CSB Bank Ltd

NSE:CSBBANK

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the CSB Bank Q4 FY '22 Investor Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Praveen Agarwal from Axis Capital Limited. Thank you, and over to you, sir.

[Praveen Agarwal, analyst]

Thank you, Pawan. Good evening, everyone, and welcome to this earnings call. We have with us Mr. Pralay Mondal, MD and CEO; and Mr. B.K. Divakara, CFO from the management team. And I would request Pralay to give his initial remarks after which we'll open the floor for Q&A. Over to you, sir.

[Pralay Mondal, executive]

Thank you very much, and welcome, everybody, to this annual results investor call. We had a very good quarter and a year at CSB. And while Mr. Divakara, our CFO, will take us through and take you through all the detailed numbers, and that's why I'm not getting into too much with numbers. But also, I would like to say that, we, as a bank, have broadly -- actually most of the parameters, either on the ratios or on the -- whether it is NIM, whether it is from an interest income perspective or even on the noninterest income, if you take the treasury out, which is a noncore kind of income, on the core noninterest income, we have done pretty well. Even on cost side, we have managed so far. But obviously, we have lot of plans in the next few years to grow both our distribution technology and invest into the franchise because now we are looking at growth.

Also, if you look at our capital and some of the other earnings per share, I mean, whichever we look at it, I think we have actually most of the objectives which we wanted to achieve. The only thing which we now need to do is grow the balance sheet and scale the business, and that is what we are focused on.

With this, I'd also like to say that, globally things are a little different as we all know. All of your experts on this side, so I'll not spend much time trying to tell you what is going on in the world. But given the inflation scenario and some of the volatilities which is happening, I think clearly, there will be focus by which we need to build our liability franchise and all the banks will be focused on the liability franchise in the next few years.

Also, the bond markets, you know globally what's going on, it has crossed 3%, 3.08% or 3.09%, something like that. I mean, that is no different, and there are still expectations and that on June 8 RBI policy, there could be another rate hike if that happens and also with the CRAR, the indications are very clear that liquidity will get sucked out. Interest rates will rise because the real interest rates has to make sense. And also, there will be -- we have to protect our rupee versus dollar ratio and things like that, right?

So to that extent, I think there's a lot which is going in the environment. But the good news is that most of the frequency -- high frequency indicators are looking good for us, whether it is potential GDP growth, that demand coming back, or the GDP growth in terms of whatever the projections are and hence, the credit growth, the government investment is coming back, there will be -- the LIC IPO so far is looking good.

So I think most of the high-frequency parameters are looking good. CapEx will pick up based on what government has announced in the budget and things like that. So overall growth will come back into the system. And with consolidation happening in the banking system, both in the private and in the public sectors, there will be opportunities for banks like us to participate in many parts of the franchise or many parts of the opportunities, whether it is retail, whether it is SME, whether it is mid-market or emerging enterprises, growth, whichever way we look at it, there are enough opportunities.

We will look at fee income as an important area, whether it is ForEx, whether it is on the [indiscernible] largely franchise, we have to go by granular franchise. While on CASA, we grew on an end-of-period, this is 10%. But on average, the CASA grew by, I think, 20% to 23%, which is a good news. That means that we are getting more uniformed in our CASA balance. And hence, we need to -- also we are growing our distribution by almost 20% year-on-year. And most important is going ahead, and we can take some of those things when the question comes in, that we are looking at significant investment into technology, significant investment into partnerships and significantly going in the retail and SME franchise and building our franchise model in addition to what we are doing already well which is gold loans.

So our thinking is we'll -- as we call it our strategy, SBS 2030, which is sustain, build and scale model. That is, we'll sustain what we have done well. Build the churn, which is technology, digital partnerships, dealerships, products, processes, services because if we are a full-service bank, we rather use that full service bank license and become a true blue full service bank across length and breadth of the country. And then scale once we have tested our models right, because we also don't want to go wayward on cost and then -- so everything will be pilot basis.

And once we see that our return on every investment is coming back, then after 12 to 18 months, by that time, hopefully, our technology will be fully in place, then we scale it up [Audio Gap] 0.5% more than -- sorry, 1.5x more than what the credit growth in the ecosystem is. This is not a guidance, but this is what our ambition is.

So that's the way and it will be -- and it should be balanced growth and not just single product or a single franchise kind of a growth. So that's broadly what our thought process is, but we'll take more as we take questions at the end of the conference. With that, thank you very much for participating, and I hand over to our CFO, Mr. Divakara for taking you through the results. Thank you very much.

[B. Divakara, executive]

Good evening, friends. I will be making a brief presentation about the performance of the bank for the quarter and for the year ended 31st of March 2022. Audited financial results for the quarter and for the year ended 31 March, 2022, was taken on record by the Board of Directors for this meeting held today. Our performance of the bank improved on several accounts during the year.

