City Union Bank Ltd

NSE:CUB

Q2-2026 Earnings Call

[Operator]

Ladies and gentlemen, good day, and welcome to City Union Bank Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Jignesh Shial. Thank you, and over to you, sir.

[Jignesh Shial, analyst]

Yes. Thank you, Bhoomika, and good evening, everyone. On behalf of AMBIT Capital, I would like to thank the management of City Union Bank for allowing us the opportunity to host this Q2 FY '26 and H1 FY '26 earnings call.

We have along with us Dr. N. Kamakodi, MD and CEO; Mr. R. Vijay Anandh, Executive Director; Mr. V. Ramesh, Executive Director; and Mr. J. Sadagopan, CFO.

I will now hand over the call to Dr. N. Kamakodi, MD and CEO of City Union Bank for his opening remarks. Over to you, sir.

[N. V. Kamakodi, executive]

Good evening, everyone. Hearty welcome to all of you for this conference call to discuss the unaudited financial results of our City Union Bank for the second quarter and half year ended 30th September 2025. Board approved the results today, and I hope all of you have received the copies of the results and presentation.

As you may recall, our bank had celebrated our 120 years of Swadeshi Banking legacy on 2nd September 2025 in the August presence of Honorable President of India and the Honorable Finance Minister. The function also had the gracious presence of Honorable Governor of Tamil Nadu and the Honorable Minister of Tamil Nadu. I take this opportunity to thank all our customers, dignitaries, stakeholders and all who have devoted their valuable time to attend this function and making this function a grand success. The speech of Honorable President of India is published in the official website of Rashtrapati Bhavan, and the link is provided in our investor presentation. Also, a link to our video recording of the function is given in the presentation.

As you may have also observed, bank celebrated its 122nd Foundation Day on Friday, 31st October. And the -- as you all know, the bank started -- received the certificate of registration on 31st October 1904, which is celebrated as the Foundation Day.

With these opening remarks, I hand over the mic to ED. Shri Vijay Anandh to take discussions further.

[R. Anandh, executive]

Thanks a lot, sir. Good evening. During last con call, we had shared with you our expectations for the current financial year as below. With our best efforts, we have accelerated the growth to mid-teens. We will continue to explore various avenues of advanced growth in addition to our core strength of MSME. With a growth engine up and running, we could see visibility in achieving mid-teen growth at least 2%, 3% over and above the industry. Our deposit growth is also back on track and aligning with credit growth. We were expecting the NIM in the range of 3.5% ROA to be expected in the range of current level of 1.5%. We will achieve our PAT growth with the help of better asset quality and our cost-to-income ratio will be in the range of 48% to 50%. These were the expectations which we shared.

For the current quarter, half yearly year ended, our performance is in tune with our expectations and in some parameters, we have exceeded our expectations. We have registered 18% advance growth in Q2 FY '26 year-on-year and our advances increased to INR 57,561 crores from INR 48,722 crores in Q2 FY '25. The positive momentum in growth achieved during the start of FY '24-'25 had geared up, and we have achieved double-digit credit growth in all the four quarters of FY '25 and also up to H1 FY '26.

In Q2 alone, our advances have grown by over INR 3,500 crores, which is close to 7% in a single quarter. Also, the growth of 18% is highest credit growth achieved in Q2 in the past decade.

Our secured retail portfolio is also growing in a steady manner, and this will improve the credit growth along with our core MSME going forward.

Deposits. Our deposits have grown by 21% and stood at INR 69,486 crores for Q2 FY '26 as compared to INR 57,369 crores in Q2 FY '25. Our deposit had increased by INR 3,700 crores or 6% growth sequentially. Our average CD ratio for Q2 FY '26 stood at 83%. The CASA percentage to total deposit increased marginally to 28% from 27% this quarter.

Asset quality. On asset quality front, as we had stated earlier, the trend of recoveries over and above slippages is continuing. For Q2 FY '26, the total slippages is INR 156 crores, while the total recoveries is INR 303 crores, consisting of INR 250 crores from live NPA accounts and INR 53 crores from technically written-off accounts, resulting in negative credit costs. Our gross NPA percentage had reduced to 2.42% in Q2 FY '26 from 2.99% in Q1 FY '26. Both gross NPA and net NPA, that is in both percentage and absolute terms is reducing quarter-by-quarter for the last 10 quarters continuously.

When compared to Q2 FY '25, the GNPA has reduced from 3.54%, which is 112 bps reduction. Similarly, our net NPA number had reduced to INR 513 crores and net NPA percentage is now at 0.90% in Q2 FY '26 as compared to 1.62% and the reduction is 72 bps year-on-year. Net NPA has come below 1% after 46 quarters, it was 0.89% in Q3 of financial year 2014.

Our overall SMA, including SMA0, 1 and 2 put together used to be in double digit in the earlier past, but the number started decreasing starting from Q2 FY '24. In our Q3 FY '25 con call, we had stated that it has come down to single-digit numbers. For the current quarter, the total SMA numbers stood around 5.60%, showing significant improvement. Our slippage numbers also had shown substantial improvement since last financial year, and it has reduced in the current quarter as well. Overall, SMA2 to total advances stands at 1.34% in Q2 FY '26 as against 1.59% in Q1 FY '26. In the corresponding period last year, that is Q2 FY '25, it was at 2.03%.

In our last con call, we also stated that we do not foresee any sudden spike in stress despite the uncertainty among multiple financial institutions on asset quality front on the background of U.S. tariffs on import.

We want to reiterate that our exposure to U.S. export is around INR 154 crores, covering textile, food processing, gems and jewelry and metal industries, et cetera, which are the major exporting industries to U.S. The exposure to U.S. export is 0.27% of our loan book, and hence, we do not foresee any material impact on the asset quality due to U.S. tariffs. Of this, textile segment is a major exporter to U.S., and the exposure towards U.S. is around 0.12% of our loan book. Our discussion with these customers gives us enough confidence that there is no significant threat to the account since they are pursuing other countries.

