CSB Bank expects more margin squeeze

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Private sector lender CSB Bank asset quality deteriorated in January-March, slippages were elevated, and the corporate book shrunk although deposit momentum is strong.

The bank reported a 3.1% year-on-year (YoY) dip in net profit to ₹152 crore for and a net profit of ₹156 crore.

The stock was down 3% at ₹373 today (April 26).

Pralay Mondal, MD and CEO, of CSB Bank told CNBC-TV18 that the banking sector is currently experiencing a transition in net interest margins (NIMs) primarily due to rising deposit costs.

CSB’s NIM has narrowed to around 5%, and it is anticipated to remain between 4.5% and 5% next year, leaning closer to 5%.

This impact could last for another quarter due to residual high deposit costs.

The bank’s shifting focus towards wholesale SME retail, which currently makes up nearly 48% of its portfolio, may also slightly impact the NIM, but any potential decrease is expected to be offset by an increase in fee income and business, he said.

These are the edited excerpts.

Q: The first question that shareholders have is about the deterioration in asset quality. Can you tell us what led to this surge in slippages? Was there any one-off this quarter? And what are the average slippages that the bank would have over the next few quarters?

A: Our gross NPA and net NPA did slip a little bit this quarter. But as you rightly said it is a one-off, there was one account which has a coverage of around ₹70 crore with us right now outstanding. And for some technical reasons, it slipped this quarter though it was not on our watch list at all. So that’s why we didn’t discuss it last quarter otherwise we would have given disclosure. We are pretty confident that we will reverse this definitely in this fiscal year and hopefully in the next two quarters.

And if you take this out now, how does it impact the overall non-performing assets (NPA)? There is ₹18 crore in terms of provisioning because we do ₹25 crore provisioning and there’s another ₹22 crore of around interest impact which overall takes up to ₹20 crore. If you take that ₹20 crore out, I think overall GNPA and NNPA, PCR, the coverage ratio all of that looks typically the way we have been covering for the full year.

Next year, we will be in line with what we had been till Q3 this year in terms of Gross NPA and net NPA. Coverage and slippages will be similar to what we are till Q3FY24.

Q: You’re saying the slippages on an average would be what you did in Q3, which was around ₹40 crore odd? That would be the average that you’re looking at over the next couple of quarters or will it be much higher than that?

A: On a percentage basis, yes. And overall GNPA will be somewhere between 1.3 and 1.4 and NNPA will be somewhere between 0.3 and 0.35. And we will be back above 70% in terms of our PCR, which is the coverage ratio.

While we’re talking about credit cost, our credit costs for the full year basis are two basis points negative. So it has not really impacted the overall yearly numbers and we hope that next year also our credit cost should be below 10 basis points.

Q: You don’t think this is exceptionally low? You don’t think that will sort of much normalise? Can you contextualise that in the context of CSB and then also talk to us about net interest margins (NIMs)? What’s your sense for that for FY25?

A: You are right. The bigger banks will have more normalised kind of numbers. For us, we must appreciate that more than 45% of our portfolio is gold loans where the slippages and NPAs are very low. Credit costs are almost close to zero. So to that extent, it helps us.

Also, if you look at the last two years, we have been closer to zero in terms of our overall credit cost. So I’m being pretty conservative when I’m talking about 10 basis points in terms of credit costs next year. Hopefully, it will be less than that.

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Coming to NIMs, yes, you’re right. I think the entire banking system is going through a little bit of a transition on the NIM because deposit costs have gone up for everybody. That is true for us as well. Our NIM has come closer to 5% now, and next year, I think we’ll be somewhere between 4.5% and 5% – closer to 5%. And that’s primarily because of two reasons. One is some tail of the deposit costs will continue to impact the entire ecosystem, including us for another quarter or so. But that will be not much. The other reason is we also are planning to shift our asset book gradually more towards wholesale SME retail. Because today the gold is almost 48%. So to that extent, I think the NIM will get a little impacted, but it will be compensated by our overall fee income and fee businesses. And hence, from our overall ROI perspective, we should close this year around 1.79. I think we should be able to hold close to that. All right.

Q: There’s another player in the gold business, which is IIFL. Have you seen any kind of shift towards banks? Have that been more inquiries for your gold loan business?

A: I think we are in a different segment of business because typically the interest, which we charge our customers is in the range of 12-12.5% or even less and non-banking financial companies’ (NBFCs) interest rates are almost 50% higher than us. So to the extent, the segments which you’re talking about are very different. So it will not necessarily give us more business.

The second question which Prashant had asked, I think I just sort of wanted to allude to is overall, I think the wholesale side of the business will grow for us next year. And SMEs also will grow next year. So to that extent, the gold portfolio impact will be a little lesser, and hence, overall, our balance sheet will look a little more balanced from that perspective. But coming through next year’s growth, I think gold growth will continue to grow for us, but not at the cost of others. We have our own ways of building our portfolio, and we’ll do that.

Q: Just wanted to ask you – are there some inorganic growth plans because there is some kind of buzz that maybe CSB is on the prowl, and maybe one of those public sector undertaking (PSU) banks could be on your radar. It’s happened in the past – if you recall – with the Bank of Maharashtra I think so. Are you on the prowl again, are you looking at any PSU bank?

A: Purely from a CSB perspective, I can tell you that we are building the bank completely organically. I can’t answer on behalf of Fairfax, which is an investing company, and they can look at whatever opportunities they want to look at. But from our perspective, we are looking at organically growing the book. And if you look at our biggest investment this year is in technology and most of our technology investments are not in line with the bank you’re talking about. Our systems are different. So to the extent had I known that something is happening, then I would have done it differently.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow