Ladies and gentlemen, good day and welcome to DCB Bank Limited Q2 FY 2025 earnings conference call. Joining us on the call today are Mr. Praveen Kutty, Managing Director and CEO, Mr. Sridhar Seshadri , Whole Time Director, Mr. Ravi Kumar, Chief Financial Officer, Mr. Ajit Kumar Singh , Chief Investor Relations Officer. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.
Thank you very much, and good evening, everybody in this call. I want to tell you that we have had a steady quarter two. Our growth trajectory, both on assets and on liabilities, remains in the same curve. We have grown the balance sheet by 19.49%. Similar kind of percentage growth in advances and deposits. On the deposits front, the growth of 19.86% YoY has been recorded in reasonably tough times in liquidity, I should say. What is heartening is this growth is in a scenario where our top 20 depositors remain at a very comfortable 6.89%, very similar to the 6.88% we had last year. So the structure of our deposit franchise remains the same. We continue to look at small ticket, build it the hard way, small, brick by brick.
To get the kind of growth which we have achieved in the last one year all goes well for the future as well. Similarly, on the advances side also, the ticket size is consistent. In fact, we will be happy to even increase the ticket size going forward. But it is a very steady growth on advances, deposits, and balance sheet. One of the things I want to tell you is that our cost ratio has marginally improved from 25.04% to about 25.61% in the year. But that may be unremarkable as it is. What is remarkable is our savings growth. Our savings has grown by 27% year-on-year, clearly showing the effort leading to the desired result. Another area where I want to highlight is our core fee. I had spoken about engagement as a big idea in the last quarter.
We want to have engagement as a key differentiator from where we were to where we want to be. That translates to doing products which are less of fill it, shut it, forget it, and more of customer interaction, electronic as well as normal, traditional face-to-face. A big element of that is CASA, specifically savings account and on the asset side, overdraft accounts. We made a good beginning, and this good beginning has also seen the core fee increasing from INR 114 crore last quarter, which was high in itself for quarter one to INR 139 crore in quarter two. This, along with benign NPA numbers, our gross NPA coming down from 3.36% to 3.29% over the last one year. Net NPA shedding 11 bps, 1.28% to 1.17%, has resulted in an overall profit of the bank in excess of INR 155 crore.
I want to draw your attention to two things here. One is on our area of focus, which is NIM. Our NIM is down to 3.27%, and primarily because of three, four elements, some which are uncontrollable and some which are controllable. We have had an extension of some of the one-offs, which I said would happen in our Q1 call also, where we had to do some reverses. That continued into July. So those one-offs were taken on the NIM. Going forward, those types of one-offs will not happen. Second is that we kind of foresaw the weakening microfinance environment, and we have gone slow on it. Going slow on microfinance also means that the earnings that you would have got from that book also dropped. This is a high-yield book, so there has been a bit of drop on that count as well.
Thirdly, on the NIM front, we have done some opportunistic co-lending activity during the quarter, which comes at a lower yield, albeit at a lower cost also as compared to our organic business. So some of these activities give us the time to build the kind of structure that we want on a steady state go-forward basis, and I am repeating what I told you earlier. So to build a strong overdraft proposition, to build a higher ticket size mortgage proposition, marginally higher than what it is currently today within the risk framework that we have. The third point is, improve the LAP-to-Home Loan ratio. We made some strides on it, but there is more way to go. So these are three key areas that we are working on. All this gives us the time to build it as we go along.
Our cost to average asset is at 2.75%. We have put in the people, we have put in the technology and I will talk about both. Over the next six quarters, we should see the increased sweating of both the people and the technology that we have invested in. The bank has upgraded Finacle system, the transaction banking system, the lending system, FinnOne, the Treasury Management System from TCS, the SIEM system for cybersecurity, Compass system for AML, behavioral biometrics. That is, we have put in the hard yards on technology over the last 12 to 18 months. We will see the benefit of that on a go-forward basis. Likewise, we have about 12,000 odd people in the bank, currently 11,901 monthly precise as of September 30th. We will see the benefit of that increased manpower resulting in a higher organic business.
I believe that the cost to average asset is more of investment in nature, the benefit of which we will see over the next few quarters. Having said that, it is important to know that the cost income ratio quarter on quarter has reduced by almost 3%, from 67.8% or to 64.3%. Net-net, we have had 11 bps improvement in ROA in our journey towards, a journey where the next stop is a yearly ROA of 1%. Our ROE has moved from 10.93% in Q1 to 12.69%. You are seeing some of the effort converting into the result. You will be able to see more of it in the not too distant future. That is my brief summary, and I look forward to questions and clarifications from your side. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Dixit Doshi from White Stone Financial Advisors Private Limited. Please go ahead.