PCR. For Q2 FY '26, PCR with TW stood at 82%, which has improved from 75% last year. From Q1 FY '25, we had been increasing our PCR without TW to bring it closer to the industry levels. Hence, PCR without technical write-off had improved to 63%, which had improved from 55% last year.

Interest income. Our interest income had grown by 15% in Q2 FY '26 and increased to INR 1,653 crores from INR 1,434 crores in Q2 FY '25. Our yield on advances reduced from 9.81% in Q1 FY '26 to 9.66% in Q2 FY '26, which is 15 bps. For H1 FY '26, the same is 9.73% as against 9.70% in the similar period last year.

On the other side, the cost of deposits has reduced by 24 bps sequentially, which is much higher than the anticipated level of 10 to 12 bps. Thus, our NIM has increased from 3.54% in Q1 FY '26 to 3.63% in Q2 FY '26. Even though we had an expected NIM level of 3.45% to 3.5% for Q2, faster repricing of deposits and migration to fixed rate of gold loans has resulted in a stable NIM. Also, some of the high-cost refinance borrowings matured and repriced at a lower cost. During Q3 and Q4, we expect a stable NIM with positive bias.

Other income. The total other income for the year has increased by 20% from INR 418 crores in H1 FY '25 to INR 503 crores in H1 FY '26. Loan processing charges, suit recoveries, income from treasury and insurance commission are the major contributors of other income growth. For the current quarter also, we had interest from IT refund.

Our operating profit had grown by 15% in H1 FY '26 and stood at INR 922 crores compared to INR 802 crores in the corresponding period last year. The total PAT for H1 FY '26 is INR 635 crores as against INR 550 crores in the H1 FY '25, showing 15% growth. For Q2 FY '26, PAT stood at INR 329 crores for Q2 FY '26 as against INR 285 crores in Q2 FY '25, which works out to 15%.

Cost to income. Our cost-to-income ratio for Q2 FY '26 stood at 49.1% as compared to 48.2% in Q1 FY '26. For H1 FY '26, it stood at 48.66% as against 48.15% for H1 FY '25. We expect the cost-to-income ratio hovering around 48% to 50% for financial year '26 as per our earlier communication.

ROA. Our ROA for Q2 FY '26 is at 1.59% compared to 1.55% in last quarter. ROA is over and above our long-term level of 1.5% since Q1 FY '25, and it is very stable. Our bank has secured a commitment of USD 50 million from IFC. It is a three-year term loan with a bullet repayment option. The proceeds shall be to support MSMEs in their efforts in transitioning to energy-efficient and cost-effective solutions, primarily in renewable energy space, which is solar or wind. With this, we take part to support India's efforts to accelerate transition to carbon net zero by 2070. During the current year, we have financed more than INR 500 crores so far and expected to build a book of renewable energy by INR 2,500 crores in the next 24 to 30 months. This strategic partnership with IFC shall help us to focus on our sustainable finance efforts.

To sum up, our continued efforts so far have helped us to achieve consistent double-digit growth for the past six quarters. In addition to our core strength of MSME gold loans, we will be venturing into new avenues to keep the momentum in growth. We are confident to surpass the industry level growth for the future. Our deposit growth is aligning with credit growth, and it is expected to continue. CRR cut is giving positive impact, and we are expecting some positive bias in the NIM during Q3 and Q4. ROA is expected to remain at our current level of 1.5 plus. Our cost-to-income ratio remains in the range of 48% to 50% for FY '26.

Thanks a lot. Open for questions.

[Operator]

[Operator Instructions] The question comes from the line of Parth Gupta from B&K Securities.

[Parth Gupta, analyst]

Yes. So, sir, you were mentioning that you are entering into new areas like renewable energy, where we will be creating a book of INR 2,500 crores. What are the factors we are considering while underwriting these loans? And are all these loans secured or unsecured in nature? That was my first question.

Second, what was the differential? You also mentioned that some of the borrowings matured during the quarter. What was the rate of interest? Yes, these are my two questions, sir.

[R. Anandh, executive]

Sir, the second question is not clear. You got dropped in between. If you can just repeat your second question, please.

[Parth Gupta, analyst]

Yes, yes. So I was mentioning that a certain part of the borrowings were matured during the quarter. What was the rate of interest on those borrowings? Yes.

[R. Anandh, executive]

Okay. To answer first question, it's not a new area. We have been funding solar. That's why we mentioned in the call that we have financed more than INR 500 crores, which is completely a secured book for the existing to bank customers. And we continue to build this book. And that's what we mentioned. We plan to take this book from INR 500 crores to INR 2,500 crores, majorly for existing customers, in the next 30-month period, which is 2.5 years from now.

With respect to second question, our INR 800 crores of borrowings have come down from 8% to 6.5%.

[Operator]

The next question comes from the line of Rohan Mandora from Equirus Securities.

[Rohan Mandora, analyst]

Congrats on good set of numbers. Sir, I just wanted to understand on the credit growth that we are seeing, which segment is this coming from? And how are we originating these loans?

[R. Anandh, executive]

These are completely branch distribution. As you are aware that we don't use third party for our MSME sourcing. It's completely branch-driven and JL is also completely branch driven. With respect to retail, we have 10% sourcing from third party and 90% is completely branch driven. So, to answer your question, only part of retail, which is 10% is from the third party.

[Rohan Mandora, analyst]

Sure. And in terms of where you are -- the customers are getting onboarded in the SME space, like where are you -- are these only takeover from other banks? Or is this organic growth is coming in terms of higher credit demand from existing customers? How should one look at it?

[R. Anandh, executive]

It's a mix of both, sir. It's a mix of both.

[Rohan Mandora, analyst]

Okay. Sure, sir. And sir, just on the recoveries, we have been showing a negative net slippages consistently for the past many quarters. What is the outlook in terms of being able to maintain this kind of a run rate for the next few quarters?

[R. Anandh, executive]

We were thinking till Q2, but looks like we might get into Q3 and Q4 as well.

[Rohan Mandora, analyst]

Got it, sir. So this year, second half, we should again see a negative net slippage as last year?

[R. Anandh, executive]

Yes.

[Rohan Mandora, analyst]

And sir, if you can, then in that backdrop, guide us like with the ECL, you have made some ECL provisions this quarter. So what changes in terms of your credit cost outlook for the next year because you started making some ECL provisions. So how should one look at the steady state run rate on credit cost after you move migrate to ECL? And any assessment on the onetime impact?

[R. Anandh, executive]

You are asking about the provisioning, what we are going to make it in the next one year. So, okay. Let me give you a brief on ECL then. Just give us a couple of minutes. So I'll try to give our perspective. We are getting ourselves prepared for ECL computations. We made certain broader assumptions, and we have just tried to have the back-of-the-envelope calculations. So unless otherwise we get specific guidelines in the final circular, most of the calculations are still in the fluid stage.

For example, in the same time last year, we had a double-digit SMA. We have seen 50% reduction in SMA stock. The impact of reduction in SMA contribute huge reduction in ECL provisions. Even the reduction of SMA from Q1 to Q2 resulted in substantial reduction of ECL provisioning requirements.

So let me go stage by stage with the ECL draft guidelines. Just to outline the very, very broad assumptions, again, at the back-of-the-envelope calculation we made, we have done this with the principle of approximately right is better than accurately wrong. So let's start with Stage 3, which is the NPA bucket as per current IRAC norms. When we look at this bucket, we don't see any significant difference in additional provisioning requirement as of today. This is on Stage 3. With respect to Stage 2, which is mainly of SMA1 and SMA2, the restructured loans are unveiled portion of this in these respective buckets of SMA1 and 2. If you look at our trend on both SMA and restructured portions, we are witnessing significant fall in our SMA numbers, number one.

Number two, our restructured book have come down significantly over the past few years. Just to give you a background, it was around INR 2,248 crores in FY '21, '22. We are down to INR 593 crores as we speak today. Accordingly, our expectation is that restructured book would be negligible when ECL comes into force. This is on Stage 2.

So, for Stage 2, currently, we hold a provision of INR 100 crores as per IRAC norms. When we adopt the model of PD-LGD as per ECL guidelines, we envisage some incremental provision, which would be required for this bucket. This is on Stage 2.

With respect to Stage 1, it's majorly standard assets. As per current IRAC provisioning requirement varies from 0.25% to 1%, but the new ECL has floor for this bucket. For the Stage 1 standard assets, the bank is having the IRAC provision requirement of 48 bps. And if we adopt the ECL calculation to our Stage 1 assets, we might require 10 to 20 bps additional provision by taking into consideration the new ECL norms, where we need to make a provision for the bucket, which is mainly for unavailed portion as well as nonfunded items. Also as per ECL, standard asset provisioning will be based on PD LGD model. Due to the above, we will have some impact on the provisioning. But if you look at our last 10-year slippage and credit costs, the average credit cost is around 114 bps. So, technically, if you see the recovery from technical write-off pool, it comes down to 80 bps, which is our historical recovery rate in the range of 60% to 70% has been our recovery rate.

Again, sir, this is broadly on the back-of-the-envelope calculation and the exact number will be ascertained only after the final guidelines comes into the place.

[Operator]

The next question comes from the line of Anand Dama from Emkay Global.

[Anand Dama, analyst]

Sir, first, I mean, you had a margin expansion during this quarter. I think there was some noncore part as well because of which margins have expanded. What is that contribution in terms of margin expansion, if you can explain?

[R. Anandh, executive]

One is deposit rate coming down. One is deposit rate coming down. So the cost of deposit has come down from 5.95% to 5.71%. This is first, sir.

[Anand Dama, analyst]

I think you had talked about some interest in IT refund, and I think your investments that is also coming on the high side.

[R. Anandh, executive]

That is in other income. Almost same. We had H1 last year, INR 35 crores. Again, this year, INR 33 crores.

[Anand Dama, analyst]

Okay. So there is no other extra interest income during this quarter because of the margin expansion has happened. Is that the right understanding then?

[R. Anandh, executive]

Right, right.

[Anand Dama, analyst]

So which means that your margin expansion, I think, would sustain because I think you guided that your margins could be upwards of 3.5%, right, here on?

[R. Anandh, executive]

Exactly right. Bang on.

[Anand Dama, analyst]

That's great to hear. And sir, secondly, in terms of credit cost, is it possible for you to guide now because you said that the net slippages are in zone and you expect that to continue at least for next two to three quarters.

[R. Anandh, executive]

Next 2 quarters, we envisage recoveries to surpass slippages. That's our guess.

[Anand Dama, analyst]

So, in that case, how should we look at credit cost for FY '26? And also, if you can just talk about the broader outlook on the credit growth.

[R. Anandh, executive]

Credit growth, as we said before, we would be 2% more than industry growth. So we want to stick to that. In terms of credit cost, it will be stable.

[N. V. Kamakodi, executive]

We will take a call as and when we take it depends on how much. See, it depends upon how we want to, let's say, have the net NPA and all it will be a comprehensive call. So the only thing what we have a clear-cut visibility is that we will be having our recoveries more than the slippages as we have seen in the many quarters. So that trend could continue for a few more quarters.

How much we, let's say, provide what is going to be our target net NPA. All these things, we will be taking a call as and when it comes.

