Ladies and gentlemen, good day and welcome to DCB Bank Limited Q1 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; and 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 touch-tone 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. This is Praveen here. I want to take you through the highlights of the last quarter, starting with deposits. Our deposit growth has been slightly above 20% Y-o-Y, and the CASA growth was about 18% year-on-year. Our focus on CASA is savings account, and savings growth has been 21% year-on-year. During the last quarter, we crossed the INR 50,000 crore total deposit mark. In a market which has tightening liquidity, we improved our CD ratio to 81.6%, and our LCR is well over the 120% threshold that we kept for ourselves internally. On the loans front, we have had a loan growth of 18.9%. Our restructured book now is 2.34% net, considerably less than what we started off with.
Our credit cost is very comfortable, though there is a slight elevation in the NPA ratios and our provision coverage ratio is 76%. These are top-line numbers. On the profitability front, our NIM has come down to 3.39% in this quarter, and our fee has hit a high of INR 143 crore. The core fee income is robust at INR 114 crore. The cost to average assets in Q1 2025 is 2.71%, slightly less than the 2.73% of the same quarter last year. On the non-financial front, we had two very important technology upgrades during the quarter.
One was that we upgraded our treasury system. We have a new TCS system, which is there for our treasury, and also from a cybersecurity perspective, we have an upgraded SIEM system. In the last quarter, we have made some basic rejig, which I think is important for the bank from a future growth perspective.
This is mainly on the assets front. Mortgage is undergoing a bit of a revamp. It is a bit of a rejig. We are reorienting ourselves to business loans. Mostly, if you look at our mortgage book, it is cut half in home loan and business loans. Increasingly, we would be pursuing business loans within the framework that we currently have. The second element in the mortgage revamp is that we are reclaiming the INR 50 lakh to INR 1 crore space very well within the MSME self-employed segment. Over a period of time, from 2016 to now, there has been a steady decline in our ticket size. So we have moved, there was a skew favoring affordable housing and small ticket lakh, and there is nothing wrong with that.
The only thing is that from a productivity perspective, there is a market out there, specifically the INR 50 lakh to INR 1 crore range, which is a space that they are comfortable with, we are comfortable with. So there is a greater thrust on getting that going in addition to the affordable housing and the small ticket business loan that DCB Bank anyway does.
The second area of modification is our focus on engagement. Our SME book will be more focused on the overdraft product that we have. Currently, the SME that you see, if you were to look at the investor presentation, it has a combination of TReDS and the traditional SME, MSME products that we have. In the future, you would see the reliance on TReDS coming down and overdraft coming into play. It will help the yield. It will also help cross-sell. It will also help increase the fees.
The second part of the engagement is on the CASA front. While we have grown savings account by 21% Y-o-Y and CASA also by 18%, there is increased thrust on improving the CASA even further as we go along. This would come from focusing on engagement at multiple levels, both digitally as well as relationship manager-based engagement. The third element is greater use of data analytics to deepen and widen relationships within DCB Bank. So we have a dedicated team solely focused on increasing product penetration within DCB Bank. This, ladies and gentlemen, is a summary of the last 90 days. If you have any questions, feel free to ask. I have my leadership team also here with me. Feel free to ask questions and we will provide you with the answers.
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 their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Rohan Mandora from Equirus Securities. Please go ahead.
Good evening, sir. Thanks for the opportunity. Sir, wanted to understand on NIMs and the compression that has happened this quarter, especially on the yields, 20 basis point decline. So is there any one off here? How should we look at the yield trajectory going ahead?
Yeah. Hi, Rohan. The NIM compression primarily comes from two components. We are at the last leg of the term deposit renewals. The long-term term deposits that we booked in the past have come up for renewal, and now they are repricing themselves to the current rate, which is obviously higher than what they got booked two to two and a half years back. We are at the last leg of it. Probably, that will stabilize, it will flatten out by middle of third quarter. What you also can see is that if you see the trend line of the cost of deposits, the rate of increase is coming down. From 6.77%, it will increase by 18 basis points from quarter two to quarter three, and then subsequently became 13 basis points from quarter three to quarter four.
From quarter four to the first quarter of this year, you're seeing a 2 basis points increase. We will see a stabilization of that coming through. That's one element to it. The other element, Rohan, is that there has been some regulatory changes on the loans front, which has resulted in interest reversal, which we believe is a one-time thing. This also includes the change from penal interest to penal charges, the circular which DCB Bank has come with. We implemented that, and we have also ensured that incremental disbursements on loans, the interest charge is from the daily handover date. On an ongoing basis, we can see the NIM rising up, because we don't expect too much of one-offs to continue in the future.
Sure, sir. Here, sir, if you can quantify what was the total impact due to the regulatory changes on the yields?
That's something which I don't think we can tell you right now. The only thing is that there are two components we can speak about. One is about the penal interest component being replaced with penal charges, and we see a slightly elevated fee income also coming through correlated to that. The second part is for ensuring that the loan dispersal interests are accrued from the handover date and not necessarily from the dispersal date.
Sure. And, sir, with these changes, like the NIM guidance that we typically give, 365- 370 basis point, does that change for a steady state?
Not really. On ongoing basis, we should As you know, NIM has got multiple components, yield, cost of funds, the slippages, aging of portions, right? Plus, any one-offs that may happen. We expect the one-offs, the June booking may have some bit of spillover into July, but beyond that, I don't think that will happen.
Sure. But sir, for the current financial year, would it be fair to assume that the NIMs would undershoot the guidance?
Unlikely.
Because of this impact?
Unlikely. Not because of any particular reason. We don't expect that.
Then sir, what will the drivers on NIM expansion from the current levels? Because the cost of funds would go up. On the advances side, like we had explained that certain part of the mortgages book is on that fixed to floating thing. So that may have some impact and-
Three elements, Rohan.
Right.
One, I'll repeat. The rejigging of the mortgage book, which would result in higher quantum of business loan over home loan. The kind of onboarding rates on business loans are significantly higher than that of housing loan. The second thing is that we are focusing on SME overdraft at the expense of SME TReDS. TReDS obviously is a smaller tenor loan at a lower yield. So we will compensate that with an SME overdraft facility. So you will see that there is a difference in the yield that one gets. The third element, what you said, is not a new element as and when the hybrid loans come up from fixed to floating, DCB Bank gets a benefit of the increased EBLR, which has not been passed on because of the benchmark changing post the customers coming into the fixed rate criteria.
Sure, sir. Secondly, on the other OpEx piece, what kind of a trajectory should we expect by FY 2025?
Our cost to average assets is 2.71%. We would expect that to come down steadily to 2.5%.
Okay. Over what time frame?
In the very near future.
Okay. Sure. And sir, just if you can quantify the amount of construction finance book.
About 4%.
Sure, sir. Thanks a lot.
Thank you. Next question is from the line of Viraj from SiMPL. Please go ahead.
Yeah. Am I audible? Hello?
Viraj, yes, you are.
Yeah, just couple of questions. First is, as for our presentation, we have a stated guidance to achieve 1% ROA and 13%-14% ROE. This would imply a leverage of 13- 14 times. If I look at the last 14, 15-year history of our bank, we have never operated at such a high leverage. To achieve this kind of ROE, we would also have one of the highest leverage among private sector banks. If you can just help us understand if we and the board are comfortable operating at such a high leverage, and what is our thought process to have such a high leverage.
Sorry, Viraj. Can you repeat your question?
Yes. Hello, am I audible?
Yeah, you are audible now.
What I am saying is that, if you look at our presentation, we have a stated guidance to achieve 1% ROA and 13%-14% ROE.
Correct.
So, employed working would be that this would have a leverage of 13- 14 times. If I look at the 14, 15-year history of our bank, we have never operated at such a high leverage. In fact, to operate at this kind of leverage, we would be among the highest in private sector banks. If you can just help us understand if we and the board are comfortable operating at such a high leverage, and what is the thought process to have such a high leverage.
If you look at the net worth of INR 5,000+ crores. We work on a RWA of 53%. What you are seeing is a very efficient use of capital. This has been consistently being done from 2018 onwards, you would see that our RWAs are primarily in the less than 55% category. There is considerably lower usage of capital, and that has resulted in the ROE being close to 2.5 times the ROA.
Hello? Hello? Hello?
Yes, you are audible to m anagement.
Yeah. We will be talking about increasing it further from 2.5 to almost 14 times to achieve the kind of ROE we want to achieve over the next few years.
You continually see that the risk-weighted assets would be in the region of 54%. Internal accrual of capital at a 17%-18% growth will come from within. Because our ambition is not to grow 17%, but we are looking at a 20% growth, then a fresh infusion of capital would certainly happen.
What will be the proportion of fixed rate and floating rate loan book for us? And if rate cuts were to happen at the end of the year, how do you see the impact of rate cuts on our name?
I can answer the second part. We have three types of loans. One is a fixed-rate loan, another is a hybrid loan, and third is a floating rate loan. In case a rate drop happens, one of the things which we can do is to ensure that there is a simultaneous drop of a similar rate on a savings account book where the proportions would be similar.
We have got INR 11,000 crore book on savings account. And if that particular portion of INR 42,000 crore of asset book were to have a benchmark-related reduction, we would see a similar reduction in a similar timeframe happening on the savings account book also. Because savings account is more or less retail in nature. It is reasonably price inelastic. Maybe at the top end, we could have a bit of a customer movement happening, but then the benchmark affects most players in the industry as well.
And in the budget, there's been an announcement of credit guarantee scheme for MSMEs. If you can just help us understand what this scheme is, and if in any way it is beneficial for our bank to underwrite a higher number of loans or underwrite better quality loans.
There is a program called Tarun, which has been extended to INR 20 lakhs. Our team is looking at the budget proposals and studying it. Then we'll come back with an action plan on whether that makes long-term viable sense for us or otherwise.
Okay, just two questions. One is on the fee income growth. If you can just elaborate more, are we driving that to increase? I think historically it used to be close to 1%, but it's been trending low for now few quarters. How are we looking at driving that better in coming quarters? Second is on the promoter preferential issuance. If you can give an update, by when do we expect that to happen?
Sure. On the first question, which is the fee income, we've had a 33% Y-o-Y growth on fee Q1 2024 versus Q1 2025. There was some bit of inorganic fee also there. But from a core income perspective, INR 114 crore of fee income has been amassed primarily by some good performance from the third-party distribution, processing fee, et cetera, which is a repeatable fee income revenue. That's one part of it. The second part of it is that some amount of elevation is there because what would have otherwise come in NIM has come in fee on account of the penal charges coming into play instead of penal interest. But on an ongoing basis, where will the fee come from? How would we go more towards 1%?
The answer to that is that the whole engagement model, which I spoke about in the beginning, is to drive overdraft and CASA. What is common between overdrafts and CASA on either side of the balance sheet is that these are high engagement products. When engagement happens, there is an opportunity to cross-sell. As a bank, we have multiple avenues to cross-sell, both physically as well as through the net. Effectively, the shift to CASA, and you have seen some parts of it already with the savings account grow to 21%. Some part of that is still bearing fruit.
There is lots more one can see going forward. Movement from TReDS, which is a fairly anonymous system-based lending to overdraft-based lending of SME, would result in higher opportunities to come by, both on the funding front as well as on the bank guarantees and other fee revenues which we can get from them.
Okay, on the promoter fund infusion.
The promoter capital, there are a few more documents that are being sought for. We are in the process of submitting it, and once that happens, we would get the clearance. Once the clearance comes in, the capital inflow should happen within a very few days, if not weeks.
So maybe by Q2 we expect the closure?
We expect it by Q2, definitely. Usually it's an iterative process. Some documents are asked for, and then some more are asked. Assuming that that particular process is complete, then the infusion should happen practically immediately.
Okay. I'll come back in queue. Thank you.
Thank you.
Thank you. Next question is from the line of Mona Khetan from Dolat Capital. Please go ahead.
Yeah, hi, sir. Good evening.
Hi, Mona. How are you?
Yeah, I'm good, sir. Thank you. The first question is on margins again. So, you mentioned of the impact on NIM partly being offset by higher fee lines, where penal interest got converted to penal charges. To that extent, shouldn't the NIM going forward settle at lower levels? Or simply because there'll be levers on yields from changing loan mix, you believe that the guidance will be maintained?
There are actually three things in this. One, what you said of penal interest coming back as penal charges. Second is about refund of interest for loan disbursements from the time of the demand draft being made to the time the demand draft is handed over. These are one-time events. A bit of a spill-off may happen into July as well, but beyond that, I don't see that one-off coming into play as far as the NIM is concerned.
From a slightly longish perspective, the repricing of long tenure term deposits would continue to middle of third quarter, after which you would see a stabilization of the rate of cost of deposits. I would draw your attention to the key ratio sheet, page number 30, if you have it with you. If you were to look at the cost of deposit, you see it is on an increasing curve, but the rate of increase is decreasing in every quarter. So from 16 basis points, 18 basis points, 13 basis points, it's now come to 2 basis points, and you probably will see it stabilizing before tapering.
Okay.
Then what would really in reality happen is that the percentage increase in the interest income would reflect the percentage increase in the top-line growth.
Okay. Secondly, when I look at your, again, coming to the yield space, what would be the share of hybrid book? If I recollect last quarter, there was a big gain from some of the fixed-rate loans being converted to floating, et cetera. Do these gains continue this quarter and in the ensuing quarters as well, or the benefit has largely already played out?
The benefit has not gone fully. There is some more pending. Like we spoke about term deposits, right? The old term deposits are coming up for renewal right now. Similarly, there are hybrid-rate loans which are continuing as fixed, wherein the future you would see them becoming floating, and there will be an upside as and when the movement to floating happens. That story is not over yet.
Got it. But roughly how big would be that book on a steady-state basis?
That is not a publicly revealed information. One of the ways you can look at it is that we told you that in case we have to immunize ourselves against a rate cut, we said that we will look at the savings account book as a buffer for making similar kind of changes. That kind of gives you an indication as to how much will be floating.
Sure. Got it. Thanks. That is all from my side.
Right.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please restrict your questions to two per participant. If you have any follow-up questions, you may rejoin the queue. Next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Good evening.
Hey, how are you doing?
All good, sir. Thank you. Sir, wanted to check on the slippages.
Sorry to interrupt, Mr. Jai. Your voice is breaking.
Is this better now?
Yeah, we can hear you.
Sure. Wanted to check on slippages, sir. Excluding gold loan, the slippages are 2%+ , still looks on the higher side. What is driving this, and how should one look at this number going ahead?
If you were to look at page number, let me see, page number 25. Please have a look at the bottom table on the right-hand side of page number 25. You can see that there is an increase in the mortgage book. From INR 445 crore, the stock has increased to INR 486 crore. Within that, home loan is one area where there is an elevated slippage happening. It's not something which keeps us awake in the night. I see that more as episodic rather than as a continuous problem to handle.
Okay. Secondly, sir, you have partly indicated this, but if you can quantify the yield change in this quarter, or how much of the yield decline was due to penal charges flowing from NII to fee income, and maybe because of the higher slippages, just to understand the yield movement correctly.
Yeah. It is not those two items alone, first of all, Jai . Those two items are there, but there is also a third item, which is that refund of interest from the day of disbursement to the day of handover of the demand draft. There are three elements to it, which contribute to what, if you were to compare with Q4, 11.71% was our yield, now it is 11.50%. We don't give the individual breakup of it. What I can say with confidence is that the penal interest to penal charges is a one-time that is done and dusted.
The refund of interest on booking is something which is there for the June 30th booking also, which would practically be for what? Maybe two weeks or three weeks. But on an incremental basis, we don't have that problem. The day on which the dispersal happens is the day on which the handover happens in that sense. Those two one-offs will not happen.
The rest of the yield is a question of the mix. I told the group on a go-forward basis, three items where we are increasing the yield. One is the trust movement from a 50/50 home loan business loan to a higher business loan. Second is reduction in the TReDS outstanding, more than compensated by genuine SME overdrafts, which happen. These two elements would result in higher yield, and we do not expect any other one-offs to happen in a go-forward sense.
Sure, sir. Thank you, and all the very best.
Thanks, Jai.
Thank you. Next question is from the line of Prakhar Agarwal from Elara Capital. Please proceed.
Yeah, hi, sir. Thanks for the opportunity. Just wanted to get a sense on OpEx. Cost to OpEx that you probably said that it went from 2.7 to 2.5. What is the reason for this being elevated this time around, and what will lead to the changes that you probably said that in the near term, you will probably see from 2.7 going to 2.5?
I personally think that it is the reduction on the NIM, which has resulted in the elevation. It is not necessarily the cost perspective from a cost-to-income perspective. On cost to average assets, we have increased the number of people and how well we squeeze the productivity from the team and how we build a book will also determine how the cost to average assets will decrease. The third element to that is that a lot of investments have been made in technology. The impact of it is yet to come. It is happening in the future, which involves reduction in multiple costs, including courier charges, stationary charges. In fact, we have had a system called MyDocs where more than 80 odd dispatchers to customers have been replaced with electronic communication, where customers can get information at will by going into the website, not necessarily through logging into the app.
The three elements to this. The biggest element, of course, is productivity because we have invested in the people and we need to sweat the returns from some people that we invested. The second element is the focus on higher ticket size, which also will have the same cost. We are getting a higher ticket size with similar kind of yields. The third element, like I told you, is the operational cost reduction because of investments in technology.
Got it. Just one more qualitative comment on how has been the behavior of your co-lending book on FLDG side, and have you seen any deterioration in there or on-
First of all, FLDG and co-lending cannot coexist. You cannot have FLDG for co-lending. That is against the law. So there is no FLDG. So good that you asked the question. So on March 4, one of our big co-lending partners has had an embargo on sourcing a particular product. And they were one of the biggest co-lending partners by a long chalk. We have had near perfect recovery from that in March, April, May, June, and July so far. In addition to that, this also meant that no fresh sourcing for the originator means no fresh co-lending for that originator's partner. But that has not impacted our book because if you were to see the previous quarter end, our co-lending book was 7.5% of the total assets. Now it is 7.2% or 7.1%. So there is hardly any difference.
The bank has very nimbly worked out on other co-lending partners to make up for the shortfall of co-lending. Otherwise, we would be sitting on a massively low asset growth, both for the quarter and for the Y-o-Y basis. Technically, short answer, quick compensatory action on other co-lending partners. Impact on portfolio quality, nil. Negligible so far.
Got it. That is it from my side. Thank you so much.
Thank you. Next question is from the line of Rakesh Kumar from B&K Securities. Please go ahead.
Yeah, hi. Thanks a lot, sir.
Hi, Rakesh.