Yeah, thanks for the opportunity. My first question is, you mentioned in the opening remark that there was some impact due to one-offs in the NIM. If you can broadly touch upon how much impact would that be and going forward, do you feel that this is almost a bottom of the NIM and we can see the improvement from here on? My second question is regarding the OpEx. Obviously we are doing investments on the people side and as well as technology side, but it has grown almost 26% year-on-year, whereas our top line is growing at 20%. When do you see that our top line will grow faster than the cost? Or when do you see the cost going up slowly?
On the first question, let me tell you this. The one-off we had to have was based on a particular RBI circular, and that has been taken into effect fully between quarter one and quarter two. That is done and dusted. That impact is not going to happen in the future. There has also been some structural change which has happened where some part of the fee-based interest is now coming in as fee-based charges. Okay? That's a second component which also has resulted in a slightly higher core fee and a slightly lower NIM. The second part will continue the way it is. The first part is done and dusted, that's over. When would you see the OpEx coming down? You're seeing some benefit of it coming through on the cost to income ratio decrease.
What we are working on is to ensure that the incremental manpower that is put in, we are sweating it out to ensure that there is better login and better conversion to disbursement happening on the ground. We are also working to ensure that the average ticket size, which currently hovers around INR 28 lakhs to INR 30 lakhs, is hitched up to between INR 40 lakhs to INR 50 lakhs. There's work happening on that ground. The third item is, if you see the stock of mortgage book that we have, it's almost divided half and half between Home Loans, which is low yield, and LAP, which is higher yield. That engine is turned, and we are seeing a higher business loan coming through the door. We want to increase that percentage of throughput. We would see a higher LAP as compared to Home Loans.
Having put all these people in, we will see the benefit, and we're very confident that we'll see the benefit of it coming through in Q3 and Q4.
Okay. Just a follow-up. Historically, we have always maintained that our business model is around 3.65% to 3.75% kind of NIM in the longer run. Due to this change in the penal interest regulation, do you feel that structurally that range will come down?
Yeah. Like I told you, if you can't charge penal interest anymore, it will come as penal charges, and as and when you collect it, you will get it. So you will have a single-digit bps change happening between NIM and fees.
Okay. That's it from my side. Thank you.
Thank you.
Thank you. The next question is from the line of Rohan Mandora from Equirus Securities. Please go ahead.
Good evening, sir. Thanks for the opportunity. Sir, just on the MFI fee, if you can just let us know what is your total exposure there?
Hi, Rohan. If you have the investor presentation.
Right.
Then for the benefit of you and all other people in the call, you could go to page number 22.
I couldn't.
Page number 22. Okay, 16% of the AIB book is MFI plus BC, and that book is 25% of the overall book. You can do the math yourself. 16% and 25%. I will tell you how to read this. You look at the previous investor presentation and see what the MFI and BC percentage was, and I will tell you what it was. It was actually 18%. That 18% has come down to 16% now.
Sure. Just if you can.
So that gives you an idea of what the book was a quarter back and how we have reduced it over a period of time.
Sure. If you can share the asset quality trends in this book.
Say it again, please.
The asset quality trends in this portfolio for us.
If you want to look at the asset quality, you could look at page number 36. No, sorry. Page 26, is it? Sorry, I am also going through-
Yes, it gives the overall AIB, but within that. Yeah.
Publicly, what we share is what you see in page number 26. You could possibly see that the momentum change on AIB. So far, 3.22% to 3.33%, that's not a big movement yet.
Sure. Nothing much in the early delinquencies also. That would be a fair assumption.
Look at it this way. We took the call on this pretty much early. That is why you are seeing a drop in the pie chart. Right? It is not a late movement happening.
Sure.
The environment is what it is. We are also hopeful for the book size also, you have seen how it is. How material and significant it can be.
Sure. Sir, on the same slide 26, the mortgages GNPA have been rising in the last two quarters.
Yes.
What is the reason for this uptick? Like some customer behavior?
No, actually, our sourcing in 2023 was not the quality that we aspire for. We made some changes, and the new vintages are behaving better. But specifically within Home Loans, the mortgage sourcing in the 12 to 24 month bracket was not the kind of quality that we wanted it to be.
But sir, what are the kind of issues that we are trying to correct in that? Just to get an understanding.
No, actually we are done.
Certain segments of portfolios like CV, Gold Loans earlier, where we have seen a spike up on NPAs and then normalizing.
In mortgages, we made some changes on our LTV and income assessment norms for certain segments. That change we made about four to five months back. But the errors that we made earlier will have an impact, and we have to go through it. There will be a delay, but I don't think there will be a denial.
Sure. Lastly, sir, on the CEB, Commission, Exchange, and Brokerage revenue, the core fee income.
Yeah.
What was the contribution from the penal fees?
Like I said, the person who called earlier.
Right.
The net structural change between NIM and fee would be single- digit bps. What used to be penal interest earlier becoming penal charges now, which is an incremental change because of the norm will be single-digit basis points.
Sure. Sure, sir. Thanks.
Yeah.
Thank you. The next question is from the line of M.B. Mahesh from Kotak Securities. Please go ahead.
Praveen. Just the first question on the margin side or the NIM line side. If you could tell us on a like-to-like basis, how much is the NIM kind of growing at adjusting for these penal interest charge changes?
Mahesh, there are four components to the difference between the NIM of today or of September and the NIM of, say, March. There is a penal interest to penal charges conversion, which is single-digit basis point. You have a reduction in the MFI sourcing, which is we are getting a much higher yield, which has been compensated for by other products. The third is there is an increase in co-lending disbursements, which comes at a lower yield, albeit a lower cost. And the fourth element of the lower NIM was one-offs which we have taken in quarter one and in quarter two. These are four components which resulted in the NIM reduction. The last item will not occur in the future going forward. The penal interest, penal charges will continue on an ongoing basis. That will be on a continuous basis.
We expect the organic book to pick up at a faster pace than co-lending as we go forward.
Okay. Just to continue on this point, if I look at the interest expense line, that is still kind of growing at a pace much faster than the loan growth, suggesting that the cost of funds is still kind of inching up. Just trying to understand how does this move from here onwards?
Mahesh, I want you to look at cost of deposit page or the cost of funds page.
Yeah. Yes, I saw.
If you don't know where I can read it out to you. It's on page number 31. This is pretty much in line with the predictions that we made in the previous quarter and also in March, that by September we should be able to see a stabilization. Cost of fund, it's kind of flattened out at 7.19% coming down to 7.17% and cost of deposit is 7.10% coming to 7.09%. I don't see it falling off. I mean, even now, if you were to look at the way the liabilities, the deposit market is, the reduction is happening in the cost deposit. Probably you'll see a longer play of similar lines. The good news you want to look at it is that it has flattened finally.
Mm-hmm. Okay.
There is no reason to believe that it will go up also because if you see the kind of growth that we have got in the quarter, it has been at 19% based on whatever it is at the higher end of growth. So that kind of growth trajectory, if you are able to get at a kind of stabilized kind of cost, which is here, you will possibly see the cost of deposit is pretty much at its peak. Now it is a question of improving the yield to get the NIM back to where it belongs.
Okay. Second question, sir, on the asset quality line. There are a couple of banks and NBFCs who are kind of starting to highlight saying that there is stress now starting to emerge in the SME portfolio as well. Do you kind of concur with this view based on the data that you are seeing? Or you say that, "Look, it is still too early to say that?".
Not really, and I will tell you why. Look at our collection efficiency charts for bucket zero and for all buckets put together. That is a very revealing chart. Okay?
Got it.
That is page number 28.
Yeah.
I will tell you why it is so revealing. If you look at bucket zero behavior, bucket zero behavior across, and we have three big products. I mean, I have not included CV, SME in it, but 54%, maybe 55% of the entire book is there in these three lines. This basically determines our overall performance, right? So bucket zero performance has been fairly steady. So between 98.9% to 98.5% you have a deterioration of 4 bps, and in Home Loans you have a deterioration of 3 bps. I would tend to take that as business as usual and not as a harbinger of a problem. So we have not seen that really coming through.
Having said that, if you look at the overall efficiency, we are seeing that some of the particularly restructured book has kind of had a problem in September, but I would kind of think of it as a one-off rather than as an indicator of things.
Perfect, sir. The final question on the OpEx line, which is currently running at about slightly higher than 20%. It continues at these levels, or you think we can extract a little bit here as well?
Are you talking about OpEx?
OpEx, yes.
OpEx, see, you've seen the cost to income decreasing. The 2.75% is frankly unsustainable. If you see, most of our efforts are in, we are thinking it's investment. Time will tell if it is investment or cost. A lot of work is happening in the bank. The bulk of our focus is going into ensuring that this money that has been put in is giving us outcomes. The easy thing to do will be to cut the cost. It's really simple to do. It's not very difficult. That's not the whole idea. We want to continue growing at this kind of pace for the foreseeable future, but we see a good enough market for it. The question is, how do you make these guys successful rather than how do we go by the fail fast rule?
Perfect, sir. Thank you.
Thanks, Mahesh.
Thank you. The next question is from the line of Aditya Khandelwal from Securities Investment Management. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Just a question on our NIMs. This quarter, we had an impact of that one-off reversal. Going forward, increasing share of LAP in our mortgage book and increasing the proportion of OD in place of treads and with the cost of deposits and funds stabilizing for us, would it be fair to say that the NIMs have bottomed out in this quarter and should be in an improving trajectory going forward?
Yeah. You succinctly put it. Yes. I would like to say what you said. The one-offs being gone and some of our execution starting to show results. I strongly believe that we are at the bottom end of the NIM. And cost of deposits is continuing to hold up at the current levels, and we don't have any indication to believe it is going to go up or go down in the future. It's remaining where it is.