[Operator]

[Operator Instructions] The next question comes from the line of Jai Mundhra from ICICI.

[Jai Prakash Mundhra, analyst]

Congratulations on a great quarter. Sir, first question is in the net interest income or in the net interest income, do we have any component of recovery -- NPA recovery that goes into NII?

[R. Anandh, executive]

Yes, INR 15 crores.

[Jai Prakash Mundhra, analyst]

Okay. In this quarter, right? And why would that come, sir? I mean, INR 15 crores where you have recovered more than principal? Or how does it work?

[R. Anandh, executive]

More than the cost.

[Jai Prakash Mundhra, analyst]

Okay, sure. And how much was this, sir, last quarter? Because I mean, we have a very good recovery this quarter, but...

[R. Anandh, executive]

It was half of that, almost.

[Jai Prakash Mundhra, analyst]

Okay. Okay. So around INR 7.5 crores.

[R. Anandh, executive]

To be precise, I think it was INR 7 crores. And this quarter, it is INR 15 crores.

[Jai Prakash Mundhra, analyst]

Okay. Understood. Secondly, sir, on when you now -- I mean, you're doing very well on growth. On the spread basis, right? I mean, you would have declined -- I mean, the entire repo rate cut would have been affected. But have you also changed the spread in any of the segments because the growth -- underlying growth is strong. So you may have some discretion or bargaining power to increase the spread? Is there anything?

[R. Anandh, executive]

So we have a gold loan at 30% fixed rate. That's the only component here. Everything is variable.

[Jai Prakash Mundhra, analyst]

Okay. No, I'm saying, sir, so gold loan is fixed rate anyway, so that does not get impacted by the interest rate. But are there any products where you have managed to increase the spread also?

[R. Anandh, executive]

No, no. Last year, we increased the gold rate, JL rate, right? That's one of the things which we did. Otherwise, it's going to be no change this year. We continue to do where we are.

[N. V. Kamakodi, executive]

See, Mundhra, yes, if you look into like, in fact, you had, like say, regulatory announcements where even the last policy changes, how much reduction in the rate happened and how much got passed and all was given for the industry level. And our numbers are also, by and large, matching.

So, in that, there are two things. One, not only that from last year that 30 percentage gold loan became a fixed rate, in fact, we also had a marginal increase in that portfolio, which has helped us to maintain the margin to a greater extent.

So just to answer your question directly, whatever margin you have seen now is basically that we could manage both the cost and also by the proper repricing because as earlier Vijay Anandh told from the deposits which are -- term deposits, which are maturing currently are at 8.1%. So when they get repriced at 6.75% and maybe 7 percentage for the senior citizen for that portion, we get a good cushion. And the fixed rate gold loans also are giving that cushion, and that's why we were able to not only maintain the previous quarter net interest margin, but also we need to -- we could have about 5, 6 percentage basis point.

This variations in the interest recovery from the, what you call, NPA, it will vary like last year, like I said, last quarter, it was INR 7 crores, INR 8 crores, and this time, INR 15 crores. It depends upon thing. There is nothing lumpy or anything which has happened here. It's only purely it is -- so far, whatever we have seen in this -- that 5, 6 basis points, whatever -- I mean, we always used to say that whatever existing rate, plus or minus 10 basis points, that same thing continues. It is very difficult to predict beyond that.

[Jai Prakash Mundhra, analyst]

Right, right. No, I was just saying -- thinking, sir, that when -- now it looks like that the trade-off between growth and margin is very negligible, right? I mean you can do both growth as well as margin. So, I was just thinking, are there any products.

[N. V. Kamakodi, executive]

Don't take this extrapolation immediately. Maybe after you see this trend firming up for the, what you call, next few quarters, you can probably make that assessment. Already, we are getting enough pressures from the field saying that, let's say, we have to -- like what you call -- maybe agricultural gold loan should be slightly decreased. There, we are not compromising. So all such noises from the field are there, which at least it has given us some elbow room that, let's say, we can make this fine-tune properly.

So, once again, as we have been maintaining always, the current rate, plus or minus 10 basis points with the positive bias will continue.

[Jai Prakash Mundhra, analyst]

Right. Sure, sir. Sir, and if you can specify what is your yield on gold loans in retail and agri. And I think you had increased by 25 basis points, right, if I remember.

[N. V. Kamakodi, executive]

Yes. We had -- I mean, our non-agri gold loan yield is about 11%. And the agricultural gold loan is about 10%, and we are, let's say, one or two products there getting reduced to 9.75% or 9.95% or something like that, below 10%, I mean, like your Bata shoe rate. So the -- by and large, things are stabilizing.

Yes. Also, you need to keep in mind that further reduction in the interest rate is not ruled out and how much will happen on the next, let's say, two, three rounds of policy meeting and how much extra impact it will have. I mean what you can clearly see is that the interest rate reduction pressure, whatever you had when the rate of interest was reduced, let's say, a couple of months back, that has significantly, let's say, stabilized and the further pressure we expect will come after we see any reduction in the, let's say, repo rate as we move forward.

[Jai Prakash Mundhra, analyst]

Correct. Correct. Understood. Understood, sir. And sir, is there any -- have you also launched any new product on gold loan side since the LTV has been liberalized or you intend to do after April 1? Or how is it?

[R. Anandh, executive]

No, we haven't launched any new products. It's the same. And anyway, the new rules is from 26th April. So we haven't launched any new products, and it is as.

[Jai Prakash Mundhra, analyst]

Okay. And last question, sir, to Kamakodi, sir, I mean, on your transition, sir, where are we? I mean, we saw the advertisement in the newspaper also, but has the process been completed? And by what time the name would go to RBI, if you can share a rough time line?

[N. V. Kamakodi, executive]

See, the last date that is given in the advertisement for the receipt of application form is on, let's say, 7th, that is this Friday. So after that compilation of eligible candidate, then the Board will sit for the short list, then the interview process will start.

