corporate and SME is already live. We have lot of systems for various support functions. So our new HR system has already gone live, new compliance system is live. We have set up a digital customer onboarding system, which helps our customers to have better experience while joining the bank for any of the services. And we have set up new digital call center in the bank, which is ensuring that, our customers are being serviced in a better way.

We have setup very sophisticated ServiceNow platform in the bank. This is one of the leading enterprise in the world, and we were told we are the first bank in the country to implement finance FSO module from ServiceNow, which gives us our immense agility to launch new capabilities, new system on this platform. So this platform has gone live, and we are setting up one by one multiple systems over here.

There is another capability, which is API ecosystem. So API Ecosystem, combined with Enterprise Service Bus, this gives us enhanced capability to work with our fintech partners or any other partners, which will -- partnership strategy is one of the key part of the SBS 2030, as our MD spoke about. So API Ecosystem and Enterprise Service Bus will ensure that we are able to integrate our partners in a very seamless and efficient way. And all our systems will also talk to 4 systems in a effective and efficient way through these integrations.

Then, of course, while all of these business systems are in place, infrastructure has been transformed. Cybersecurity is sitting at the center of all of this. So we have invested significantly in various areas of cybersecurity. We have got our new security operation centers already installed and implemented from where we are monitoring the entire bank and also checking if there are any threats coming from the external world, various systems on the perimeter level, on the internal level, we are checking the dark web, if there are anything from the bank-related information sitting there. So very, very intense focus on cybersecurity systems to modernize the bank. So this is a very summary, very high-level view on the technology transformation in the various areas that we are doing right now.

[Pralay Mondal, executive]

So this isn't a summary what Rajesh covered, but actually, we can have a full day on what we are doing on technology. Because I really believe the bank has to be built on the back of a very strong technology for better efficiency, cost and scaling the bank in a faster turn around time, with a better service.

So with that, Shivaji, if there are any further questions, we'll be happy to answer.

[Operator]

Our next question is from the line of Mona Khetan from Dolat Capital.

[Mona Khetan, analyst]

Just I have 2 follow-up questions. Sir, firstly, if I could get the mix of loans between EBLR, MCLR and fixed rates?

[Pralay Mondal, executive]

Roughly, I remember that our fixed rate is around 70 -- roughly, very roughly, but I'm getting around 70-30. 70 will be around fixed rate and -- okay. So we have floating rate is around 38.2%, 61.2% is fixed rate. Out of the 38.2%, EBLR is 10.2%, MCLR is 24%. So 24%, 10%, 61%.

[Mona Khetan, analyst]

24% MCLR.

[Pralay Mondal, executive]

MCLR is 24.41%, EBLR is 10.22%, base rate, T-bill MIBOR, LIBOR so far, all these are around 3.84%. All these totals up to 38.20% and balance, which is 61.80% is fixed rate.

[Mona Khetan, analyst]

Got it. And...

[Pralay Mondal, executive]

But we like to also say, Mona, here I also say that it looks like fixed rate, but gold loan is a slightly shorter tenure product. So you have to take it with a pinch of salt. Having said that, gold loan prices also even in -- when interest rate goes up, it doesn't go up, interest goes down, it doesn't go down that much. So to that extent, it remains fit strongly, even if it is a shorter term approach. So that's why you can call it a fixed rate only.

[Mona Khetan, analyst]

And just secondly, while you mentioned that the penal interest impact is still there on the margin. But when it comes to incremental gold loans, are we able to reprice it at a higher rate.

[Pralay Mondal, executive]

Mona, what happens typically is, this is a customer psychology. I mean, people -- it's a competition, right? So if everybody says that, okay, it is impacting me by 25 basis points, and hence, we'll raise our rate by 25 basis points, but market doesn't operate like that, right? So if the whole market does it, it will also do it.

But ultimately, we're in a competitive market. So I think it is a permanent damage to the NIM of around 25 basis points for banks with our kind of a business mix. But we will figure out a way to manage the ROA by improving our fee businesses. But increasing because of these rates, I don't think the whole market will operate like that.

[Mona Khetan, analyst]

Got it. And what is driving such strong fee lines in your case? It's now almost 1.8% of assets, which is like very -- I mean, on the higher end of what we've seen industry and very comparable to large private banks. So what's driving this fee income fees.

[Pralay Mondal, executive]

At least summer, we should be in the best in class. So when I joined the bank, you'd remember Mona, that we were -- core fee used to be below 5%. So we have now taken it up to 17% -- 17%, 18%. I think we can go up to 19%, 20%. You can give some credit to the leadership team, which have built, who understands these businesses very well and still some more to come because once the retail asset businesses starts picking up, you will see more fees.