Performance improved under asset quality, earnings, liquidity and capital funds position. If you can look at the asset quality of the bank today, net NPA level have gone below 1%, and it remains at 0.68%. And if you can look at the earnings, it has increased manyfold, and liquidity-wise, our LCR now stands at 154% as against the requirement of 100% by RB.

And capital fund's position has improved substantially, capital adequacy ratio now stands at 25.90%. Now we are earning profits continuously for the last 3 consecutive years. As you may be aware, bank is following an accelerated loan provisioning policy and all the toxic assets have been provided at rates for higher than the regulatory prescription.

During the heightened COVID threat, bank has provided INR 106 crores for future contingencies. But despite the situation is debit, these provisions have not been touched and allowed to continue as a buffer. If this additional provision is reckoned for PCA purposes, our provision coverage ratio would have been almost 100%. Cumulatively, bank is holding additional provision to the extent of around INR 214 crores over and above the regulatory requirements.

Deferred tax assets created on account of accumulated losses have been completely wiped out. Continue to follow conservative accounting policies on ASR, our ASR level has substantially been brought down. In fact, the appreciation has been ignored for all possible impairment we have provided. All these measures have strengthened the balance sheet to a larger extent, and we are moving towards building a strong momentum.

Now let me take you through the main highlights of the published results. Total deposits of the bank grew by 6% on year-on-year basis, and CASA ratio stood at 33.66% as on 31st of March 2022, as against 32.19% as on March 2021. Average CASA during the year grew by 22%. Advances grew by 10% on year-on-year basis to touch a level of INR 15,815 crores. In Q4 alone, the growth of advances has been at 8%. Average advances grew by 14% during the year. Gold loan portfolio has reemerged from the negativities of growing at 7% quarter-on-quarter sequentially.

Share of gold loans to total advances now reaches its good hold peak levels of almost 40%. It stands at 39.2%. Net interest income has crossed INR 1,000 crore mark for the first time in history of the bank. By posting a robust growth of 23%, the net interest income stood during the financial year 2021 at INR 10,153 crores. NIM improved from 4.81% to 5.27% on year-on-year basis or by 46 bps. Average earning assets grew by 12% on a year-on-year basis. Thus, net interest income growth has been powered by both volumes as well as the spread improvement. Cost of deposits during the year improved from 5.07% to 4.31% or by 76 basis points.

Yield on advances improved from 10.97% to 11.21% or 24 bps. Yield on investments reduced from 6.81% to 5.93% or 88 bps. As an on-share strategy, Bank has not replenished the HTM gap in the initial month of the quarter, expecting yields to harden further and preferred investment in short duration paper, which had impacted the yield EBIT.

Noninterest income, G Sec market has been unidirectional in financial year 2022 given the global scenario of increasing yields and heightened inflation, even before the uncertainties of prolonged war emerged. This gave little room for treasury profit bookings, which was a key contributor to the kitty during last financial year.

Benchmark tenure is increased from 6.18% to 6.84% or by 66 bps. Thus, while we could book INR 102 crores of treasury profits in financial year 2021, when the yields were falling, the corresponding figure for financial year 2022 is only INR 12 crores. M Duration for AFS portfolio stands at 0.65%. Noninterest income, excluding treasury profit grew from INR 201 crores to INR 235 crores or by 17%, powered by growth in commission income from INR 50 crores to INR 72 crores or by 44%.

Total stock costs decreased year-on-year basis from INR 496 crores to INR 482 crores, or by 3% on account of lower AS 15 provision. Staff expenses excluding AS 15 provision increased from INR 259 crores to INR 322 crores as total employees increased from 4,180 to INR 4,662.

Other operating expenses have increased from INR 233 crores to INR 305 crores year-on-year basis or by 31%. Number of branches increased from 512 to 603 contributing highs in other operating expenses. Operating profit grew from INR 516 crores to INR 614 crores or by 19% on the back of improved net interest income and reduced stock cost.

Cost-to-income ratio improved from 56.2% in financial year '22, from 58.6% in financial year 2021. Net profit has increased from INR 218 crores to INR 459 crores on year-on-year basis or by 110%. There has been INR 10 crore net reversal in NPA provisions in financial year 2022, powered by NPA recoveries on both gold and non-gold portfolio as against additional provision debit of INR 107 crores in financial year 2021.

That's why this reversal provisioning coverage ratio has improved from 84.9% to 89.7%. ROA has increased from 0.99% to 1.90% on year-on-year basis. And ROE from 21.2% to -- from 12.5% to 21.2%. Book value per share increased from INR 117 to INR 144 or by 23% and EPS from 12.6% to 26.6% or by 111%.

Asset quality. This was a prominent quarter in terms of NPA recovery where we could contain both gold as well as non-gold NPA. Out of the gross NPA of INR 289.51 crores, INR 28 crores is gold on NPA with a higher recoverability. Gross NPA decreased by INR 104 crores from INR 393.49 crores as on 31st of March, 2021 to INR 289.51 crores as on 31st of March, 2022.