So, as per the existing guidelines in place, the application should reach the regulator at least four months before the expiry of the term, which is the thing we have to send it to RBI before 31st December. If everything goes well, let's say, we should be in a position to send by, say, at least mid-December, on the 4th or 5th of December.

[Jai Prakash Mundhra, analyst]

Earlier, sir, for change of MD, CEO, because there will be a new person. Earlier, the time line was six months, right? Or that is like it has become four months? Or how is it? Earlier, I was under the impression...

[R. Anandh, executive]

As per the existing guideline, it is four months. For reappointment, it is six months.

[Jai Prakash Mundhra, analyst]

Okay. So the new person actually RBI is supposed to take lesser time, isn't it, for the new person.

[N. V. Kamakodi, executive]

Yes.

[Operator]

The next question comes from the line of Sameer Bhise from Dymon Asia Capital.

[Sameer Bhise, analyst]

Congratulations on excellent set of numbers, sir. Just quickly, how confident are we incrementally with respect to kind of increasing our growth guidance from, say, mid-teens to high teens? We are already delivering it. So is it fair to expect similar momentum to continue in next year as well?

[R. Anandh, executive]

Sir, if the market is conducive, without diluting the risk, we are happy to grow.

[Sameer Bhise, analyst]

Okay. That is helpful. And secondly, on the ECL piece, if you could quantify the cumulative impact, say, as a percentage of loans, that will be very helpful.

[R. Anandh, executive]

Too early. Too early.

[N. V. Kamakodi, executive]

See, the -- I mean, we just went through the call transcripts of various banks and nobody has given you any number. And we also -- we don't want to put ourselves in the, what you call, disadvantageous position. And broadly, we have given you all data points. And if you work, you will be in a position to guess it to yourself.

And yes, like to reiterate what Vijay Anandh said, the existing provision level for NPA that is bucket 3, what is required and what is already available are by and large matching. For other, say, bucket 1 or bucket 2, I mean, these are particular -- let's say, these are all new areas where you need to have the -- what you call the provisioning for, let's say, new areas like unavailed portions and all, which we had not, let's say, calculated in the past. In IRAC norms, those things are not there. So these are all the new areas.

And as we already said and as it is already disclosed, we have some provision for the restructured assets already. And yes, there will be, let's say, before the -- what you call your ECL kicks in, there will be significant reduction in the -- your restructured book as either there will be, let's say, the repayments will happen or whatever it is. So you will be having some provisioning reversal from that segment. And also, you have recovery from the, what you call, technically written off book, which is expected.

If you consider all these things together, once again, for, let's say, the -- looks like the -- I mean, this is also -- you have, for example, what are all going to be your assumptions on multiple factors and all -- let's say, there are many ifs and buts which the final clarification is needed yet.

Say, for example, they give you something called, let's say, NPA in the past. What does it mean? If somebody -- some account becomes NPA and get upgraded, will you be keeping that as, let's say, once NPA till the completion of the loan? Or if they behave properly, subsequently after upgradation for the few months or few years, you will be upgrading. These sort of final nuances, which had not been, let's say, considered in the past, a lot of evidence and, let's say, clarity is needed. So heart of heart with this available information, back-of-the-envelope calculation, it will not be very -- I mean, we have adequate provision for, let's say, accounts which have already turned NPA.

For the -- let's say, the second bucket, whatever reversal from the restructured book, by and large, could manage the incremental. Like said, it's a complicated thing and you need to have, let's say, you need clarity. But if you strictly look into the expected loss in the true sense, the expectation is that it is not going to be alarming.

[Operator]

The next question comes from the line of Param Subramanian from Investec.

[Parameswaran Subramanian, analyst]

Congrats on a great quarter. So, firstly, on CASA growth. So we are growing now at 16% Y-o-Y on CASA. And for the last two, three quarters, we've been seeing pretty good momentum here. So anything you would like to call out how we are outpacing the industry quite significantly over here. And it's still while seeing a decline in cost of deposits. So how is that playing out?

[R. Anandh, executive]

So we got the team actually now. We got the team, which was earlier -- dedicated team wasn't there. Now we have put a dedicated team and the branch focus is more now. I think with the branch focus on the dedicated team, we could see some momentum picking up here.

[Parameswaran Subramanian, analyst]

It's not that the loan growth is -- the positive momentum from the loan growth is feeding into CASA or something like that, is it?

[R. Anandh, executive]

No, no, no.

[N. V. Kamakodi, executive]

And also, don't just extrapolate, let's say, we will be increasing by 2 percentage every quarter and all such things. As we had already said multiple times, we had never been in the top bracket of the CASA. And it is not going to be before a few years where we can show considerable growth. And whatever we have shown so far is, let's say, allowing for the fluctuations, by and large, in the same track, whatever we have demonstrated in the past.

[Parameswaran Subramanian, analyst]

Fair enough. Forgot that. Sir, now coming to the loan and deposit growth, right? I think in your initial remarks, you called out on loan and deposits. I think if you look at it on a combined basis, this looks like a decade best quarter on growth. So just wanted to try to understand what has changed structurally? Is it just base effect? Is it that we are finding the environment so conducive? I mean gold loan, obviously, one can understand. But overall, what is driving this very significant system plus growth that is on both loans and deposits that you are seeing? Or is it just some of the transformational projects that we have taken?

So if you could just broadly talk about what has changed for the bank from a growth perspective because there is a very significant uptrend from what we are used to seeing from the bank on loan and deposit growth.

[N. V. Kamakodi, executive]

See, up to pre-COVID, we had this 15 to 18 percentage as our guidance and which we had been dealing for many years. So after the arrival of the COVID, which impacted our growth plan for two, three years. And subsequently, we had, let's say, one year or so, we have to spend on that whatever transformation project, which you said.