Understood. Sir, second question was on our fee income. Year-on-year, I understand there has been a big jump because of classification from penal charge and penal interes . But even on a quarter-on-quarter basis, fee income has increased by more than 20%. If you could just help us understand what has led to this big.
See, I want you to look at the last five continuous quarters of core fee income growth. It is somewhere in this book. It is page number 34. Okay? Page number 34. Core fee income was INR 107, going to INR 124 to INR 136 to INR 143 to INR 205. Such quarter-on-quarter for five continuous quarters, that kind of rise does not happen by coincidence. Okay? It is because of specific actions that we have implemented on the ground. Why you are seeing the growth happening on the overall fee line. On the core fee line also, you see INR 97 going to INR 98 going to INR 118. In Q1, which is traditionally a very difficult low-performing quarter, INR 114 going to INR 139. So effectively, what has happened is since March, and I can say even since Q4 of last year, we really worked on getting engagement going big time in both assets and liabilities.
There was a tendency for the bank to be more, for want of a better phrase, fill it, shut it, forget it kind of mode, with 55% of our book being mortgages, LAP and Home Loan, where opportunity to interact with customers also is limited. Also retail term deposits on the other hand. Retail and bulk also for that matter, where interaction with the customer is fairly on the lower side. But when you are seeing a savings account YoY, savings growth of 27%, we are seeing the beginnings of our overdraft strategy coming to light. There is far more engagement the bank has with its customer, and one area where it is really seeing the light of the day is in the core fee income. Our ability to cross-sell has improved. Is it where we want it to be? No.
I think there is a further strong long play involved. But we, I think me and the management team strongly believe that this focus on engagement resulting in products which demand engagement will result not only in the core fee income increasing, but also in terms of better retention and a stronger bond with the bank. TPD has got a big play in it. We have launched our wealth distribution vertical. Still early days. These things have held the bank get a better grip on the fee income. This was traditionally a weak, it still is an area of improvement for us, honestly, if I were to ask myself, and we are making some progress on it.
Thank you. The next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.
Yeah. Hi, good evening.
Hi. Good to hear you.
Yeah, hi. First on this fee income only. The YoY growth looks very impressive on the core fee side, and it is clearly higher than the loan growth and assets growth. There's no one-off here, right? There is no one-off and ideally one would expect the fee growth to be higher than asset growth. Is that the way to think about this?
The way to think about is, look at the core fee income growth. That's where you need to focus upon. That way we are really, really focusing upon. That is much more repeatable, sustainable, linked in. There are some core fee income here, which also has some lag on the cost side. The classic example is something like a processing fee. The volume goes up, the processing fee goes up, but there's a sourcing cost that we have to pay for it. Having said that, even after taking that into consideration, there has been improvement in the margin between the fee that we get and the cost that we may have to incur on those lines. Much more importantly, the third-party distribution system is kicking in. I'm repeating, but the wealth distribution setup that we have put up is started to work.
The overdraft product that we are looking at, which brings in slightly higher ticket size by itself. One way we get a slightly higher ticket size, but look, INR 30 lakh going to INR 50 lakh is frankly a 66% improvement on productivity, whereas it's very well within the risk parameters that we have. So there are multiple things that's happening which is helping us improve our core fee income. Honestly, yeah, we're seeing the result of it, but there is much more to come.
Sure. Sir, the SAR growth that we have seen at very impressive, defying the industry growth and even the previous trajectory at our bank. Fair to say that, part of this is driven by your differentiated SAR rates or, this is something else that you would like to call out.
No, no. Don't be fooled by it. See, our customers are self-employed customers. They are your normal people, the normal retailer, merchants, those are the kind of customers that we have. We have some unique products whereby the money the proprietor puts in his current account is swept into a savings account. So while the customer is a self-employed customer, he's got a current account. He gets a benefit of moving money into savings account and gaining whatever is the savings account rate applicable for his account. So even though we open current accounts, the customer gets some benefit out of it. For us, yeah, it's not a 0% current account, but it's definitely not a high-interest TD account, actually. So a large proportion of our savings account is coming from these kind of customers.
Proprietors do not keep the kind of money that you need to keep in a savings account to get 8%. Usually they do not. They use it normally for their transaction purpose rather than for "investment purpose." It is money on the flow. It is not money which is kept there to earn something. It is, by the way, while I am keeping it there, we are earning something. That is the kind of product and that is the kind of customer base that we have on the savings book.
Right. Sir, on treasury gains, right? This quarter is very, very strong. Is there any component which is not realized also? Because now RBI allows you to book a notional profit also. Just because the amount is so huge, I just thought of asking.
I do not know whether that is publicly available news or not, or publicly substantiated information or not. But the fact is, I would not even look at that INR 205 as much as I would look at INR 139, because we are looking at repeatable, sustainable kind of growth. For us, INR 114 into INR 139 is a good enough indicator of what the potentialities are, and I believe that we could crack it. On a separate note, I do not know if it is not a UPSI information. If it is not a UPSI information, I am sure our investor relationship unit can get back to you with relevant information. You can drop in a mail and they can give you further information, so what is publicly available.
Sure, sir. Lastly, sir, is there any update on the promoter infusion of $10 million?
Yeah. Okay. Yeah. Fine. Yeah. Good that you asked the question. We are kind of dotting the I's and crossing the T's on that. There is some documentation, which is being asked for. We are providing all that. Getting that loop. We are almost at the tail end of it. While it is not substantial in itself, it is symbolic, so it will be good to see that happening. If you ask me, it will happen in Q3.
Thank you, and have a very nice day.
Thank you very much.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address all the questions, we request you to please limit your questions to two per participant. If you have a follow-up question, you may rejoin the queue. The next question is from the line of Gaurav Kochar from Mirae Asset. Please go ahead.
Yeah, hi. Good evening to you.
Hi, how are you doing?
I am good, thank you. Congrats on the quarter. Just a couple of questions to persist on the NIM and the fee, because fee, a very strong traction in this quarter. Just to understand a little more, the core fee income to assets is currently at 83 basis points, which is fine. You mentioned, I think, some bit of it is also some shift from the NII line to fee income line. Let's say now that is captured. Really basic point, what is the, let's say, potential, maybe not even just fee. Given that second half is typically better for fee income, and in the first half you've done 83 basis points. Is there scope to increase this in the second half? Let's say for FY 2026, given that all the structures are in place, can we expect something like 1% core fee income to assets going forward?
Yeah. On the fee front, what I'd like to tell you is that the core fee income which we are seeing is primarily coming from repeatable sources. The only negative to that is that some of them are attached to cost that we have. I tend to think that on a sustainability scale, this kind of trajectory is possible. We are looking at a full year ROA of 1% in the year 2025, 2026. Okay? That's what we are gunning for. We have to fix a few things. One was the fee. I think on a steady state basis, a 1% fee is very much possible. I'm just discounting with 1.23% which we got now, not for any other reason. But on an overall basis, on a four quarterly average basis, a 1% I think is very much possible with the franchise that we have.
We have some work to do on the OpEX, and I have talked about it with the earlier callers as well. At 2.75%, our cost to average assets is on the higher side. There definitely is a 10 bps to 15 bps improvement which we can see in the next two, three quarters, which we can affect. The current provision is at 27 bps, may not be the right indicator. We are still getting the benefit of the restructured assets having a higher provision, either going away or staying with us and there is a provision right back as per the guidelines or becoming NPA and need not having to take the incremental provision or need to have take only the lesser incremental provision as the case may be. There is a bit of a tailwind on that.
The 30 bps, 35 bps seems like the right thing for the particular model to come through. NIM at 3.29% is possibly at the lowest end. We probably are not having too many one-offs coming in there. I think from the 0.93% which we have today of ROA, there is a distinct possibility that we could steadily build up to a 1% ROA. That is not a milestone in itself. I mean, that is not an end of journey by itself. I think that is the way to go, and which will take us to our next phase of growth. That is the way the management team is thinking about the revenue cost or provision dynamics.
Sure. No, thanks a lot for that lovely answer. Just specifically on the liquidity front, if I look at the overall balance sheet growth was much higher than the deposit growth, which essentially means you had borrowed and kept higher liquidity on the balance sheet. Just wanted to understand, is it because of the revised LCR norms or is it more of an opportunistically, some treasury action that you would have done in this quarter? Because the borrowing has gone up.
There are two things to look at.
Yeah.
I want you to look at the cost of funds.
Yeah.
The cost of funds went up from 7.14% to 7.19%. Not in the current period. I want to look at the previous period. Between Q4 2024 and Q1 2025, the cost of funds went up from 7.14% to 7.19%. Page number 31. Can you see that?
Yes. Yes
That is a 5 bps increase.
Yes.
What is the cost of deposit increased by during the same period?
2 bps. 7.08% going to 7.10%. Do you see that?
Yeah.
What does it indicate? It indicates that while the cost of deposit was increasing at a lower rate, the cost of funds was increasing at a higher rate. What is the difference between cost of funds and cost of deposit? It primarily is borrowing. What we did is we went back and reworked our borrowing strategy and ensured that the cost of funds are more or less in line with the direction the cost of deposit takes. Which is why you are seeing a correlated movement of cost of funds and cost of deposit happening in this quarter, 7.19% coming to 7.17% and 71.0% coming to 7.09%. We worked on the borrowings, we worked on the refinance, we tried to ensure that the overall cost of funds of the bank decreases. We have done multiple things on this front.
We have also done some CDs, short-term CDs to match with the short-term assets that we have. We are looking from an integrated perspective to bring the overall cost down. More of it will be coming in the future anyways.