The gross NPA percentage that was as at 2.68%, as on 31st of March, 2021, improved by 87 bps to 1.81% as of 31st of March, 2022. NPA in gold loans decreased from INR 45.39 crore to INR 28.81 crores on year-on-year basis. Net NPA percentage decreased from 1.17% in March 2021 to 0.68% in March 2022, or by 49 bps. In absolute terms, Net NPA reduced by INR 62 crores to INR 107.11 crores. Our leverage ratio stands at 9.2%. Liquidity ratio has improved to 154%. Capital adequacy ratio is at 25.89%, which is well above the regulatory requirement of 11.5% and previous year trading of 21.3%.

As I said earlier, leverage ratio has been improved to 9.12%. It is up from 8.11% well above the regulatory minimum of 3.5%. That bank has done well under all critical business and profitability parameters. While consolidating our performance, we have strengthened our balance sheet to a larger extent, adequate provisions have been made both for known and unknown losses. I'm happy to take your questions -- we are happy to take your questions.

[Operator]

[Operator Instructions] The first question is from the line of Digant Haria from GreenEdge Wealth.

[Digant Haria, analyst]

So congratulations firstly on a great performance for the whole year. So my question is to Mr. Pralay. You just did a passing mention that this year would be a little more about liabilities for everyone, including yourself. So what I wanted to check was that see, we give the lowest savings rate interest, like I see it's right from 2% to 3.5%. Our deposit rates are also maybe at par with the largest bank.

So how do we -- like if we have to grow our balance sheet this year by say, 20%, 25%, how do we plan this whole liability strategy? If you can just give some more color on this -- till now, the liquidity was easy. So despite lower rates, we were getting deposits. But what happened in the next 2 years?

[Pralay Mondal, executive]

See, I will answer it in 2 parts. One is if liquidity is there, it's not easy to get deposits because everybody is competing and there are various instruments. But we have a very high loyal base of customers in Kerala in our branches. And we have seen, we have almost 95% last kind of a renewal rate with our customers. So I have analyzed the portfolio and I've seen that -- and these have happened 2 cycles, irrespective of interest of cycles.

So which means there must be something good we are doing in terms of retaining the loyalty of these customers in all interest cycles. So we obviously will not take things for granted. We will continue to engage with these customers and continue to do the work. That's one part.

Second part is that -- but yes, that will not help us in growing our balance sheet of what we are doing. So we have to build on top of that. So we are investing more into branches. Secondly, we are investing into our sales structure in liability by which we'll get more customers. And when I say for us, liabilities are different to some other banks like HDFC, ICICI, Axis, et cetera, because they already have a large customer base. We have to build up a large customer base, not only for liability. Liability is just not about deposits, it's about a franchise. And on that franchise, as we now launch our retail assets, other payments and other products, fees, et cetera, we'll be able to cross sell to those customers.

So for that, we need very large acquisition strategy to debt to the bank. And that's not necessarily is to do with rates because some of these will be selling the account, some of these will be small FDs and things like that. Some of these will be solution-oriented. We'll start looking at corporate salary and those kind of businesses gradually in the smaller corporate, et cetera.

So -- and as we expand our markets into the North and West -- West and North rather, in that hierarchy, we will meet this production channels to add more customers to the bank. So that's number one. And that's number 2, which will help us in growing the customer franchise and hence the liability, the granular liability which will remain with us. The third point is we are not looking at rates as the primary way because when you give rates in cycles, [Technical Difficulty] margins, which we don't want. B is we don't want rate shoppers coming to the bank at end of the day. We want to build a very long-term franchise.

So from that perspective, we'll build solutions. So we are planning to create teams which will focus on task and which will focus on solution-oriented businesses. On the SME's side, we already were telling the SME side that your job is not just getting asset business, you have to be self-funded, start with 20%, 30% and then we'll see how do we do it. So I think we have to look at that, that at every part of the bank is looking at the whole customers. For example, if you having SME customer of somebody, you can get his personal accounts, you can get his family accounts, you can get liabilities. So those are the kind of focus which we want to start.

The third thing is that branches, especially the metro and urban branches, they have to focus a larger part because a good liability customer is eventually a both fee and asset customer as well. And hence, they have to focus on liability. And in the cycle, if you have to continue to grow at a rate at which we want to grow and we definitely want to grow faster in the market and significantly faster than the market, if that is so, we definitely need to build a liability franchise.

I understand your question that there is a cycle which is picking up, but at the end of the day, also lot of these banks have big large bank books and not everybody can give store rates on the liability side of the day. And a lot of these large banks have grown liability franchise without showing rates. So we don't have to show rates. We have -- I have worked in many organizations where you can do without giving this, but building a solution. And we have people in our team who knows how to acquire customers and what is the strategy which we can put. And last strategy on liability -- not liability, but as for franchise building will be digital and partnerships.

We are investing -- going to invest significantly on technology, significantly on partnerships and significantly on solutions. So based on this architecture which we'll build, we will get a lot more customers and when customers come, they will come along with a liability as a float or whether it's on the [indiscernible] side or on the selling side, et cetera because eventually if you have an EMI to pay and that's the reason we have tied up with, for example, HDFC for home loans or for credit card there is somebody else. Even if you don't have those products also at this stage, eventually we are building everything. We don't want a situation where our customers are going and shopping around for some products to somebody else. So all of this put together is a liability strategy. Liability is just not giving less and getting deposits because they will not last and they will have a negative impact on our cost of funds.

So that's broadly the strategy. So it's an execution strategy and not trend rates.

[Digant Haria, analyst]

My second question is on the operating cost. That we already saw some operating leverage coming through this year. Now that you said that you are going to do a lot of partnerships, build a lot of different capabilities around the bank, do we still have this operating leverage or the level of operating leverage in the next 1 or 2 years? And if yes, if you can just quantify what's the dream cost to income or target cost to income that we have for our bank?

[Pralay Mondal, executive]

See one is ratios and numbers. One is I will give you more strategic perspective and let me -- how to quantify that nobody knows, there is a bit of an understanding who are sitting here. So from a strategy prospective, I'll tell you what, any ratio is a numerator and a denominator, right? So -- and sometimes you have to upfront certain investments to get the numerator. So we will not shy away from investments. So any cost which you look at it, I want to divide cost into cost and investments. And every investment will have a payback period. And then I'll look at cost separately.

Lot of costs, actually, the operate leverage will come down because of the investments we'll make because a lot of these operations will do spread through, lot of these branches which are seeing lot of operations, I mean, the branches will -- we actually as we're talking we are taking documentation out of the branches, we'll take operations out of the branches, we'll do stretch through a lot of products at launching, which is stretch through on the SME and the other side, we've already launched some of them.

So we want to make branch -- either they are focusing on gold loans which are heavily operating model on the branch which is a bigger model structure, and we'll continue to do that in some of them, and most of the branches, especially in the rural markets, in the semi-urban markets and nonmetro branches. At the same time, we would like to see that the front of the branch how do you ensure we leverage lot more for sales and service.

So all of these together -- because as you know that when you build a customer franchise, there is a front-loaded cost out there. And typically, a customer -- a branch breaks even -- a large metro branch breaks even little more than a year. Gold on branch breaks even less than a year. The customer breaks even in a year's time. So once we have this continuous growth on customers, we'll have a little bit of operating cost, and we will get the opportunity to leverage by taking lot of straight through process into the ecosystem.

Finally, once this productivity starts kicking in, which will take year and 1.5 years, and by the time our technology strategy will be in place, you will see the real operating leverage for us will start coming somewhere around 2025 onwards, okay? Till then, it's an investment phase and then I'm not seeing too much of an improvement on the cost-to-income ratio, frankly. But there, if you look at it till then -- but there if you look at it cost, you please see which of the costs are going into operations costs and which are the costs which are getting into investment.

And as I said before, we'll put lot of investments into partnerships, manpower, resources and technology.

[Operator]

[Operator Instructions] The next question is from the line of Prasheel Shah from CapGrow Capital.

[Prasheel Shah, analyst]

Yes. Just a follow-up on the previous question. So you mentioned that the focus should be sort of on how much is going in the investment -- the cost -- how much of the cost is going in investment and operations. So currently, what would be the proportion? And what would it be, let's say, in 2024 and '25?

[Pralay Mondal, executive]

So this is -- I mean, from my perspective, it's a difficult question to answer, maybe Mr. Divakara can try. But I don't think we have looked at it this way because lot of these investments -- what are the investments? Investments is technology. And again, technology investments is broken into 2 parts, one is operating cost and one is CapEx, right, which gets depreciated over a period of time. Second part of the investment is sales structure and sales and acquisition. And third part of the investment will be partnerships.

These are the 3 investments which will go in. I think we have -- because we were trying to sort of consolidate the balance sheet and ensure we deliver what we delivered this quarter and this year, we were a little focused on getting our act right in our bank and getting where we have reached, which is very, very well appreciated by everybody. From here on, the next phase will be growth phase. And in that growth, these are the investments which are going to get into it. And hence, this will all be incremental investments if you ask me, whether it is the sales structure, whether it's partnerships, whether it is technology.

What would be the -- so these are all incremental. Where the cost will come down is basically the operating leverage, which we'll get from the branches because if you add more products and more services to the branches, you will automatically get operating leverage and very difficult to give a calculation where we have not done all this in our life cycle year because we have not got those product yet.

Once we get those product, then only you'll know how much. And those products alone will not help because if you don't get those customer into the branches. So all of this, in my experience, comes together at a one stage which will take 12 to 18 months. So currently, if you ask me, mostly 40% of our business is in gold loans, right? It's very easy. I mean, those ratios, Mr. Divakara can give you that what is our OpEx cost. I mean, overall our operating cost to income will be around 3-point something like, what is that -- 3.5 or something like that. So those ratios are there.

But the point I'm making is that we have to invest these to build our growth-oriented franchise. And whatever investments has to be met, we'll make them, and they will have a payback figure anytime between 12 to 18 months.

[Prasheel Shah, analyst]

Okay. And my next question is on the ROE. So we have seen excess of 20% in the last 3 quarters. It was mainly sort of driven by recoveries and the negative direct costs essentially. So going forward, maybe in '23 and even in '24, how would we sustain an ROE of this magnitude? Maybe not 20%, but at least something like 15% or 16%?

[B. Divakara, executive]

Yes, we have been able to reduce ROE of 20% less during last 3 to 4 quarters. So credit cost has become negative only in this quarter. But if you see, personal assets during last 3 quarters, so we have made provisions. The credit cost was there. Despite that, we have been able to show ROA in excess of 20%. So we may be able to maintain this. So the profitability projection is what we have in mind and the business parameter is what we have envisaged for the current year. I don't think so we will be having any difficulty in reaching these figures.

[Pralay Mondal, executive]

Sorry, also if I can add, if you get to the growth momentum, okay, which should happen because there will be opportunity in the market, et cetera. So if you look at it, our capital is very high, right, at this point of time. So as we start consuming more and more capital getting into the growth mode and obviously, it will automatically -- on one side, it will give you slightly higher ROE. So I think what you are asking and what will happen here in terms of growth, both will balance out, and we should be able to deliver the ROE.

[Operator]

The next question is from the line of Nirmal Bari from Sameeksha Capital.

[Nirmal Bari, analyst]

Congrats on a very good set of numbers. My first question is on the current market environment based on what the RBI said in terms of reducing liquidity as well as increasing interest rate. Typically, in the last few calls, what we have been discussing is that there has been excessive competition because of which we were sort of not able to grow in the SME, MSME side. So with the current environment now, how are we placed to capture this growth opportunity?

Second is, if you could talk a bit in terms of technology, what are we doing? We had a new head of technology, CTO, I guess, a couple of quarters back. So -- and what all -- that's all. Those are 2 questions.

[Pralay Mondal, executive]

Sure. So on the first question, let me put it this way that what is happening in the ecosystem is good things for us because we want to do prudent business and in a way it is good that we didn't grow that much in a very low interest rate regime where the cost of funds and all these were so low that the kind of businesses which has been done, they -- some of them may be term loans, some of them may be working capital, we don't know. But not necessarily whatever -- even in a variable rates, real interest rate that will go into the market, maybe slightly higher than the real hike which happens on the regulatory front. So these are linked to certain rates, right? So to that extent, at least, we'll not be in the terms with them. We don't have those challenges today.

So we did prudent business based on the -- whatever cost of funds we had and we don't have those cost of carry of those assets with us right now. So that's advantage #1. Advantage #2 is because when such liquidity is there in the market, almost everybody goes and does businesses. I'm not talking about only the large banks, there are a lot of people including NBFCs, everybody. A lot of people does business which becomes very difficult to compete when we wanted to run a prudent balance sheet. But I think scenario will change now.and there will be a lot -- I've seen this package twice before and there will be a rational pricing that will happen in the market.

And this is the time when we want to go to the market and whet off it on the SME side and some of the other businesses. So we see SME as a major opportunity for us in the next 2 to 3 years because retail will take time to build, till then, SME mid-market, these are the segments which will grow and we will do well.

And today, and now onwards, we are willing to participate in that market because we believe that grades will be a lot more rational than what used to be before. So that's on that front. Coming to the technology side, there is lots happening. In fact, I'm personally involved significantly in our technology initiatives, which are doing it.

So we are dividing the 2 parts. One is running the bank and one is building the bank. So on running the bank, as we grow our balance sheet and our customer expectations grow and new products, new services, LOS, a lot of things which you are given in some of the other banks which we are implementing now because we didn't have those products and services. So we will be at par on some of these products adn services.

Because if you don't have this kind of pathway, you can't run proper retail assets, product payments or something. Building the bank for future, obviously, we have to -- what Rajesh is working on, he is the new CTO. So what he's working on is evaluating our core system and what options we have there.

B is what is the surround system which you need to build? And third is how the plug and play system, which will work on the other layer and how this too will get integrated along with the workflow system, which you're taking on the LOS, whether it is corporate LOS, whether it is retail LOS, whether it is LMS, all of these we are investing right now, as we're talking, it is happening.

