City Union Bank Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. Our first question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.

Yes, hi, good evening, sir , and thanks for the opportunity. And many congratulations on a meaningful career at City Union Bank, driving the bank to a very impressive height, and creating shareholder value. Sir, my first question is regarding gold loan. So far, the gold loans have grown at a much faster pace than overall loans, and I believe this is not an asset quality issue at all. But I just wanted to understand the risk practices here in the sens e that, let's say, in January, February, from the peak of gold loan prices, gold prices have come down by 10% to 15%. So how do we manage the risk management for those portfolios that have originated at let us say INR165K of a 10-gram gold loan? So, if the loan—gold loan — was originated at INR165, it has come down by 10% to 15%. While at the portfolio level the LTV is very respectable, very manageable, how do you manage the risk in that portfolio?

See, thankfully, we had the experience of 2014 when you had a similar gold price crash, which gave us some sleepless nights, but ultimately we ended up in not missing much but about had to book a loss of about INR5 crores or something like that only, but we had to go through a painful process of auctioning and things like that. So, keeping all those things into account, when they say the gold price crossed beyond say INR12,000 and things like that, we did not increase the per gram rate beyond that. So, when it went to that INR15,000, INR16,000 and all , we had continued to give at the range of around INR10,000 per gram, or not, we had never crossed INR10,300 or something like that. So, we have sufficient cushion built into gold loans that were issued when the share price was at that level. As we had a higher margin when we gave that loan, so that is not giving us any concern at this point in time. And even if another like say 10 %, 15 % crash, which is unlikely , we will still be having this in addition to the RBI given LTV margins. W e have sufficient cushion at this point of time. So that is not a concern at this point in time.

Okay. So, I mean, even irrespective of gold loan prices, you would have kept per-gram gold lending at what you said, INR1,000, INR1,100 at max, right?

Yes, not only us, almost the entire banking industry had that discipline, and there was no undue competition . So, when the price increase was too sharp, we all adopted a wait -and-watch policy, and I don't think any bank ever offered, say, a per-gram rate beyond INR11,000 and all. Even INR10,500 was something that was maximum even at the peak level of INR15,000, INR16,000, whatever that happened.

Okay. Great to know , sir. Secondly, on the cost of deposit and the yield on advances. For this quarter, the cost of deposit and the reported cost of deposit have increased by 3 basis points. Does this mean that, if there is no change in the rates in the deposit rates, card rates, the cost of deposit should start rising, or is there something unique to this quarter, and next quarter we should still see cost of deposit moderating, or how to look at cost of deposit incrementally? Have they bottomed now, should move up?

See, there were some amount of fine -tuning when we saw wha t is that advance growth rate increasing at a much faster rate, some amount of 10, 15, 20, 25 basis points at that we had to fine-tune the rates to ensure that we get retail term deposits as usual with the flow so that we are not stopping the credit growth for not having the deposits per se. But what I have to say is that it gave us a sufficient cushion so that we could even retire the high cost certificates of deposits and things like that. See, the one thing you have to keep in mind is that the 3 -basis point, 5-basis point difference could happen even because of the variations in the average CASA rates. These are all finer things you can monitor and control. You have to just report whatever that comes into. But what I can say is that there were no significant changes that happened in between and that's why we could almost have an incremental CD ratio of 100 percent. We can, in fact, still maintain the liquidity coverage ratio, and we can go for another INR3,000 crores of advances without increasing the deposits and that much elbow room is also available. These sorts of tactical decisions we take depending upon the day -to-day ALM and the regulations that are prevailing, and don't read too much into a 3 basis point thing. But what is available to you, it is very much on the table , is that on one side you had seen the rates getting reduced by the Central Bank, at the same time you saw the 10-year bond yields increasing, there were dichotomous responses with the liquidity, market rate, bank rate , and I mean rates given by the Central Banks and all. They are not going in tandem , which they normally used to do during the normal business environment, because of so many changes due to the Iran war, when you saw a lot of fluctuations in the flight of capital from one place to another, like there are so many factors that were happening. But we had even though we had terrifying fluctuations and signals in the TV panels, the operating level there was absolutely smooth and we did not have any issue, but how long this calm will continue, whether it will continue like this or whether it is a calm before storm, all these things depend upon how long the conflict goes there, whether you will have higher inflation because of the oil prices and things like that. So other fac tors are there, but up to this , don't read too much into these 3 basis points, 4 basis points, and all.

Right, sir. And sir similarly on yield on advances, there was a 25-basis point rate cut even for the last 6 or maybe 12 months, the yield o n advances are only even on a Y-o-Y basis is only down by 13 basis point. In the mix, we had a higher proportion of gold, so that is what may be helping. But have you passed on, I mean I'm sure you have passed on the 25-basis point and the MCLR book is also -- has that also been reprised? So, assuming no change in the RBI policy rate, how should one look at the yield on advances incrementally, sir?

See, you may remember, I think in the last con call we said the passing of the rates was complete d somewhere in the month of December, if I remember correctly, we specifically gave that, and that part is through. The incremental book, let's say for example it's a new contract and incrementally the weighted average yield is holding up, and that's why we are able to have, as you rightly said, 30 percent of our book is in gold loan, which is in the fixed rate, and non- agri gold loans are having even double-digit yields. So even though you have only that mathematically speaking , only that let's say 65 percent of the portfolio or sort of incrementally the yields are holding up, and that's why we are able to see the margins holding to a greater extent.

Sir, you would have passed on the rates , but the spreads you would have managed better, right? So that is why the yields did not drop as much apart from the gold loan and mix change?

Exactly, that's why I said. Since 30 percent plus is on the fixed rate, maybe about the remaining 70 percent you can perhaps take apart from the other loans and all, about say two -thirds would have had that passing on. And incremental whatever the INR5,000-odd crores we booked in the second half, since we were able to book at the enhanced incremental yield, overall, we were able to maintain the margin.

Right, sir. And second last question on ROA, right? So, we have delivered a very stable 1.5%, 1.55% kind of ROA, and maybe 1.56% this quarter. When do we achieve the next level, sir? I mean the growth is now coming back very, very strongly, margins hopefully as you said should be more or less stable. So, when do we go to the next level, let's say 1.7%, 1.8% ROA? I mean , what would be your sense for the next year ROA?

Technically speaking, it is a futuristic question for which Vijay Anandh should answer. Before handing over the mic, maybe I can say one thing. Like you have started seeing in your DuPont analysis the operating profit margin has started holding up and the we had to go for extra provision for NPA because honestly speaking, somewhere around 2013 -'14 we decided to have our net NPA always above 1 %, because keeping it less than 1 % was not giving us elbow room to manoeuvre things and it was giving us extra mental pressure to manage, and that was reasonably good compared to the peers in the sector. That was the time when the AQR and all started, and thi ngs were much worthier for the industry as a whole, and we wanted to use Phase 2 to have higher things . So now , since the industry environment has changed, when stage by stage we had to, as you know, during the COVID period, the slippage ratio increased by about 1 % point more than normally. We used to have two, which has come down substantially. That too in fact increased to 3 percent during the COVID period, the data is already there with you, and the recoveries were also not happening because the courts were not functioning. So, because of the last two to three years, we had to make substantial provisions to continuously reduce the gross NPA and net NPA %, and thankfully, because of the recoveries more than the slippages and also making more provisions, we are able to have the coverage ratio also improved. So, since it has reduced maybe after it reaches further down, maybe we will get some extra elbow room even after making provisions for your ECL provisions and all, there will be some cushion which can improve ROA. But it is not fair on my part to explain further, over to Vijay Anandh, please.

Absolutely, sir. I think we should exit this year with at least 10 bps more in ROA, so we should be there between 1.65% to 1.67%. That's the number probably we will plan basis the retail income deliverable and little bit of cost - to-income coming down. That's the endeavour to get there.

Okay, great, sir. And last question, sir, on your association after...

Yes, one minute. As we are talking, looks like the ECL circular has come. Looks like it has now asked the banks to adjust in the opening balance itself in the reserve so that no impact on the P&L. And since we have 20 % plus Tier 1 equity, let's say I don't think we will let's say the ECL provisioning requirement may not be there in the future, which is also a good news which we just we are receiving.

Great, sir. The last question is, sir, on your association of course after demitting the executive role, I mean, sorry, what is the plan ahead? Do you intend to be there as a Non-Executive Director or you know that is not confirmed as yet or how do we see that transition, sir? Thank you.

I'm honoured by this question and Board also asked me for my comfort to join the Board in the non-executive capacity, which I'm honoured for that offer. So, it depends upon the regulatory comfort. Looking into the comfort of the regulator at appropriate time a call will be taken in future, whatever time frame on ge tting the acceptance you have on the comfort of the regulator we will be taking a call on this front. At the same time, Board has offered me an honorary position as the Chairman of the City Union Bank Foundation, which is the CSR arm of the bank, to overse e the implementation of the CSR projects. And the same was offered to my predecessor and Guru Shri Balasubramaniam. So, he continued as MD and CEO when I took over in 2011 as MD and CEO, he was Non -Executive Chairman of the Board. After he had to retire after completing his 8-year tenure after the regulatory 70 years of age at that point of time. So, after that Board offe red him the position of City Union Bank Foundation and he had relinquished that position to me. So, post laying down the office as MD and CEO of the bank, I'll be honoured to take the position of Chairman City Union Bank Foundation. And any non -executive in the bank or the Board and all, it depends upon the regulatory comfort . Once we get a positive feedback, we'll take a call on the Board will take a call on that.