Sure. Perfect. Just last question, if I can squeeze in. The current quarter value indicated that these are probably your bottom margins at 3.27%. You mentioned in the presentation that the business model is designed for a 365 basis poin, 375 basis point kind of steady state margin. I know the situation is little more challenging on the macro front. You have to slow down on MFI, et cetera, which is leading to some compression. But by when do you expect to see the normalized NIM traction? I mean, expectation, not a guidance for sure. But expectation, is it like forward view when you start to see that margin to move towards that 3.65%, 3.75% band?
See, there are two things which is very important for you to know. One is that for the foreseeable future, the structural movement from NIM to fee or penal charges is a given, and it's not going to come back. It's very unlikely it will come back. That is one.
Yeah.
Number two, the MFI environment, I would tend to presume will take a year at least to get back to normal. I could be wrong, okay? But that's just a rather uneducated guess. So there are two elements. That being the way it is, I don't see us also rushing headlong into high-yield MFI assets, which we would have otherwise done. So that would be a no-go area. Whatever microfinance or similar kind of loans that we'll be doing will be to meet our small farmer, marginal farmer target or the agri PSL target if we so desire. At the current moment, we have met all these sub-segmental PSL numbers. Right? So there will be an impact on yield because of these two particular reasons, but it's better to take a yield hit than take an NPA hit, obviously. It goes without saying. Right?
But on the other side, what you're really asking us is how quickly can you ramp up the LAP as compared to Home Loan? How quickly can we get the overdraft, overtread engine working? Believe you me, we are working as hard as possible, as quickly as possible to make those stages happen. That's very integral part of our action plan to make the next full financial year our average 1% ROA year.
Sure. Perfect. Congrats for the quarter again to the team and all the best. That's it from me.
Thank you. Participants are requested to please limit their questions to two per participant. We will move to the next question, which is from the line of Rakesh Kumar from B&K Securities. Please go ahead. Rakesh Kumar, please go ahead with the question. Your line is unmuted.
Yeah. Can you hear me?
Yes.
Hi. Okay, yeah, of course. How are you doing?
Yeah, I am fine, sir. Thanks, sir. How are you?
Not bad.
Results are showing that. Good results. Sir, one question was pertaining to the slide numbers 11. The margin guidance that we have is around 40 bps higher. If you look at the ROA numbers, it is increasing by around 7 bps as we are guiding. What is happening in between? Because cost to asset number also, if you look at, it is kind of falling by around 25 bps approximately. Briefly, if you can take us through this margin movement to this ROA movement.
Okay. You are talking about the journey towards 1% ROA?
Yeah. Basically, the increase in margin that we are looking at is around 40 bps from the current quarter.
Yeah.
The ROA movement is that we are looking at around 7 bps. In between, what is changing so much?
There are two ways of looking at that. I will explain it in two ways. One is the ROA for this quarter is 93 bps, correct?
Correct.
That is 7 bps short of 1% ROA. That, if you convert it into a PBT, is 9.46 bps before tax.
Right so far?
Correct.
As a management unit, we have to find somewhere close to 10 bps across four different lines. I still want to say that the 27 bps of credit cost, we will go to 30 bps because that is what the model is about. Between 30 bps and 35 bps is where the model is about. On the cost side, 2.75%, it is only a matter of time before we see it coming down. There is a bit of slack there. It is an investment for the future. If it does not happen, we have the liberty to cut the cost. It is not like a sunk cost which kind of hangs around on the neck. There is an ability for us to move it. That will be a last ever option. I really wish we wouldn't come to that cost at all.
Our idea is the investments that we have made in people succeed, and we make it happen, and that's the way to build the business, and we are reasonably confident about that. These kind of one-off windfalls plus the momentum that we had in this quarter, that gives us the time to rebuild the proposition, like I told others also before, of our OD proposition, of our LAP-to-HL proposition, of a higher ticket size proposition within the framework. We are using this time to build that up. That's a cost that we are incurring. Once we get that moving, you will see the 10 bps can come practically entirely from the cost to average assets reduction. The other way of looking at it is that if we go with our So far okay? Before I go into the-
Correct. Okay.
Yeah. The second way of looking at it is, we look at a 3.4% NIM to total assets, not average assets. A consistent fee income of 1.1%. You would reach possibly somewhere around 4%, 4.5%, 4.5%. Cost to average assets of about 2.60%.
You would land up with something like 1.9%. Take a slightly exaggerated provision of 45 bps. You come to 1.45%. If you reduce the tax, you'll be somewhere between 105 bps to 108 bps, somewhere around there. Okay? These are, in my mind, achievable. The NIM movement, some just by passage of time, and some of the actions that come into execution mode will help us reach there. The key to achieving all this is, in my mind, getting the OpEX as a percentage of average assets close to 2.6%. That's what the management team is focused upon, and really working upon it to improve their efficiency and output with the same number of people. If that works, then we would probably require very little investments of manpower in the time leading up to the next year.
Okay. Sir, just one last question. This was pertaining to credit.
To what?
