- Shares slumped 14% despite a 21% YoY jump in net interest income.
- Gross NPAs rose to 1.96% and net NPAs to 0.67% – the first quarterly uptick in a year.
- Deposits grew 21% YoY, but CASA ratio lingered at 21%, limiting low‑cost funding.
- Cost‑income ratio improved to 60%, yet asset quality erosion could pressure margins.
- Capital adequacy remains robust at 19.41%, offering a buffer against downside scenarios.
Most investors ignored the warning signs in CSB Bank’s latest numbers. That was a mistake.
Why CSB Bank’s Profit Flatline Is a Red Flag
CSB Bank reported a net profit of ₹153 crore for Q3 FY26, virtually unchanged from ₹152 crore a year earlier. On the surface, a flat profit might look benign, but the context is critical. Net interest income (NII) surged 21% YoY to ₹453 crore, and non‑interest income climbed 26% YoY to ₹276 crore. The earnings boost was essentially eaten away by rising credit costs and a marginal increase in provisioning for bad loans.
In banking, profit growth should ideally outpace credit expansion. Here, advances grew 28% YoY, driven by a 46% jump in gold loans and a 40% rise in wholesale lending. Such rapid loan growth often precedes asset‑quality stress, especially when the loan book’s composition tilts toward higher‑risk segments.
Asset Quality Deterioration: What It Means for the Banking Sector
Gross non‑performing assets (NPAs) climbed to 1.96% from 1.81% in the prior quarter – a 15‑basis‑point rise. Net NPAs, the more refined metric after accounting for provisions, rose to 0.67% from 0.52%. While these figures are still below the sector average of roughly 2% for mid‑tier banks, the upward trajectory is concerning because it marks the first quarter‑on‑quarter increase in over a year.
Historically, Indian mid‑size banks that experience consecutive NPA upticks often see margin compression in the following two quarters. For example, Bank of Baroda’s NPAs spiked in FY22, and its net interest margin (NIM) fell from 4.1% to 3.5% over the next six months. Investors should therefore monitor whether CSB Bank can contain credit‑risk exposure, especially in its fast‑growing gold‑loan and wholesale portfolios.
Deposit and Advance Growth – Is the Momentum Sustainable?
Deposits rose 21% YoY to ₹40,460 crore, a healthy sign of funding strength. However, the CASA (Current Account Savings Account) ratio stayed at 21%, indicating that only a fifth of deposits are low‑cost. The majority are term deposits, which carry higher interest expense and compress NIM.
Comparatively, peers such as Federal Bank and IndusInd Bank maintain CASA ratios above 35%, giving them a natural cost advantage. If CSB Bank cannot improve its CASA mix, the cost‑income ratio improvement to 60% may be short‑lived, especially as competition for low‑cost deposits intensifies.
Cost Efficiency and Capital Adequacy: The Safety Cushion
The bank’s cost‑income ratio fell from 63% in Q3 FY25 to 60% in Q3 FY26, reflecting better expense control. Operating profit rose 32% YoY to ₹292 crore, and the net interest margin (NIM) hit 3.86%, the highest quarterly figure for FY26.
Capital adequacy remains a strong point. The Capital Adequacy Ratio (CAR) sits at 19.41%, comfortably above the regulatory minimum of 15% and even the higher benchmark of 17% for systemically important banks. This buffer can absorb unexpected loan losses, but it also raises the question of capital efficiency—whether the bank is deploying its capital to generate sufficient returns.
Investor Playbook: Bull vs Bear Cases for CSB Bank
Bull Case: If CSB Bank can arrest the NPA creep and improve its CASA ratio, the current valuation—trading at a price‑to‑book (P/B) of around 1.2—offers upside. Continued NII growth, coupled with disciplined cost management, could push NIM above 4%, aligning the bank with the higher‑margin peers.
Bear Case: Persistent asset‑quality deterioration and a low CASA mix could erode margins, forcing the stock to test lower support levels around ₹380. Any regulatory push for higher provisioning would further squeeze profit, making the recent 14% sell‑off the beginning of a longer downtrend.
Investors should watch three leading indicators over the next quarter: (1) change in gross and net NPA percentages, (2) CASA ratio movement, and (3) NIM trajectory. A combination of improving asset quality and a rising CASA ratio would validate a bullish stance; the opposite would merit caution.