Right, very clear, sir. Thank you and all the very best, sir. Thanks a lot, sir.

Thank you. Our next question comes from the line of MB Mahesh from Kotak Securities. Please go ahead.

Thanks a lot. It's been amazing 15 years that you have given us, trying to understand the bank and the sector in detail. Just two questions from my side. One is internally at the Board level; do you have an upper limit on how much of gold loans the bank ca n take, and has there been any change recently? Number one. And the second question, when you look at the demand for MSME loans that you're seeing on the ground, if you could just kind of give some colour as to is this just simply working capital utilization that is going up taking advantage of raw material prices, cash flow mismatches, what is the nature of the demand that you're seeing on the ground? Or are you doing much higher balance transfers as compared to what you did earlier? These are my two questions. Thank you.

Yes, thank you, Mahesh. By the way when you said you're trying to understand the bank maybe at least I think in 15 years is a long time to understand, I think I hope you have that part is through because you have been interacting for quite some time and thanks for all the support and interaction whatever we had. See, on gold loan, basically, the 30, 31, 32 itself is like say we are almost at the upper band. Even if it is a, w hat is that sweet Kheer, you will not be able to take beyond couple of cups or so. You need limit for everything. Maybe there could be that 1% or 2% here and there increase. So that 1% or 2% fluctuations could be there, but when it crosses 30, at least we have to take it with a pinch of salt is the approach which we keep for the gold loan, and this is something which we have to accept. On the MSME front, the growth is because of the combination of all the factors which you mentioned. In fact, you may recal l when the RBI policy statement was given out, it in fact talks about the capacity utilization of the economy has in fact increased, which went to about 70% post COVID. You will normally see capacity expansions happening when it crosses 84%, 85% and all. You are able to see things reaching there and we could see many of these units are reaching their near capacity level, they are going for expansion, the utilization of the CC limit and all these things are happening. And in fact, when you compare that with the lowest SMA level which you are seeing, particularly in this geography where we are having our significant portion of our exposure, it's the combination of all the factors which you mentioned.

Just one clarification. When will you start tightening the filters on underwriting? As in what will it take for you to decide saying that things on the ground is starting to get a little bit more riskier than before? Given that we know where the fuel prices are and we know that there will be some impact on demand, what will it take for you to tighten the belt on that front?

See, one numerical number will be your SMA numbers, first part. Second thing will be the anecdotal feedbacks which you get from the customers. See, day - in and day-out when we are at our central office, at least every day, we will be having not less than 4, 5 customer interactions when people who meet us will be of reasonably medium level all. So whether we sit in our office or we go visit the branches and during the reviews, the feedbacks from the anecdotes which we get from our branch managers, from the customers we meet day in and day out, coupled with the SMA numbers what we are seeing, we will, get a feel. That's how over the last 15 years to greater extent whatever I had felt during this interaction I have shared with you all during the con-call. So, the common sense says that you have to enter into the tougher period because of like say your inflation or global prices or things like that. And we are closely monitoring the situation keeping our eyes and ears on the ground to get the feedback. So basically one thing which you have to see very clear is, the business loans whatever we are giving, there could be finer changes in the filters and all. Whenever the filters which we are trying to fit, you should be convinced that they have sufficient resilience to run over through multiple business cycles. Maybe like that incremental slippage rate of maybe 1% or 2% extra may come because of this economic cycles and all. Maybe six months down the line if the economic downturn if at all it happens, it is going to affect all the existing customers also. So the, the filter whatever we are we keep will go with some extra caution, that is one thing, but at the same time we have to be very clear that unless and until something like that COVID happens and all, in other business cycles and all, the underwriting and all like we normally look into multiple business cycles and not just for like one or two downturns through which you are passing through.

Right, sir. So, one last question. What proportion of your loans would now be covered under the CGTMSE scheme or any other scheme of the government?

It's very minuscule. Jayaraman, do you have the data with you? I don't think it is going to be more than 3% to 4%.

And you think it's not useful to take a cover today?

No, see, there are multiple things. One, like say when you ask for the, the most of the customers when you deal with, they are ha ppy with giving extra collateral and taking loans with the lesser rate rather than paying the CGTMSE premium.

Okay. Sorry, Jayaraman Sir, was saying a number. I just wanted to just take a note of that, sir.

Number is linked at 3%, mostly around 2% to 3%, that's all.

Perfect, sir. Okay, thank you, sir.

Okay.

Thank you. Our next question comes from the line of Soubir Samadder from Axis Capital. Please go ahead.

Yes, hi, sir. Am I audible?