And we are also investing significantly on the cybersecurity front because that is something which we need to be very clear if you want to build a digital bank lot more aggressively. And then the other part which you're doing is we're saying that if this is running the bank today and this is building the future today, we can't be remaining without doing things. So what we'll do is we'll do lot of plug-and-play kind of a digital solutions which will be disposable models, let's say.

So next 2 years, we'll use it and throw it. And by that time, our future is built. So we can't wait because if somebody tells me somebody will give a system over 3 years, I can't wait for that. So we will use, for example -- I'll give you an example if you want. For example, if you look at our leap management system or if you look at easy connectivity with the partnership model, et cetera. So how do you do all that?

And one of the reasons we are also looking at it is because we are from a regulatory perspective, the thought process is changing little bit and saying that do we want to do it this way, do we need to look at cloud as an option, et cetera. So we see a lot of technology changes happening in the next 2 to 4 years. Cost of obsolescence is very high. So we are also evaluating all that and seeing that is it better to go full hog and invest into all the systems at this stage or some we do based on our current volumes, and then throw it and build it based on whether by that time the cloud model is prevalent and then your whole operation becomes very flexible and faster. So those are the various things which we're working on, but we are primarily looking at running the bank and building the bank.

[Operator]

Mr, Bari, does that answer your question?

[Nirmal Bari, analyst]

Yes.

[Operator]

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

[Mona Khetan, analyst]

So my first question is if I look at the numbers from a sequential basis quarter-on-quarter, your NII growth was flattish versus loan or interest-earning assets growing at 7% to 8%. And yet margins were largely stable Q-on-Q. So what has held NIM despite the flattish NII growth?

[B. Divakara, executive]

No, if you can look at the Q3 results, say, that of Q4, so marginally, it has come down. It is mainly because of 2 reasons. The first one is with regard to migration of NPA, that has happened mostly in Q4 as compared to Q3. And maximum recoveries have been affected in Q3, especially with regard to gold loans.

So gold loan recoveries was done to a maximum extent during Q3. That is why if you can look at it, this net profit was higher in Q3, that was -- now most of the gold loan NPAs have been recovered. So from a peak level of around INR 288 crores, today, it has come down to INR 28 crores, so it has come down almost 1/10 of what it was in June 2022. So September itself we have been able to recover. But between September and December, we have recovered maximum.

So that is why that's -- whenever -- when it is recovered, what will happen is that even the unchecked interest that was reversed when it was being declared as NPA. But again, that interest income will be available for us. That is the interest income was more in Q3 as compared to Q4, but now most of these NPAs have been recovered.

So that is why the interest income has come down in Q4 as compared to Q3.

[Mona Khetan, analyst]

Okay. Okay. So now that gold portfolio has largely stabilized the GNPs at 0.5%, 0.6% or above. Where would you expect a steady set margin to settle at for CSC Bank?

[B. Divakara, executive]

From SME, if you can look at our SME portfolio, so that is giving an average yield in excess of 10%. Similarly, gold loans, it continues to give a yield of 11% plus. And corporate advances is giving a yield of around 8.5% to 9%. These are all the stable sources of income with earnings, that is our net interest margin. If you can look at it, it has improved to 5.27% as compared to 4.81% during March 2021. So margins have been -- margins have improved mainly because of all these factors. Yield on advances has improved. Cost of deposit has been brought down.

[Pralay Mondal, executive]

So Mona, to give you a little forward-looking answer, Mona, let me give you a qualitative aspect to it. So let's look at it, cost of deposits, cost of funds, whichever we look at it, and let's look at it separately. So cost of deposits, obviously, will go up, right? I mean, that's not rocket sign.

At the same time, we have both our MCLR link book as well as R&D [indiscernible] link book and [indiscernible] immediately get impacted as soon as we announce -- as soon as the 1st of July, right, it will get impacted positively. And MCLR will -- depending on what is the duration of that, based on that it will be effected.

So to that extent, at the same time, we have to look ahead and say, we cannot look at the short term and say that let's not deposit business for the next 3 months, 6 months, right? You have to look at it slightly because these interest rates going to be here for real for the next 2, 3 years, if the country does well.

So given that perspective, we have to raise deposits and hence, our cost of funds will go up. But at the same time, we still have some long-term deposits, which is there in the system, which will get renewed either at the elevated rate where it is coming today or at a slightly higher rate than if it was booked like in the short term in the last 1 or 2 years. So overall cost of deposits is bound to go up little bit. At the same time, we will be able to pass on some of that depending on how the competition is playing on that side.

So to that extent, I think, at the margin, there will be not too much of a difference, and that would be the story almost for all the banks. For us, it will be -- it could be little different because we will also change the mix of the business little bit.