I do not know. Credit risk, credit risk number that has come down to 11.4%. So I do not know if I have missed it. Had you given the reason? What was the reason for the fall in the same? Because
The NIM reduction is primarily because of the yield advanced reduction. It is entirely that. You see the cost of funds is stabilized. It is actually not just flattened, it has come down slightly, but leave it as it is. The yield advanced reduction is primarily on account of the one-offs, primarily on account of the movement from penal interest to penal charge.
Okay.
Primarily on account of our being conservative on the MFI portfolio much before the smoke started turning out into fire, in certain areas, at least, if not all. That is the impact on the yield advances. The way forward, and I was telling some other caller also, is that the improvement in NIM will come from improvement in the yield advances.
Understood. That one-off amount is contributing how much to that falls?
Individual case, reason why I split, I don't think we'll be able to give. These are four items. We are aware of it and we are working on it.
Yes.
That is where it is. What we are working on is to ensure that the yellow bar next time around is at a higher level.
Understood, sir. Thank you, and all the best, sir. Thank you.
Very much Rakesh.
Thank you. The next question is from the line of Kartik Solanki from Elara Capita l.
Hi, Kartik, how are you?
Hi, all good, sir. All good. Thank you for the opportunity. Sir, my question is on the lines of net interest margin. You had earlier stated to one of the questions that it is due to a one-off in quarter one and quarter two. Can you just throw some light on the same?
The Reserve Bank of India had sent a communication to banks, I think banks and NBFCs, I could be wrong, but definitely the banks, where interest charged to customers who have taken loans should start from the time the demand draft was handed over to the customers. There are many cases where the demand draft was made and customer for whatever reason, the Home Loan agreement not coming into play, the seller traveling, a variety of avoidable and unavoidable reasons, did not take handover of the demand drafts. I understand completely where the central bank is coming from because the draft is with the bank, the funds are with the bank. Even though the capital is allocated to it-
Okay
The funds are with the bank, and therefore the directive was, you can start charging the customer only from the time the demand draft has been handed over. That, we fixed it in middle of Q2. From April 29 to middle of Q2, the bank took a hit. Rightfully so, because it's more customer-friendly in that perspective, and I understand that, and I also advocate the same. Right? That's the right thing to do. But the fact is that it did take a P&L hit.
Sir, is possible could you please like-
It is impacting NBFCs also, but banks, definitely I can tell you.
And sir, if possible, can you please quantify the best impact?
I am sorry.
If you have that number handy.
Okay. One, we did not communicate that, so it is not publicly available. What is publicly available is that that issue is a non-starter now. It doesn't exist now.
Okay. And sir, the ROA target of 1%, which you gave a clear ROA three as well.
It's still not right around a target, Kartik. It's a pit stop before we start up our next journey.
Okay. So this 1% ROA is with factoring any rate cuts or without factoring?
No, I'm seeing it the way it is, because if you were to factor this multiple things, then what's the point in income at all? Effectively, we have to manage it. Environmentally, there will be some tailwind headwinds coming in. Some are unavoidable, some are avoidable. I didn't really have to over-manage that.
Okay, sir. That's it from my side. Thank you. Thank you so much.
Hey, not at all. Thanks, Kartik.
Thank you. The next question is from the line of Rishikesh Oza from RoboCapital. Please go ahead.
Yeah. Hi.
Rishikesh Oza.
Hi, sir. Thank you for the opportunity. My first question is the QoQ INR 60 crore growth in the fee income. Can you provide a broad breakup? Where is it coming from?
It is coming from two separate items. One is the core fee income and others. If you look at commission exchange and brokerage in page number. Just hang on a minute. In page number 34. You see it is a steady kind of growth. Have a look at the commission exchange and brokerage. Are you there? Page number 30-
Yes.
Sorry, 37. Page number 37.
Yes.
INR 97 going to INR 98, going to INR 118, going to INR 114, going to INR 139. Do you see that?
Yes.
That's the kind of quarter-on-quarter growth that we have managed. This is the core fee income that you see there. The profitable sale of investment was INR 52 crore benefit that we got, which is in the second line. There were some exchange transactions and others. The big mover here is the commission exchange and brokerage of INR 139 crore, and that's what we are looking at from a repeatability and sustainability perspective. Profitable sale of investment happens when opportunities arise, so does exchange transactions.
Most of the incremental is coming from sale of investment, right?
You can see that. We used to get somewhere in the teens, INR 14, INR 11, INR 17. That's gone up to INR 52 last quarter.
Got it.
What we are happy with is the sustainable first line. Not that we are happy with the second, but definitely the kind of growth that we have achieved on the earlier line is what we are trying to sustain going forward.
Got it. Also on the cost to income part, could you guide for coming quarters, Q3, Q4, what cost to income do we foresee?