So the point is like -- that BCG project is definitely helping us to come back to our old growth quickly. So the -- and 18% is something which is more than, let's say, 2, 3 percentage more than our, let's say, consistent track record. Once again, I would like you to just keep it like 2 to 3 percentage over and above the growth rate of the industry, like what Vijay Anandh said, that to continue. So let us not just try to explore, let's say, take 18%, 20% percentage, 22% and all like that, let us not do that.

But definitely, gold loan growth is helping us. And the capacity expansion basically has happened in both the, let's say, level, like just to give you two, three things which is helping us, which will be helping you to understand the things better. One, we did not have secured retail as a separate vertical and product pre-COVID, which we started only after the arrival of our the, let's say, BCG project. And we never had sales vertical separately from the, let's say, branches in the past for which capacity is created.

So the capacity creation in retail sales, capacity retail sales, capacity sales for the MSME vertical, capacity created for the sales in MSME vertical, which added to the, what you call regular sales that happened at the -- from the branches, along with the gold loan growth are giving probably another 2, 3 percentage extra growth.

Last year only, we started the, let's say, secured retail vertical. And we clearly said it will incur a loss of INR 30 crores, INR 40 crores last year because of capacities is created, the money is yet to come. And for the financial year '25, '26, it will be breaking even and the profitability addition to the ROA will start only from the '26 only. If you remember correctly, this is what we discussed around the same time last year. That extra capacity we created and also the BCG project has created the capacity in the processing. So the capacity is created both in the sourcing and also in the processing, which is helping us to have additional growth. As you said, the base is also small, all helping together to take it to the next level.

[Parameswaran Subramanian, analyst]

Fair enough. That's very helpful. Last bit, just on the OpEx growth. There is a sharp uptick in this quarter, so both employee and nonemployee. If you could just call out the reasons for that. Is there some DSA expense sitting there?

[R. Anandh, executive]

This should be around 15% OpEx.

[N. V. Kamakodi, executive]

See, 15 percentage growth in business and 15% growth in OpEx, particularly on that. And as you said that the moderation in the cost-to-income ratio, we are perhaps, let's say, a few quarters away. So we will -- in fact, the cost-to-income ratio, there was an increase when we incurred expenses for the, let's say, project. And that elbow room, we started using for creation of, let's say, human capacity.

And so yes, the -- we are -- let's say, as you said, we built the verticals and all for sales and other things. So they are yet to give you the full capacity. And because of that, we see these extra expenses.

[Parameswaran Subramanian, analyst]

Sir, what is 15%. Because OpEx was is 20%.

[N. V. Kamakodi, executive]

No, for the current quarter, it's around 20%.

[R. Anandh, executive]

Going forward, this will be around 15%. H1, 17%.

[Operator]

The next question comes from the line of Gaurav Jani from Prabhudas Lilladher.

[Gaurav Jani, analyst]

Congrats on the quarter. Sir, just on the cost of deposits, right? So if you can just elaborate as to what proportion of deposits matured for this kind of a benefit, right? And what are the upcoming -- or how -- what proportion of deposits would also mature or give us that benefit in the second half?

[N. V. Kamakodi, executive]

Second half, there may be around INR 18,000 crores of deposits to be repriced precisely. Every month, we are expecting around INR 3,000 crores to get repriced. Already, it was around INR 18,000 crores done in the first quarter, first half year. The project started in April. We have revised the rate from April onwards. So going forward, another INR 30,000 crores that's in the range of 45% to 50% of overall deposits to be repriced in the next half.

[Gaurav Jani, analyst]

Okay. And sir, just to clarify, what was this number for the second quarter? I mean what proportion of deposits would have matured for the second quarter?

[R. Anandh, executive]

Around INR 18,000 crores. Second, around maybe around INR 9,000 crores. It was INR 9,000 crores.

[Gaurav Jani, analyst]

Okay. And just to specify, the second half, you estimate about INR 30,000 crores to mature, right?

[R. Anandh, executive]

INR 18,000.

[N. V. Kamakodi, executive]

INR 17,000 crore to INR 18,000 crore on the term deposit side.

[Gaurav Jani, analyst]

In the second half?

[N. V. Kamakodi, executive]

In the second half.

[Gaurav Jani, analyst]

Okay. Sure. And just to, sir, simplify the ECL, while I do understand Kamakodi, that it's tough for you to comment, but safe to assume that the kind of additional provision that we have been making, that trend would continue for some quarters, right? So what I mean is about 45 to 50 basis points.

[N. V. Kamakodi, executive]

Yes. No, it is fluid because as I told you, there is a significant reduction of whatever pro forma we calculated for 30th of June and 30th to September because of the reduction in the SMA number. Like as Vijay Anandh said, we had double digit last year, and then it has come to 50. So it is, let's say, it's going to be fluid. And once the things stabilize and then when we get, let's say, clarity on the assumptions, what we need to make, particularly on what is going to be the discount factor and all sort of these things, we will be in a position to give that thing exactly.

Let's say, for example, there is at least not less than 15 to 20 percentage reduction between the 30th of June and 30th September. So it's a new territory to charter. But what I can definitely say is that it is not going to be as alarming as whatever, let's say, originally when the ECL was given, it was made as if what you call an unknown, what you call, demand is coming sort of. And also comparing with the smooth transition what NBFC had and whatever numbers we try to calculate, it is not going to be as alarming.

One more thing what you need to understand is you will be making your regular provisions in the -- for the next five years also. So when you calculate that, how much increase you are going to have over the next five years, that's why we feel it is not going to be alarming. Please understand, let's say, you will be making, let's say, whether the -- or to put it the other way, for example, how much provision I will be making in the next five years if ECL is not there and purely by the IRAC norms. And how much provision we will be making for the next five years for IRAC norm plus ECL together. So it is not -- the difference is not going to be as worried as some of the people worry.