Our gold loan mix, I see continuing to do what it is today because we had a very muted growth last year. And this year, we want to take the growth up, and that will help us in our ails to some extent. At the same time, we will look at even better quality portfolio on the SME side, we want to participate in the real SM business. And hence, if you have to sacrifice some yields on the SME or wholesale, we'll do that because we have the goal which will grow and which will at least hold the mix what is today around 39%, 40%.

And hence, on the margin, I think if we want to build the quality of the book even better for the long run and with the cost of funds little bit of increase, whether we'll be able to hold back the name while we are today, we don't talk, okay?

But we will not sacrifice growth to hold the NIM of 5.2 or 5.3 or whatever it is, okay? So growth is paramount. And for that -- and quality growth is most important because we don't want a growth which is toxic growth, we will have a quality growth. And for that, if a little bit of a NIM sacrifice is required, we look at it as and when it comes.

But growth will be there, quality of deposit franchise will grow and we will gradually change the mix of the business. But this year, there will be no change in the gold loan mix at all. And hence, that will hold the ails to a great extent.

[Mona Khetan, analyst]

Okay. But then could it continue to be the over 5% that we have seen in the last couple of quarters, at least or could it moderate below 5%?

[Pralay Mondal, executive]

At least for the next 2 quarters, I don't see it is. Beyond that, we have to figure it out.

[Mona Khetan, analyst]

Sure. And any time lines on the rollout of retail products and color on the products will help?

[Pralay Mondal, executive]

Yes. So on the retail products, actually, to ask me, all retail products can be rolled out together once we have -- one, we have the a, customer franchise; b, the technology to roll it out, right? So we are working with our technology partners on LOS, LMS and so the risk of retail business is if you do it branch-centric or if you do it without technology, et cetera, it is either a very niche strategy or it will come back to bite you.

So we are working very hard on the technology framework. Policies, processes, all are ready. So maybe we are a little late into this and you have an impression that we have been talking about it, but there's a lot of work going on the technology side.

And once it happens, then things will happen very fast. So -- and retail, as you know, can't be built in one day. We have to build up the liability franchise in parallel in terms of customer base. So all of it will happen together. Parallelly, we'll do through partnerships, but what we'll not do is -- also we'll do co-lending as a business, which you can look at the underlying assets at retail, we'll look at securitization again on the line, we have done securitization primarily on the micro finance and gold so far.

But this year, I've been discussing with the team, we'll do securitization on, because I think businesses like CB and some of these things will come back [indiscernible] because with the infrastructure, there will be a lot of investments from the government. I think CVC -- I mean, commercial equipments and commercial vehicles, health care, all these businesses will start picking up. Some of these, we'll participate ourselves. So we are building a team. Some of this we'll participate through -- either through securitization or through partners or through online -- or through co-lending, we'll figure that out.

So all of these are different modules of building up a retail business. Something will be directly on our route, something could be through securitization route, something to co-lending route, we'll figure that out. But whichever way we do it, we will gradually build up a long-term retail highway for us.

[Mona Khetan, analyst]

And it is possible that these may not come up within FY '23 and get extended to FY '24 or...

[Pralay Mondal, executive]

There's no problem all. We don't need to rush into it because my experience is in retail. If you rush, you will make mistakes, okay? But that does not mean that we are not working on any of this. We'll do what is prudent for us. And we don't need all this for growth this year, okay? We have our clear strategy on how we'll grow our portfolio. And whatever we have planned for our growth, we'll do that irrespective retail contribution a big way or not. But retail will contribute in a big way next FY.

[Mona Khetan, analyst]

Got it. And on the recovery from written-off accounts, I understand it's adjusted against provisions in your case. Is that a fair assumption?

[B. Divakara, executive]

No, this year, we have done maximum recovery under written-off accounts. That is why, the credit cost is negative. So it has been netted off from the provisions to be made. In fact, we have made a reverse of INR 10 crores during the current year. So I think the recovery has been done. So bad debts recovered INR 78.7 crores, whereas provision to be made for NPAs is INR 68.9 crores. So we have made a net reversal of INR 9.8 crores during the current year.

[Mona Khetan, analyst]

Got it. And just finally, on the investment in technology that you spoke about. If I look at your OpEx to assets, which is a more stable indicator rather than the cost to income, it was at 3.2% for FY '22. So could one assume a similar kind of ratio going forward? Or could it rise given your technological investment plan?

[Pralay Mondal, executive]

It may marginally go up, but these are investments, these are not costs, as I said before, okay? Because we will not shy away from industry into technology. That's very clear. Because we are -- whenever we look at things, we don't look at quarter-to-quarter anymore. We want to look at the next 3 years, 5 years or 10 years. So to that extent, these investments are nothing.

And lot of technology cost will be CapEx first, right? So it does not hit you in the same year in a big way. I don't see too much of OpEx coming there. Only depreciation will come. So to that extent, it gets distributed over a period of time. But yes, we will invest lot more in technology this year and next 2 years, at least.

[Operator]

[Operator Instructions] The next question is from the line of Prasheel Shah from CapGrow Capital.

[Prasheel Shah, analyst]

Yes, actually, I wanted to continue on what I was talking about earlier. So see, what I'm trying to say is this year, we had an ROA of 1.9%, FY '22, right? This was aided by negative credit cost for most part of the year. Steady state credit cost for us would be around 1%, right? So if it is 1%, so from next year onwards, how do we plan on maintaining an ROA of 2% for FY '23? And especially because you just said that OpEx to average assets will be growing above 2%?

[Pralay Mondal, executive]

So -- see, there is not one, like banking business is not a monoline business. There are many tools to leverage. So one of the tools we leverage is noninterest income, okay? So this year, worst has happened on the treasury side, right? I mean, how much worst can happen this year? So -- not from our perspective, I'm talking about the cycle and from the market perspective.

And Mr. Divakara can explain that how good our portfolio and how safe our portfolio on the treasury side is in a rising interest rate cycle as well. So given that perspective, and in spite of the fact that our treasury income was very low compared to what it was the previous year, we could still manage our net interest income at a reasonable level.

You can see the momentum and not noninterest income on a reasonable level. This is happening because of core noninterest rate growth, which are third-party business, which are products businesses, which are liability and commission-oriented businesses. So these things, as we grow the balance sheet and if your focus is on growth, these things will multiply, right?

So I think some amount of noninterest income will start growing. There will be some pressure on NIM in the second half of the year, I'm sure for all the banks, not only for us. And as we said, that -- but I think those slippages should be under control. I don't see slippage as a problem because a big problem last year, we had multiple problems with us, in spite of the fact, we have done well, right?

The entire gold loan, 75%, 90%, that problem was a huge problem. I think the team has done a tremendous job in executing it, and we are today deciding that we have a reversal and all that. If you look at the year-on-year, it doesn't show. But if you look at quarter-on-quarter, the gold slippages and all that was significance and it has been controlled.

So this year, we can have a growth. Last year, we couldn't grow on the gold loan and tonnage, we did well, but because the 95% -- 90% and 75% were a problem. So there are certain positives which are there. Also, growth will come, right? Not everything is in ratios. It's also growth what would we get back. And then in absolute terms, we'll start doing well.

So overall, it's -- and for a moment, if I say that if we grow better and if my ROA comes down by 3 basis points, 4 basis points, 5 basis points, how does it matter? We are growing a franchise which is a much better long-term compounding growth story.

So that's the way we look at it. I don't want to be so my opinion in terms of saying that if we are in the 1.9% or something, we have to remain at 19%. It can be higher, it can be lower, we'll figure that out.

[B. Divakara, executive]

But even otherwise, you are expecting this interest rate to happen. Keeping this in mind, almost INR 2,000 crores of our amount has been invested in short-term assets in treasury. So essentially in treasury, which is at present giving a yield of around 3.5%. Now the 10-year G-sec is giving us a yield of almost 7.40%, if this gets replenished. So with that so clear, about 4% visibility is there to grow. So almost INR 2,000 crores and in the HTM category itself, we have got head room of almost INR 350 crores to INR 400 crores investments we can make.

So without bothering about the investment depreciation likely to come if the rate of interest is likely to go further. So to that extent, we are protected. So we have invested in short-term assets essentially in treasury since that gets invested in some other alternate opportunities wherein we will be getting a higher rate of interest. That's more or less. So it will give us the referred income to sustain this level of 1.90% to 2%.

[Prasheel Shah, analyst]

Okay. And I mean, I believe the balance sheet is doing really well in terms of asset quality, right? The quality is solid, I agree with you. So on the growth part, are you willing to put a number to how much do you think you will be growing in the next 2 to 3 years?

[Pralay Mondal, executive]

So I already told that I thought, I said that if the system grows at an x percentage, we'll grow faster than that. How much faster? Maybe in the next 2, 3 quarters, we'll tell you more confidently. But we'll definitely grow faster than the system. And if you ask me the question about the next 3 years, I can tell you that we'll grow faster than the system by close to 1.5% -- 1.5x in 3 years, not right now.

[Operator]

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

[Pralay Mondal, executive]

Thank you, and thank you, everybody, for participating. We are very excited with the prospect of having a -- I don't want to look at it as of next one year. As I said, we want to look at 3 years, 5 years and 10 years kind of horizon. And we are looking at that long term when we look at any strategic decisions, and there are a lot of strategic decisions we're taking in the bank today. We are building the bank for the future.

We are building growth, mindset, and we are building product services as a full service bank, as I said in the beginning. So I don't want to look at quarter-to-quarter, at least we want to look at year-to-year as we build the franchise. So thank you for being on the call, and we look forward to your support, and I'm sure that will not disappoint you. Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Axis Capital Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.