Wholesale business generally, good wholesale business run by good banks, and we have all worked in good -- I mean, large banks, can be up to 1.8% to 2% comes on the fee side, right? I mean, we actually did a syndication last quarter, okay? I mean you may or may not believe this, but this is the kind of expertise we are building in the system on the wholesale side.

So some of these fees, whether it's transaction banking fees, syndication fees, processing fees, insurance fees has been doing very well. I mean there are 4 such large companies between ETLI, HDFC Life, ICICI Pru and now Max. There's a reason that they are tying up with us, so they are chasing us because we are doing well. They are seeing the kind of a process, which we are following to do all this. And believe it or not, we had only 4 complaints which we resolved in insurance after doing so much of business within turnaround time, and we have 0 pending complaints right now. So that's the level of -- our persistency ratio is one of the best in the system.

So given all these things, we know how to run these businesses. So we know how to run many businesses, but till Rajesh delivers all the systems, they're not able to do it. At least these things, we are leveraging somebody else's systems to do it. To do some of these businesses, we don't need our systems, right, when you do insurance businesses. So at least where we can do well, we are doing well right now. So I think that's how it is. I see it sustaining. Take the core fee business, core fee business for us is around 15% of the total income. I see it sustaining, if not growing going ahead.

[Mona Khetan, analyst]

And just one final question. So when it comes to the corporate book, you mentioned that there's some reboot going on which led to slippages in the past quarter. So could we have more of these in the ensuing quarters? Or you believe that this is done with -- and slippages related to that...

[Pralay Mondal, executive]

Mona, I wish I could say that. Nobody can do a crystal ball guessing. But whatever we can do, we are doing. So we can always have a surprise item, but I think we are doing whatever best we can. And that's the reason I said that last 2 quarters, we have been exiting relationships which have perfectly -- now regular businesses. And they are not NPA. They are not even SMA.

We just exited a very large, very, very large relationship just because -- and there is no NPA, no SMA there, but we just exhibited maybe once it came to SMA. But we exited just because we think that, that's not the line of businesses we want to follow. So we are completely changing our wholesale franchise business in a different way.

Having said that, a legacy book where something will fall we don't know. That's why we are granularizing I mean, any large businesses in wholesale, which you have done in legacy, we are gradually reducing that, and we enhance the shock, if at all, if there is anywhere, which we don't know of is going to be very low.

I would like to also add one more point that we have INR 183 crores of contingency plus non -- beyond regulatory mandate provision. Out of that INR 106 crores -- INR 105 crores, we have taken under COVID provision. Now there's no COVID. So we have put it under contingency of INR 105 crores. And what we did is whatever we thought stressed accounts, now stressed accounts does not necessarily mean that they are NPA accounts or they are SMA accounts. Anywhere we didn't feel good about it, we kept those accounts under those.

Out of that one big account is gone, but we are trying to put some more accounts into that to retain that. So we are taking a very conservative provisioning policy. Otherwise, we could have written back a large amount and improved our PCR. We are not taking that route. We are doing in such a way that we will add some more so that if there is an accident somewhere, which we don't know yet, we have already provisioned that. So that's the way we are following a very strong -- a very conservative provisioning policy. Beyond that, who knows? I mean somewhere, something happens, we can't say anything. But truthfully, we don't know anything which can just hit us anytime. If we know we will exit that relationship.

[Operator]

our next question is from the line of Sonal Minhas from Prescient Capital.

[Sonal Minhas, analyst]

I have 2 questions. First one is linked to your PCR. I wanted to understand like what is the steady state PCR that you target or there is direction there that we want head to because given your charts, given how you see this PCR excluding write-offs, has been coming down. So if you could just explain that a little bit, that will just help to understand it.

[Pralay Mondal, executive]

See, PCR, our targeted PCR is somewhere between 70% to 72%, okay. We'll get there sometime next financial year. We were there, but there is -- I talked about that one account slipped okay, which is a legacy account, which led to this problem. Either we'll recover or we'll write-off. So naturally, mathematically, this will -- we will go back to somewhere close to 70%.

We had choice, as I just explained before, from a contingency provision because one of the accounts we have just exited. We could have written back some of the provision we have taken against this, but we lack some more provisions and we'll remain -- retain it at contingency because if you move from contingency to incremental provision, from a conservative provision, we can increase our PCR very easily. These accounting principles are there.

But from a bank, from a Board perspective, we have said, no. We'll not use those routes to artificially raise PCR. We'll raise the PCR only by either collecting or provisioning, which is not under the contingency provisioning. So we have a very easy method of doing it, but we're not doing it today. So I think our model is around 70% to -- without PW, 70% to 73% somewhere around that, we will be there. But we will take little time because we hope to recover some of this. If we can't, anyway, we will do a provisioning or accelerated provisioning and move on. So that's the way we'll plan it.