Actually, not for quarter three and quarter four, but for the next full year, what we want to be is around 3.6%. I think it is achievable. 15 bps reduction from today on cost to average assets, I think it is well within our grasp. I was not going to dodge Q3, Q4. The reason I was talking about the four quarters of next financial year is because whether it is a cost or investment, which all of us will get to know soon. We are very confident that it is an investment. That this investment is mainly in people and also in technology, not to forget the fact that we have upgraded three out of the four core banking systems. We have upgraded our AML system, we have upgraded our behavioral biometric fraud detection system, we have upgraded our FCM system.
Leaving all of this aside, I think on the people front, the investment that we made, we are beginning to see the benefit of that. Hopefully, Q3 and Q4 will enhance that, and that will result in us getting to the 2.6% average on a full year basis, April to March next year.
Okay. Also, if you could share what is our Home Loan and LAP mix currently?
On the stock, 50/50. On the incremental, we are trying to ensure that the BL is more than the HL, and that has turned around.
Okay. Could you share any targets that we have for the target mix?
We don't have a target mix as such. Like I told you, the NIM is where it is currently. In our view, it can only go up, and we're working hard on that by a multiplicity of ways. One of which is by focusing on higher-yielding product. Having said that, in the same breath, let me tell you, the management team here took a collective call not to do high-yield microfinance business pretty much early in quarter two. Pretty much early. And you can see that from an 18% contribution, that has come down to 16%. So we are not averse to taking a hit on growth if we believe that's not the right way to grow the top line.
Thank you.
Thank you very much. My pleasure.
Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Yeah. Hi.
Nitin, so good to hear from you.
Yeah. Hi, Praveen. My pleasure. Absolutely, and congrats on a good result. So one question on the loan growth. We have been now consistently delivering healthy loan growth. 20% is what we are looking at sustainably. But this quarter, there is a pickup in certain product lines wherein they were not growing as much hitherto. In fact, they were on a decline earlier.
Say the last sentence again?
Certain segments, which were declining earlier, there has been a sharp pickup in the disbursement growth in those products. Especially if you look at the CV, the corporate. Sequentially, there is a strong pickup on disbursement. How are we looking at this contours of overall loan mix going into the next year?
First of all, I want to tell you, Nitin, that our corporate book has declined and has not grown. Okay? One second, let me see the same graph that you are seeing.
Yeah. I am just talking about the corporate book.
If I remember right, INR 100 crore less than what we started the year with. 23% less, 20%.
I will just quote the disbursement number was like INR 475 crore in the previous quarter, which is now INR 634 crore this quarter, like 30% plus jump on a sequential basis.
Correct.
Disbursement-
What I would suggest is, look at the overall pie chart on page number 21 and compare it with the pie chart of last quarter. You would see that the corporate banking book in Q1 is less. Q2 is generally less than March, if I am not mistaken.
Yes.
Yeah. Right? In absolute terms, I know the number, it is about INR 100 crore less than what we started off the year with.
Yeah.
Yeah. Okay. Maybe more disbursement happened. Must be short-term loans. Right? Must be short-term loans that have been given. But otherwise, no change in strategy. We hold around whereabouts of this . Yeah. In fact, we are less than March .
Okay. Likewise, in CV also, that was more of a defocused product, and this quarter that has shown some pickup. How are you looking at this segment now?
These are more of opportunistic lending given to certain existing CV customers. Because one of the things that we found out, which should've been apparent earlier, is that the performance of the book improved significantly if we were to keep it going. It is a small book. We will keep it going. I do not see that rapidly increasing. It is not like a target segment in itself. But the real movement is getting your mortgage and OD. That SME book which you see there, frankly, we are trying to convert it into a full overdraft product, a full engagement product, similar to what we spoke about earlier also, about converting that to the complete branch-led, digital-led engagement process.
Okay. Sure. Secondly, on margins now, as the rate cycle turns in the coming quarters, how do you see the trajectory moving into the one age? What sort of pricing power are we looking at? In this sort of a risk-averse environment, how much downside risk do you see further with the NIMs?
I do not see a downward risk happening because cost of funds is, the deposit market continues to be challenging like it has been for the last six months. When it is challenging that way, it is very unlikely that you will have a yield drop happening on any of these products. Very, very unlikely. But like MFI, for example, we have budgeted for something much more. That is not going to happen for obvious reasons, right? So that will get compensated by some other secured products which will now give you a similar kind of yield. So that kind of dampening will happen. But much more importantly, the productivity that we will have of secured lending products like SME and LAP and even Home Loan will more than compensate for the rate drop in specific portfolios, which we will not be really going after hard.
To sum it up, since I think NIM is at one of the lowest which we can foresee.
Okay. That is interesting. Right. Thanks so much, Praveen, and wish you all the best.
Thank you so much.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you for your patience. It's been an amazing evening. Good thought-provoking questions. I hope you got answers for that. If you haven't, please send an email to our investor relationships team. They'll be more than happy to respond to your queries. Look forward to meeting you again or speaking to you again in Q3. Thank you very much. You can close this call, operator.
Thank you. On behalf of DCB Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.