Yes, hi. Thanks for taking my questions, sir. So, a few minutes ago you said that with the new ECL regulations coming in, the banks would have to adjust through the opening balanc e itself and not through reserves, and hence not much incremental provisions will be required on the ECL front. However, the floor rates have been unchanged. So, I was wondering if , at this point, you would be more comfortable sharing your view on what the impact would be on the steady state credit costs? Yes, that's all.

See, at least fortunately, this difficult question I have to pass and Vijay Anandh has to answer. But what I have to say is that if you had a chance to look into that 15-year figure, what we have given in our presentation, you can say in fact it is there in terms of credit cost post accounting for the recoveries from the written-off assets, the net provision in 2010 -'11, it was 0.41, 0.15, 0.25, 0.5, 0.4, 0.5. It was 0.09 in '2 4-'25 and 0.04 in '25 -'26 and all. The average works out to about 0.60 or so over the period of last 15 years. Now with the improved underwriting based on the AI and the improved LOS and all, my expectation is that at least there has to be 50% reduction i n this number in the next 15 years or so. But individual years, there could be aberrations as you move forward.

Thank you. Our next question comes from the line of Suresh Ganapathy from Macquarie Capital. Please go ahead.

Yes, hi. Thank you and congratulations, Dr. Kamakodi, for a very eventful stint at City Union Bank for the past 15 years , and best wishes for all your future endeavours, sir. It's been a pleasure knowing you and interacting with you. My question is to Mr. Vijay Anandh, the new CEO. Sir, what made you decide to join this bank? I mean, you've been with RBL for a long period of time. You have worked in ICICI and other inst itutions. How do you see City Union Bank's culture here, how is it different from other organizations? Because you are, of course, stepping into big shoes now. So, we just wanted to know your perspective and your take having spent now almost couple of years with the bank.

It's been wonderful, sir. I've completed two years , and it's almost 25 months. I think, first of all, I hail from this town and I come with 28 years of experience and last 15 years I think I was in Bombay. From Bombay, I h ave moved to Kumbakonam. The major reason why I took up is that when I was interacting with Dr. Kamakodi and the Board, I was fully convinced that I should be here. I think my wavelength, my passion for what I wanted to do, was absolutely matching with where Dr.Kamakodi wants to take this bank to the next level, how he wants to take the bank to the next level. And I felt that getting into this 120 -year-old legacy institution , which has an impeccable track record and with the beautiful Board, I didn't even think twice, for sure. Culturally, I know that I will fit because I hail from this part of this town and my mother tongue is, of course, the same as what I speak here. So, a combination of factors, I think, made me move here for sure.

Suresh, just adding to what he said, I think this question you should have reserved for the get-together tomorrow.

It's a busy results season, sir, so I'm not sure whether I can make it. But yes, for whatever it is, I mean we just thought it'd be great to take his perspective and yes, to see. I mean, family and everybody is relocated to Kumbakonam, how is he handling those dynamics? Because these things are also at times important from fitting to the organization perspective, right, moving from Mumbai to Kumbakonam.

Yes, my parents stay in this part of the town, so...

Okay. Awesome, cool. That's very clear. Thank you, sir.

Sure. Thanks.

Thank you. We have no further questions, ladies and gentlemen. I would now like to hand the conference over to Dr. N. Kamakodi for closing comments. Over to you, sir.

Yes, thank you all for attending this call, and special thanks to Suresh, Mahesh, and all, because Suresh and all, perhaps we have been in touch for more than 15 years. I think even I remember the interaction we had in one of my travel to airport in the car itself. You all had been supportive of us over the period of time and because of you all I had a satisfying experience with the bank. And I thank you all for all the support you have given, and I am sure you will be continuing with the same support to Mr. Vijay Anandh. I look forward to meet you all tomorrow in perso n where we can discuss some more numbers. And more than that, it's a get-together time when we meet and exchange the good memories that we have had over a period of time. I thank Ambit for organizing this for over many years now. And I am once again looking forward to meeting you all tomorrow at the Grand Hyatt, Mumbai by 5:30. Anybody who had not received the invitation or given RSVP, kindly get in touch with Mr. Jayaraman whose number is given in the presentation or with Raguraman whose number is given in the presentation so that to confirm your presence which will help us to organize things better. And with this, I think I have completed a big responsibility , and it has been like a monkey is off my back. It's a moment of relief, because over the period of time handling things -- I mean, I was in fact telling, had I known it was going to be having so much weight, probably I would have thought multiple times before taking charge. But at that point in time, I was not aware that it was going to be so challenging and all. But your support and God had given, showered extraordinary blessings so that all the efforts whatever we took we were able to see results. Now and then few times, we had minor accidents and bruises, but there was no fr acture or bigger injury. It had been very satisfying tenure and with that satisfaction, I once again thank you all and looking forward to meet you all tomorrow. Thank you.

Thank you. On behalf of Ambit Capital, that concludes this conference. Th ank you all for joining us. You may now disconnect your lines.