[Gaurav Jani, analyst]

Sure, sir. No, I understood. Just that as various basis, I thought that basis the comment, there was a slight shortfall, right? So I just thought probably that's the kind of run rate that we're looking at. That is I wanted to.

[N. V. Kamakodi, executive]

See, it is only that the shortfall or whatever it is, it is -- and you are having another five years to manage that. And also, you have unrecovered let's say, technical written-off account you have what you call the normal reduction in the restructured book. So all these things, our back of the envelope calculations say to a greater extent, there should be, let's say, converging the requirement through IRAC and converging the requirement through ECL and nothing much to complain about.

[Operator]

The next question comes from the line of Vivek Singh from ValuePickr Forum. I'm sorry to interrupt you, Mr. Vivek, your voice is breaking. Can you please speak through handset?

[Unknown Analyst]

Sir, first of all, congrats on good set of numbers. NPAs are reducing and ROA numbers is increasing. Sir, I want to know what is the long-term aspiration goal of CUB Bank?

[R. Anandh, executive]

Can you please repeat?

[Unknown Analyst]

Sir, what is the long-term aspiration goal of CUB Bank?

[R. Anandh, executive]

So always keep your growth rate 2 to 3 percentage over and above the industry growth rate and be an efficient bank in the system, at least be one of the efficient banks in the system.

[Operator]

The next question comes from the line of Punit Bahlani from Macquarie Group Limited.

[Punit Bahlani, analyst]

Just on the bit, I missed the comments on growth, but I heard you saying to one participant that you expect 200 bps above industry levels. Now I'm not sure if that was for current year because assuming we end at 12%, maximum 13% growth, around 12% industry growth, our target around 15% is very conservative. Are we -- some because of the base effect last year in the second half? Or are we guiding for that? But even if I factor in that, our growth should be way higher than guided. So just wanted to get your comments around that.

[R. Anandh, executive]

A couple of things. As we said before, we would love to be 2% to 3% more than the industry growth. Having said that, we would not shy away from the growth if the market is conducive and we don't dilute the risk.

[Punit Bahlani, analyst]

Okay. But this year, we are still guiding that only that 2% above industry.

[R. Anandh, executive]

Yes, yes. We are sticking on to 2% to 3% more than the industry growth.

[Operator]

The next question comes from the line of Pritesh from DAM Capital Advisors.

[Pritesh Bumb, analyst]

Good set of numbers. Two questions. One is this reclassification, if I see in this pie chart, there is a very large reclassification in personal loans. Last quarter, it was something around INR 1,300 crores. This quarter, it is much higher. What has been the reclassification? This quarter, it is something like INR 2,600 crores.

[R. Anandh, executive]

So you're asking #32 slides, right?

[Pritesh Bumb, analyst]

Yes, 32.

[R. Anandh, executive]

Yes, it's around 5 percentage, the overall personal loan means all other loans put together.

[Pritesh Bumb, analyst]

Okay. But last quarter, it was INR 1,300 crores and this quarter, it is INR 2,600. So I'm just trying to check if there is any reclassification and what is the reclassification? What are we now putting under this?

[R. Anandh, executive]

Sir, we'll come back -- we'll come back to you. We will just check and come back to you separately.

[Pritesh Bumb, analyst]

Okay. Because it was 3% last quarter. And this quarter, it is 5%. So I'm just checking what is being reclassified there. Yes. And the second question was on Tier 1 capital, that does not include our profits for the half year, right? That's how the number is.

[R. Anandh, executive]

Yes, only after the audit can it be included.

[Pritesh Bumb, analyst]

Okay. So if you have a ballpark number, what could be that including the profits? Including the profit, any ballpark numbers you will have handy? What would be the number?

[R. Anandh, executive]

See, simple thing is like whatever closing network on 31st March, first half profit, let's say, minus INR 50 crores, you add, you will get an approximate number.

[Pritesh Bumb, analyst]

Sure, sir. I'll try that. And lastly, on branches perspective, we've been gradually adding branches, so what is your stance on branches from here on? How do we see branches to be added?

[R. Anandh, executive]

Every year, we have been adding 75 branches. That trend will continue.

[Pritesh Bumb, analyst]

Sure, sure. 75 this year as well, which we'll...

[R. Anandh, executive]

There could be some overlapping between the next year and the current year sort of thing. But the average -- rough average expectation of branch addition for the next couple of years will be, say -- for the last three, four years, it has been about 75 branches, and that trend will continue.

[Operator]

The next question comes from the line of Akshay Badlani from HDFC Securities.

[Akshay Badlani, analyst]

Just one question. It's around the asset quality, especially in the MSME book because we have been growing that book for the past few quarters. And overall, how do we see the asset quality? And what would be guide for the credit cost overall? Are we seeing the credit cost declining at a normal average run rate? Or is this like probably one-off quarter? Or how do we see that going forward? Because overall, we were thinking the stress was building up in MSME, but how are we seeing -- is there any pockets somewhere if there is more stress or overall, the stress is receding?

[N. V. Kamakodi, executive]

See, the -- as we -- let's say, Vijay Anandh said, for next at least a few quarters, it looks like the recoveries should be more than the slippages. And you have -- you are right, during the last quarter, let's say, the market trend and let's say, the information around said that the stress is building and all. And now you have started hearing that it is getting better and all. But for us, it is almost identical earlier and now and there is a significant improvement in the SMA. See, originally, as a practice, particularly on the SMA, it was very difficult to convince an MSME borrower about the significance of the SMA. That's why we traditionally had higher SMA.