Hi, sir. Hi. Congrats, sir. Good numbers, sir. Just one thing, I want to clarify with respect to notes to accounts detail. We have acquired around INR 800 odd crore loans with a residual period of 4.6 years or something. Out of that, close to INR 600 crore number is on the secure side. Just wanted to get some detail. Also, what is the full year credit growth target that we have, sir? Internally target that we have.
Yeah. So last question first, about credit growth target. We intend to double the book in about 3.5 years, so you can work backwards out in that. We are comfortable with the 19% growth, so anywhere between 19%-20% growth is a good number to target. More importantly, as far as the transfer of loan exposures is concerned, from our side, DCB Bank has always been playing a key role in alliance and partnerships. In May 2021, when the co-lending circular first came out, we started involving and we got almost 10 odd co-lending partners right now. The reason for that was that, and we built a co-lending book which is about, my guess is about 5% of the industry. Whereas from an overall perspective, we are about anywhere between 0.25% to 0.3% of the total lending book from the overall banking scene.
We are punching much above our weight in co-lending. The reason I am telling you this is the bank has always been partnership focused, so we have had relationships with multiple financial institutions, both on the pass-through certificate front as well as on the direct assignment sense. Securitization and PTCs play an important role. The number of players that we deal with is vast, which has helped us migrate into co-lending also very, very quickly. But the ticket size are usually pretty much low bite size units which we have.
This is important for us. We will continue on the journey. It gives us insight into new products. We are non-predatory by nature, which helps us also have multiple relationships within the same product, same segment, or same geography. It is important for us and we will continue with it. That will be, in a proportion sense, it will be the current proportion to the overall book the bank has.
Mr. Rakesh, does that answer your question?
Yeah. Just one question, sir, in addition to that.
Yeah.
The total maturity of the book is around six years. Correct me, sir? The book that we have taken on our book.
Yeah. Door-to-door.
Door-to-door. Correct. The loan is 4.74 years.
Is the current weighted average residual maturity.
Right.
And the holding period at the originator is about 1.14. But that, frankly, you should look at [inaudible] .
Correct. And sir, the originator is holding just around 10% of that book, correct me, sir?
There is a minimum. See, it depends upon what product it is. There is a minimum holding period and MRR, minimum retention. What is it called? MRR full form, I don't recall it right now. There's a portion which is retained by the originator as well.
Correct. Just wanted to understand that six years book, right from door-to-door and unsecured. What is the characteristics of this loan, sir? If you can like-
It's a combination. You have combination, is not entirely is not answered. There are multiple loans within that where there are long-tenor loans and there are short-tenor loans. Unsecured typically are short-tenor loans. The average, which you see is the weighted average here, this is the maturity.
And credit risk. Sorry, sir, how much credit risk you maintain, sir, on this book? Credit risk, sir, on this book.
Around the yield? See-
Yes.
We don't give individual yield-
Correct.
For the TLEN D book.
Correct. Okay. Thank you, sir. Thanks a lot, and all the best, sir.
Thank you so much.
Thank you. Next question is from the line of Shreyas Pimple from JM Financial. Please go ahead.
Hi. Thank you for the opportunity, sir.
Shreyas.
Hi. I wanted to ask about the recoveries. Recoveries this quarter has been really good. What kind of pipeline that we are looking at and how do we build the quantity of recovery for this full year? Can you give some sense on that?
We have a fairly large book of NPA stock of INR 1,400 odd crore. If you were to look at the page number 25, you will find that a substantial portion of that has matured. When an NPA happens, either you get the recovery fairly quickly, or you get it after a period of, let's say, two and a half to three years. Why I say that is because the judicial process in India usually takes that amount of time for the possession order to come in, et cetera. When the possession order comes in, that's when people rummage and arrange for the loan repayment to happen or sale of asset to happen. Usually, in our case, the borrower himself or herself ensures the sale of the property happens in cases where the possession orders come through.
We have a reasonably big pickled pool, vintaged pool, from which we are expecting recovery to happen. Effectively, if you were to look at it, INR 486 crore is mortgages, INR 176 crore is SME and MSME, which frankly, the collateral for both are practically the same. Then we have a small book of commercial vehicles where probably the recovery factor is not very high. But if you were to look at mortgage and SME, close to about INR 700 crore of high recovery pool is there with us. With the passage of time, we are confident that we'll be able to make a significant recovery. The trend line should continue.
Understood. Thank you so much, sir. Secondly, on the unsecured business, we are seeing in the industry credit costs normalizing. How do you see the unsecured lending part, the credit cost going up, or how's the book seasoning? Can you give some sense on that also?
On the unsecured book, what we are concerned about is our customers having an unsecured book and how that impacts our secured customer behavior. We also do not have an organic book with unsecured lending, unless you include MFI, and we will talk about MFI in some time. On a normal SME mortgage book, what we are clearly looking out for is our secured customers' behavior in the market if he has taken unsecured lending. Based on scrubs with the credit bureau, you understand which customers to proactively act upon. So far, we have not had any issues on that particular account. The other unsecured book that we have is MFIs. Our repayments are as per plan, as per our expectation, rather, and we have not seen any worsening of the MFI book in the quarter.
Understood, sir. The last question, sir. On the business loan part, what is the delta in the yields that we are looking at as far as increasing proportion of business loans is concerned?
Luckily, if you were to look at it today, I can give you a general. If you are a customer and you are taking a business loan vis-a-vis a customer taking a housing loan, there is anywhere between 1.5%-2% difference at the time of sourcing itself.
Okay. Thank you so much, sir. That was very helpful. Thank you.
Thank you. Next question is from the line of Ravi Purohit from Securities Investment Management Private Limited. Please go ahead.
Yeah. Hi. Thanks for taking my question.
Hi, Ravi.
Yeah. Hello.
Yeah.
Yeah. Can you hear me?
Very well, Ravi. Go ahead.
Yeah. Okay. Yeah. Thanks. Okay. This refers to our PPT, and this one and the earlier guidance also that we've been mentioning lately about hitting 1% ROA and 14% ROE.
Just wanted to understand the mathematics as to if you hit 1% ROA, how does that translate into a 14% ROE? Because as I think at one of the conferences, you were referring to the DuPont formula, and you had said that if you look at the constituents of that, and when I work on that, I kind of struggle with the math. 1% ROA translating to 14% ROE. If you could just kind of help us give insight into what's our path to this 14% ROE.
Is it higher leverage to networks in terms of more loans? Is it higher NIMs? What is the path towards hitting this 14% ROE? Because it's something over the last 15 years we've never done. We've probably achieved within a hairline distance, maybe about eight years back or seven years back. But apart from that, we've never hit even 13% ROE or 12%. So in that sense, where does this confidence for 14% ROE, is it an aspiration or is it something that can happen over the next year and a half?
Yeah. Good question. Is it an aspiration? Of course, it's an aspiration. Will it happen? We are very confident. Why will it happen? There are two, three components to it. We believe that the investments have been made. Okay? There is a product mix change that is required in some areas. So I spoke about this earlier, PL, more business loan-oriented growth, which may have a higher capital impact, but not a higher credit impact. The segment remains the same. So that's one element to it. Second, I told you, TReDS currently, you can guess what kind of returns you make on that vis-à-vis a regular overdraft on the SME platform. So without changing the growth numbers, we are talking about a higher yield coming from in there. There are two areas management is working upon, which will ensure that the aspirational number of 14% will be realized.
One is on the fee front. We have a task ahead of us. From a late 80 basis points, 86- 90 basis points, we have to move towards a 1% of fee. Where will it come from? What is working for us currently is the third-party distribution, is the processing fee, is the ATM charges. Some amount of tailwind will come from the penal charges, which is coming to play. But be it as it may, we want to put our emphasis and thrust on the engagement model that we spoke about, which would result in NFB, non-fund-based income coming through, fee income coming through. That's a key area of change for us from the way we used to operate. Nothing wrong with mortgage, and we are very comfortable with that.
But the opportunity to serve customers is fairly limited because the interaction is perhaps two to three times during the entire life term of the particular loan. The second area where work has to happen is what I told you from the beginning. The investment has been made, that is the people cost has been incurred. Now how well we squeeze the productivity out of that investment that has been made would help us bring down the cost average down. Over the last 15 months, we've brought it down from a high of 2.87 to current levels of 2.71.
A similar kind of work would result in us getting closer to 2.5, which is the aspirational figure from a cost to average as a perspective. Lastly, on the credit costs, on a steady state, one would expect it to be around 35 basis points, which is considerably higher than the 18 basis points that we currently have. But the model would assume that we would be at around 35 basis points on a steady state basis.
Right. So this probably all of these initiatives will help us get a higher ROA, right? And ROA would probably hit one or maybe cross little above one, right?
Right.
The other element of that is how much leverage we can do on our net worth, right? Which will effectively be made up of deposits and borrowings. Right. And how much would that come to be? Or how much does our balance sheet actually allow us to go? Because if you multiply one ROA to get a 14% ROE, you need a leverage of 14 times, right? So where would that, because again, if I go back in history, we've not seen that number, right, ever. The max that we've hit is like 12, maybe once or twice. Again, ROA piece is, I think, very well communicated. I think you had indicated earlier as well.
Yeah.
This ROA translating into 14% ROE, if you could explain or just help us understand that journey.
Let me give you a construct on this.
Yeah.
