Private sector lender CSB Bank on Friday reported a 10 per cent rise in net profit at Rs 133 crore in the second quarter ended September 2023 as bad loans declined. The Kerala-based bank had posted a net profit of Rs 121 crore in the year-ago period.
Total income rose to Rs 836 crore from Rs 600 crore in the same period a year ago, CSB Bank said in a regulatory filing. During the quarter, the bank earned interest income of Rs 687 crore as compared to Rs 555 crore in the same period a year ago.
On the asset quality side, the bank witnessed improvement with gross non-performing assets (NPAs) fell to 1.27 per cent of gross advances by the end of September 2023 from 1.65 per cent a year ago. Net NPAs too declined to 0.33 per cent from 0.57 per cent in the same quarter a year ago.
Some questions that Iâm still not very clear about:
What is CSB Bankâs moat exactly?
Is it just their history, bank branch network and customer relationships? What is preventing the other banks from taking market share from them? If it is just the branch network? Would their moat potentially decline in the future, when more people start using mobile and digital banking? If that happens, the branch network becomes more of a liability than an asset, as you need to rent out the branches and pay staff even though branch footfalls decline.
On a national level, how can CSB bank compete with the likes of HDFC, ICICI, Kotak (traditional) and Jio finance / PhonePe (digital / neo-banks)? The traditional banks have much bigger scale and investment power, while the new digital banks are much more agile in terms of offering mobile and digital banking solutions. CSB seems to be somewhere in the middle of these two
Gold loans: their loan book is heavily skewed towards gold loans (~48% of total loan book). What would happen if gold prices decline? Looking at historical gold prices, there have been periods with large declines: gold price dropped ~40% from 2011 to 2015. Would CSB be able to absorb this sort of decline? They hold 11,818 Cr. of gold on their books as collateral. If gold price declines 40%, that is a decline of around 4727 Cr. (close to their current market cap of 5718 Cr.). Of course, it wouldnât be a direct loss for the bank, as the gold is not âownedâ by them, but rather owned by the customers whoâve taken a loan against the gold. However, in a recession-like scenario, where loan defaults increase while gold prices drop, would it cause an existential crisis for CSB bank?
I donât think there is any moat. Banking industry is quite vanilla in nature itself. The point in favor of CSB bank is small market cap and small geographical presence and thus a headroom for growth. Under the leadership of Pranoy Monday(2022-present, he has also roped in new senior management), bank has aspirations of going pan India which should inevitably bring growth at such low market cap.
I did some more digging into CSB bank. I think I have identified one clear moat which has also been their growth engine for the last 6 years: gold loans. Since 2019, CSBâs gold loan book has grown 32% CAGR - going from 26% of their loan book to 48% at the end of Q4 2024. They have been able to do this, as they charge only around 9.5%~12% interest for these loans vs. Muthoot / Manappuram (the largest gold loan players) who charge 20%~25% interest. I think they charge less interest because they lend to more safe customers than Muthoot. This can be seen via their NPA ratios: CSB has 0.5% NNPA vs. Muthoot at 3% (meaning 6x more defaults at Muthoot). CSBâs gold loan book at âš118Bn is 16% of Muthoot, who is at âš729Bn. CSBâs moat here is low interest rates combined with being a trusted bank with a good branch network in Kerala and TN (seen below) - so people are not wary of trusting CSB to hold their gold safe.
Pralay Mondal (CSBâs MD & CEO) is cautious about gold loan growth. My guess is that the pool of safe customers for gold loans is limited. So, I donât expect them to ever reach the scale of Muthoot / Manappuram. Mr Mondal also mentions that he expects âwholesaleâ and SME business to grow faster next year (which can be seen already from Q4 2023 to Q4 2024). Gold loans have a higher NIM and lower net NPA than Wholesale & SME Loans, so these will potentially both be impacted if gold loan share of total loan book reduces. Link to the interview.
However, if they manage to maintain their NIM at 4%~5%, I donât see a reason for concern. For comparison: HDFC, ICICI and Kotak have NIMs of 3.6%, 4.4% and 5.3% respectively, while Muthoot and Mannapuram have NIMs of 11.6% and 15%. I double whether the latter is sustainable long-term, especially when loan customers get more internet savvy and are able to compare loan interest rates across banks/NBFCs.
In summary, CSB seems to be a promising bank , which will grow at 10%~15%+ in the next few years, as India is still very credit-starved and more people will move up the wealth pyramid from low-income to the aspirational / middle-class.
Where everyone was panicking about the asset quality CSB Bank stood out for me, as being a small bank, it improved its asset quality this quarter and in my opinion is one of the best among small banks. Though there could be cockroaches that may unearth themselves going forward. Some highlights
Asset Quality:
GNPA & NNPA Ratios: Lower than the September quarter. GNPA was at 1.58%, and NNPA was at 0.64%, compared to 1.68% and 0.69% in Q2 FY25, respectively. This indicates an improvement in asset quality compared to the previous quarter, with a reduction in bad loans.
Provision Coverage Ratio (PCR): Increased to 60.12% without PWO. The bank aims to increase this to 70%. The bank also holds a provisioning buffer of approximately âš181 crores, above regulatory requirements.
Asset Growth:
Net Advance Growth: Increased by 26% YoY, more than twice the industry growth of 12%. This demonstrates a significant increase in lending activity.
Gold Portfolio: Registered a growth of 36% YoY. This is a strong area of growth for the bank.
Other Retail: Grew by 32% YoY. This demonstrates strong growth in the retail sector.
SME Growth: Increased by 29% YoY. This indicates a stable growth in the SME sector.
Core Corporate Book: Recorded growth of over 30%. This shows the bank is growing its core corporate business.
Overall WSB Growth: Increased by 5% mainly due to the liquidation of the DA portfolio and few exits.
*The bank has added 34 new branches and merged 6 during the year, bringing the total to 807 branches and 777 ATMs
*The bank has been slowing growth in unsecured loans and MFI, which has led to lower NPA ratios
The result were good talk to their conservative lending and good strategy to build a lasting franchise. It is not going to be easy but if they walk the talk then we can have a winner. But as guided by management they will have compressions in margins and profits is not the focus for next 3 years. They are following customer life cycle