So now after we started focusing on that prospecting the ECL and other things, when we have started interacting with the customers more and properly making the follow-up better. the SMA numbers also have started coming down. As of now, let's say, we don't see any undue stress building into the MSME portfolio at this point of time. Things are perhaps -- that's why we are able to see the net NPA numbers coming below 1 percentage after almost a decade or so.

So things are, let's say, getting better now, particularly like we had been a little bit slow to organize these things post COVID, but I think since we have taken multiple projects together and everything is falling online now.

[Akshay Badlani, analyst]

Okay. Great. Just one more question on the PCR. So I think PCR has increased this quarter as well. Where do we see it settling going forward there, what would be the comfortable level for us for the PCR number?

[N. V. Kamakodi, executive]

So whatever pattern we have seen in the last few quarters in terms of incremental PCR, the trend will continue. It's not that we keep a big target or immediately do or whatever it is. The things will be done at their own pace.

[Operator]

The next question comes from the line of Krishna from Mudhal Partners.

[Unknown Analyst]

A couple of questions. Whether the business will be led by people-led growth or technology-led growth because the net addition in headcount, if I look at multiple quarters, is less than that of the growth.

The second question is on the technology spend. If you can give a breakup of how do you look at the technology spend now and in the coming quarters will be useful.

[R. Anandh, executive]

So, to answer your first question, the growth will be a mix of both people and technology, it is.

[N. V. Kamakodi, executive]

See, you need both the technology and people and you are coming from the cost angle. The -- typically, the expenditure spent on the technology, both on the hardware, software, AMCs, everything put together, the trend in the industry had been about 20 percentage of your PAT, approximately 15% to 20% or 20% to 22%. That is the range with which the expenses are happening. And I don't think there will be any reduction in that number in the foreseeable future. And when you get the productivity with one tech spend, another technology comes for which you have to make an investment and all.

So even after the, let's say, like SaaS model or you take it on the per-usage model, everywhere you go, the -- by and large, this is the trend we are seeing over there. So that's where 15 to 20 percentage is what we see in terms of the overall technology spend, and that is what we expect.

And in terms of, let's say, we had first half to first half, 17 percentage increase in the expenditure and 15 percentage increase in the -- I mean, but 18 percentage increase in the business, but only 15 percentage growth in the profit. So you cannot have a spreadsheet pulling a Excel spreadsheet and everything coming under the same thing. The sort of fluctuations will always be there.

And for example, let's say, two, three years back, we had issues with the operating profit, particularly after the interest rate has started coming down. So, in that, we had to manage our PAT by saving on the credit cost because the recoveries were more than the slippages. We had a positive benefit because of that. For three years, we had every year INR 100 crore reduction in the addition of NPA, which has given that headroom in building our profitability growth.

Like that, you have multiple levers, all acting in a different, let's say, rhythm. And our job is to understand at what pace individual rhythms operate and based on which we have to, let's say, work well where we need to manage well, and that is why we clearly said that 2 to 3 percentage over and above the growth rate of the industry is our requirement and there will be NPA addition will be getting, let's say, the trend of seeing addition lower than the recoveries will continue.

But what is the exact credit cost, it depends upon the, let's say, the strategic decision of where we need to -- I mean, if you had actually looked into 10 years back, we took a call not to get our net NPA below 1 percentage and we kept it above 1 percentage only throughout and between 1 to 2 percentage we are handling. It accelerated to over 2 percentage during the COVID, which we have brought down, and we got it below 1 percentage after, let's say, almost a decade.

So the point what we are trying to say is that all the levers currently are going in a positive way. And this is the time we have to, let's say, get the best efficiency out of every lever.

[Operator]

As there are no further questions, I would now like to hand the conference over to Dr. N. Kamakodi for closing comments.

[N. V. Kamakodi, executive]

So, thank you all for attending this conference. As said by Vijay Anandh and Ramesh, let's say, the first half had been extremely good. Growth is good. The asset quality front is good. Perhaps the growth is at the 10-year high and the NPA levels are also at the 10-year lows, particularly the net NPA.

We have also started taking some, let's say, incremental expenditure last year, particularly creation of capacity in various verticals, which are helping us to growth, which is also, let's say, resulting in increasing in the expenditure and a slightly elevated cost-to-income ratio compared to our 10-year average. So once the productivity comes over there, the cost-to-income ratio will also start seeing a downward thing.

Overall, the first half has been extremely good. And in fact, during the beginning of the year, we were worried that reduction in the rates will have sharper effect on the yield, and sharper effect on the net interest margin. But fortunately, some of the steps we took had helped us to balance that, and we are not only able to balance the -- stabilize the net interest margin, but also we could see a small, let's say, hike also, that's why we are continuing with 10 basis points plus or minus and all. Overall, in the -- whatever visibility we have currently, the trend is positive.

Again, the questions on ECL, we are not able to make any specific number apart from saying that, let's say, the 10-year -- on as is various condition, the 10-year provision, whatever we may make without ECL and with the ECL looks like, by and large, the numbers will be converging. But anyway, for making that proper we need to have a few more, let's say, policies, let's say, taking a clear-cut shape, both from the industry, from the regulator and other things and all. But what I can clearly see is that it is not going to be something alarming what we cannot offer to and all.

So, the overall, you have also seen the ROAs stabilizing. So we hope the second half also like on as is various condition, let's say, the things should be -- the current trend should continue. By God's grace, we hope the second quarter will -- I mean, second half, let's say, should be also like -- should not have any -- I mean, we don't express any -- I mean, we hope things should be good going forward into the second half.

With this closing remark, once again, the -- as usual, you may always get in touch if you have any specific thing. On that difference in that retail, if you have the answer, I mean, because others may be there, okay, you can -- you will be getting a call.

Overall, thank you all for attending. Once again, thanks to Ambit for arranging the call. Thank you.

[Operator]

On behalf of Ambit Capital Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.