The construct is this. The model that we are working upon is that when you utilize the capital fully, we would be operating closer to 15, and when fresh supply of capital comes in, we will be operating close towards 13. So that's the aspirational model that we have built in, where the range of ROE will be in 13 and 15, depending upon how well the utilization of capital happens. But from a risk-weighted asset modeling perspective, we will continue in the future also, continue to be in the 53%, 54% range, unless some dramatic regulatory change happens on the risk weightages that we currently operate, which we are not foreseeing.
Okay. Thanks a lot, and all the best.
Thank you very much.
Thank you.
Thank you. Next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Yeah, hi. Thanks for the opportunity.
Hi, Nitin.
Hi. Sorry if this question had been answered earlier. One is on the fee growth, which has been very strong. How structural is this? This is a very sharp improvement that we are looking at. If you can provide more color on this number that we have reported this quarter.
We have had INR 114 crore of core fee growth, which kind of resonates with the INR 117 crore of core fee growth, which we had in Q4. From a Q1 perspective, we are reasonably happy with the fee income growth that has come through. There has been a couple of one-offs of investment sales that has happened, and also opportunistic income coming in from IPO financing has also helped the cause. On a clearer go-forward basis, I expect the core fee to continue on its momentum towards getting to the 1% mark, which is an important landmark for us to get to the ROA and ROE which we have spoken about in the multiple questions earlier, Nitin.
Right. Okay. The other question is on the network expansion. While we have been adding employees at a very aggressive rate, if I look at last one year, our employee count has gone up by more than 20%.
Yeah.
The branch increase is very measured, like nine branches on last one year, three branches this quarter. How do you correlate the two, and how will this fit in in your medium-term cost to asset guidance?
So effectively, one of the ways of looking at it is that where is the growth of 20% of liabilities coming in from or 19% assets coming in from? Partly it is fueled by the increase in manpower. Most of the deployment of people has been on the front line, and one of the reasons why our cost to aggregates has climbed up is because of the increased expansion of people. There are two things in this. One is that our strategy of hiring is a lever to us to sort out the good from the bad in the environment that we currently work. So it is a process of ensuring that the productive people stay and we fail faster on people who are not cutting it. So to some degree, that is happening because there's a constant churn.
Some bit of attrition in that sense is welcome because you don't want to carry, for want of a better word, freeloaders on the book. So, it's not the most effective way of hiring, but we are getting increased emphasis on getting people on board and then there is this productivity-focused movement of people who are not making the cut.
Okay.
It will continue to happen even in the future also. So I'm not saying the growth, but this process, because getting the right sort of people on the frontline is a bit of a cumbersome process.
Right. Lastly, on the CD ratio, while DCB Bank is pretty much in control, we have reported a decent deposit growth. But what is the, say, optimal number that you are looking at in terms of CD ratio and what is the SLR ratio for DCB Bank?
My belief is our CD ratio is one of the better ones in the market today. Getting into a sub-80 level may not be a bad idea. We are at 81.6 currently, declining from the previous quarter also. There is sufficient cushion that we have. Under 80% would be a good number to aim at for the shorter term.
Under 80. But why so conservative, under 80, because most private banks are above 80 only.
Yeah. See, essentially it is good to have the liquidity. It gives you the raw materials to go ahead and get the right. I mean, today's market, having a strong liquidity backup is pretty much useful. We saw that in Q4. We saw that in Q1 also. We do not want to be scrambling for deposits at any point in time. Being solvent, being liquid is absolutely critical. It is good to be a bit conservative. Having said that, we are also very conscious about the LCR. We keep an internal LCR benchmark much higher than what the regulatory mandatory minimum is.
All right.
Also, one more thing, one more question on that, is that we are also looking at improving our liability profile by focusing more on the individuals than on entities and institutions.
Mm-hmm. Okay. Is this under 80 CD ratio guidance, are we baking it in when we look at a 19 odd percent sort of advances growth, 19%-20% advances growth and the overall deposit attrition that we will need to deliver on that while improving CD ratio? Are we like looking at that sort of deposit inflow?
We should be able to. There is no reason to believe otherwise. We should be able to do that.
Okay, great. Thanks so much. Thanks for taking all my questions.
Anytime Nitin.
Thank you. Next question is from the line of Rishikesh from RoboCapital. Please proceed.
Yeah, hi. Thank you for the opportunity.
Hi, sir.
Hi, sir. How are you? So my first question is with respect to the NII growth. If I have got it correct, we are indicating that our NII growth will be similar to loan book growth Y-o-Y around Q3 or Q4. Is that a fair understanding?
We expect the one-offs to get completely eliminated in the next quarter, and then the term deposit rates to stabilize thereafter. Effectively, what we mean is that from the middle of Q3, you will probably see the volume growth reflecting in the NII growth.
Okay. By Q4, we should maybe see the numbers reflecting in our P&L. Is that a correct understanding?
Yes. Currently, what is happening is that we are growing 19% on the assets. We are growing 20% on the yield. However, the NII is growing only by 6%, right? By 5%.
Yes. My second question is with respect to the asset. My second question is with respect to the LAP book. What is the LAP book currently as a percent of mortgages?
I am so sorry. I am not sure I understood your question.
Our business loan book, or I was asking about the LAP book, what is it as a percentage of our mortgage book?
Sorry. Okay. If your question is, what is the business loan as a percentage of our total mortgage book? It is about 50/50.
It is 50/50. What is the target going ahead?
We want to increase that. Not that we have a problem with home loans, but what you are currently seeing is a reorientation of the team, and we are doing some verticalizations within the organization to ensure that there is greater focus on the INR 50 lakh to INR 1 crore segment, and also on business loans segment. There is a bit of a rejigging of the asset structure as we speak, and we should see the benefit of that coming in from maybe quarter two or definitely from quarter three onwards.
Okay. One last question with respect to the OpEx. Our OpEx has been higher for this quarter. Is there any one-off or any particular expenses that you have taken? We have a cost-to-income target of 55%. By when are we going to achieve it, and how would that take place?
The single largest component of our cost is the people cost. Like I explained earlier, we have invested heavily in the people, and not all of them will be productive, but we are really working hard on making them productive. Those who are productive, so be it. Who are not, we would ensure that that cost does not continue in the future. Getting the productivity up is a number one challenge in getting the cost-to-income ratios down. In addition to that, you have some changes which are technology-driven. Effectively, some components of OpEx, including couriering, stationery cost, storage cost, all these are coming down dramatically because of digitization that we have done on both the liability system as well as the asset system. That will continue. Those benefits we will get.
Plus, we are working on rejigging the sourcing model by giving more emphasis and more weightages to organic sourcing as compared to DSA-based sourcing. These are elements which will ensure that the OpEx is in control. But the single largest element, what will really move the needle, is about the productivity. The number of people who have been put charitably, and is there any output from them. We can also include the liabilities, that is, the CASA and term deposit output from them.
Okay. That was from my side, sir. Thank you very much.
Anytime.
Thank you. Next question is from the line of Shrinjana from RatnaTraya Capital. Please proceed.
Hi. Thank you for the opportunity. I have two broad questions. Am I audible? Yeah. Hi. One is on the OpEx side. Currently, the OpEx in this quarter is a little bit on the higher side. Can you just throw some light on what items and what headers has led to that? The second is that, is it more of a run rate OpEx for the full year? Should we think of it like that?
What you should look at is that in Q1 is where the salary increases happen. We also have the full impact of the source, the incremental frontline workforce that we hired. The number of people that we have is now closer to 12,000. I would like to think of it like an investment, which would result in both a better quality loan book growth and a better retail small-ticket deposit growth to come in. Effectively, this OpEx that you currently see is elevated on account of incremental people and also in Q1, where the increases of emoluments are being given.
Sorry, I did not get the second part. The increases?
The increments that typically happens in quarter one.
Right. On the other expensive side, I understand employee cost. This other expensive side?
Fairly static in nature, except for costs which are being replaced by technology. Most of the costs are frontline costs. You see that the improved use of digitization has helped us in reduction of multiple costs like stationary costs, postage costs, courier costs, storage costs. There is a clear-cut improvement coming in there. The third area we are looking at is in terms of sourcing, where there is greater emphasis on organic sourcing, self-sourcing than by relying on connectors and DSAs.
Right. Understood. This expense is also more of a run rate number. We will continue to do such technology investments.
We would tend to think that this 2.71% cost to average assets would steadily drop as we move forward, both from the numerator sense as well as the denominator sense.
Understood. Thank you. Just one more question. You mentioned that some portion of the fixed rate loan book which will come out, that will also help in the yield expansion because those loans would get repriced. What proportion, can you just give some sense of what proportion would that be or how much impact would that have on the yield and the NIMs?
Look, even in this quarter one, where the NIMs are subdued, that what you said happened. You see, because every month there are loans which we booked three years back, two and a half years back, two years back, which is hybrid in nature, coming up for movement from fixed to floating. That is a monthly accrual sort of change in rates that happens on a steady state basis. What I can tell you is that is not done and dusted yet. In the future also, there are loans, hybrid loans, which are currently fixed, which will, in the future, turn to floating unless closed earlier.
Understood. Thank you so much. Thank you for taking the questions.
You are welcome.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for the closing comments.
Thank you so very much for your patience and for your questions. If you have any further questions at any given point in time, you can reach our Investor Relations team. Thank you very much, and look forward to hearing from you in any of your conferences or in the next quarterly update meeting. Thank you so very much.
Thank you. On behalf of DCB Bank Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.