Ladies and gentlemen, good day and welcome to DCB Bank Limited Q1 FY 2024 earnings conference call. Joining us on the call today are Mr. