High yield comes with high risk in the long run, says Pralay Mondal

He explains the reasons behind flat profit growth in the third quarter (Q3) and margin compression

PRALAY MONDAL, managing director and chief executive officer of CSB Bank, explains the reasons behind flat profit growth in the third quarter (Q3) and margin compression in a telephonic interaction with Manojit Saha. Edited excerpts:

 

CSB Bank’s Q3 net profit was flat year-on-year at Rs 152 crore, mainly due to a sharp rise in interest expenses. What was the reason for such an increase? 

Our quarter-on-quarter profit has been quite good. And if you look at operating profit, it has also grown.

 

Our interest cost has gone up for two or three reasons. One is the tight liquidity in the market. We are a small bank, and our liability franchise will start building only next year, once our core system is in place, which we are putting in place in the first half of next year. After that, we will build up the full liability franchise. Until then, we don’t have a liability franchise like a larger bank. Our current account savings account (Casa) franchise is also somewhat average. So, to that extent, Casa growth is also muted.

 

We also grew by 25-26 per cent in assets, which is more than double the industry growth. What we did is, in addition to deposits, we also picked up certificates of deposit and foreign currency borrowings from the International Finance Corporation (IFC) and HSBC, where the initial cost is slightly higher than deposits. But because it is SOFR-linked (secured overnight financing rate) and hence variable, once the SOFR starts coming down internationally — this is a three-year tenor — it will help us bring down the overall cost a little bit as and when interest rates start coming down.

 

How much was the overall fundraise from IFC and HSBC? 

Overall, I think we have around Rs 3,300 crore.

 

These funds came in Q3. 

They came over two or three quarters, but the IFC fund came in Q3. And HSBC came before, though some of it also came in this quarter.

 

CSB’s yield on advances has come down, while the cost of deposits has risen. As a result, net interest margin (NIM) fell to 4.11 per cent in Q3, both year-on-year and sequentially. 

There are three or four businesses we have been constantly reducing over the past few quarters.

 

One is a personal loan, one is microfinance, one is agri-lending, and unsecured loan. So, the overall unsecured book, including microfinance, is around 4 per cent. This is a call I took about two years ago. I just said, “Let us be careful”, and hence we stopped, and even two-wheeler loans were reduced.

 

These are all high-yielding products. Two-wheeler loans, personal loans, credit cards, and microfinance — all have upwards of 15 per cent, 16 per cent, and 17 per cent interest rates.

 

Because we have been reducing these, our yields have come down on the retail side. The second thing is that on wholesale, we exited a large portfolio, a large account, which had high yields. I don’t like high-yield businesses. A high yield comes with high risk in the long run. The account was very good when we exited it.

 

So, our wholesale yield also came down. Our small and medium-sized enterprise yield held on. Retail yield came down, and gold remained roughly the same. So, given that, our yield, instead of going up, came down slightly because of risk aversion — not because of any other reason, but because we didn’t want to take those risks.

 

I think NIM will sustain at these levels or maybe come down a little bit lower; we don’t know. But standalone, a 4 per cent NIM is not so bad. I am quite happy with anything between 4.2 per cent and 4.5 per cent. That’s not an issue.

 

What was the liquidity coverage ratio (LCR) as of December 31? 

Our average LCR was 119 per cent, which we reported in our investor presentation. But we ended the year at 131 per cent because the IFC money came in the last 10 days. Because of that, it went up.

 

If the draft LCR norms kick in from April 1, which proposes additional runoff factors, what will be the impact? 

Sometimes, some negatives also become positives. Our Casa ratio is low, and within that, our penetration of netbanking and mobile banking is not as high as some large private banks like HDFC and ICICI. So, in a way, if it all comes, our LCR impact will be less than 8 per cent. I’m not so worried about the LCR at this point. It will be more than 110 per cent even then.