[Sonal Minhas, analyst]

Got it, sir. And sir, second question is regarding the LTV for the gold loan. I see this as coming down over time, but just asking you subjectively from an operational perspective of risk assessment of assessment of let's say creditworthiness of the customer, what the gold is given the collateral. Basically, are we there in terms of systems and processes and technology for gold loan? Or there are still like some hoops to cross for us to say that our systems are at par or better than, let's say, the other large gold loan players in the market. Just trying to understand the new system, basically.

[Pralay Mondal, executive]

Yes. No, thanks for that question. Let me put it this way. Given that golden is anywhere between 44% to 50% of our bank, depending on you take where do you take that loan against security business, but effectively, it is like a gold loan business.

It will be only prudent to ensure that we have the best systems and processes. And it's unbelievable amount of work we have done in the last 2 years in gold loan business. From being an average gold loan player to, probably we think we are one of the best compliant gold loan business right now. That's the reason I said in the beginning of the call or maybe some of the media were saying, I don't remember. That we have put so many things in place in the gold loan, this thing that when this RBI circular came, we found we tick most of the boxes proactively, okay?

So that's the kind of work which has happened in this bank on the gold loan side. But being a very touch and feel physical distribution oriented business, you can never say that we are 100% there because where somebody is sitting somewhere what he's doing, we don't know. We can only find it through proper audit process and proper review mechanism, which we are expanding and we are expanding our scope of audit everywhere, a lot more.

So let me put it this way. From an intent perspective, we are 100% there. From a process prospective, we are 100% there. From an execution perspective, maybe we are 70%, 80% there. Rest Risk, 20%, it can never be 100%. So we are trying to see how we can inch it little bit more over a period of time.

Having said that, on your question on LTV, let me say that, actually, we are close to 70% on LTV right now. It varies every day, I see a different number, 70%, 71%, 72%, but we also do a sensitivity analysis constantly, what if kind of a scenario on the gold loan price. And that data I see every day.

And of course, the retail and everybody else, CRO, everybody sees this data. We see 2 data every day. One is this and one is the LCR data we see everyday. So given that our tonnage increased by around 10%. And our this thing, growth was around 28%. So obviously, then understand that we focus on tonnage because that's the real growth and the gap between 10% and 28% is because of the value of the gold.

Now one can argue that given what's happening globally, in next 1 year, there are no risk. Next 1.5 years, there are no risk. But who knows what is going to happen. So given that perspective, I think we continue to do the sensitivity analysis and we will take action as and when we require proactively, in case we see there is a risk on the gold price because we have to be sensitive to that 10% versus 28%, that this gap of 18% is -- a growth is because of nothing much we are doing. It is happening because of the environment. And it can happen the other way around also at some stage when the gold price starts falling. Hopefully, by the time that phase comes, we'll be ready with our other businesses by FY '26, '27. So to that extent, we are at a sweet spot at this point of time.

[Sonal Minhas, analyst]

Understand. And sir, on the gold loan business reconciliation side, at the branch level, let's say, if the loans are being given against the right collateral or, let's say, hypothetically saying that the value is actually not what the loan amount basically commensurate because it is the value of the gold that is given to you and deposited with you. What are the systems basically to this check that? What is the periodicity of those systems, if you could broadly highlight. And I don't want to take too much of your time, but broadly just want to understand that.

[Pralay Mondal, executive]

I can put it this way, that, I understand your question fully what you're asking, okay. That is exactly what we have worked in the last 2 years. So it starts with intent. It's what starts with compliance. It's what starts with what we want to do. And then next is what is being done on the ground, right? So if we take action on anybody who's not following the process right, if we have a very strong audit periodicity in every branch, if we have signs of saying that where we have more fraud prone or this thing.

And if you take staff action the way we need to do it, then you have a much better control. So let me put it this way I think we have very, very strong controls on our gold loan business at this point of time. Obviously, the kind of pedigree which our management has. Intent will never be an issue, the kind of board we have, the kind of promoter we have, we have -- from an intent perspective, we are 150% there. From a process policy taking action, controls, all these perspectives, we are 100% there.

Still, we -- can I commit that there will 0 fraud or there will be scale of finance, there will be something where something is going wrong in some branch here, some branch there in a distributed setup that can always happen.

But our view is that we cash that and we take action, which deterrent, deterrent is the biggest thing, which deters people from doing wrong things. But if management looks the other way when something is happening, then there's a problem. Our bank don't believe in that. So that's the best way to handle this business, and we are doing in that way.

[Operator]

Ladies and gentlemen, that was the last question for the day. I now hand the conference over to the management for closing comments.

[Pralay Mondal, executive]

Thank you, Shivaji, and thank you, everybody, for asking very relevant and very, very good set of questions, I must say. We are very excited the way the bank has turned around in this quarter, and we are very committed to hopefully show even better performance next quarter. Thank you very much, and have a good evening.

[Operator]

On behalf of YES Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.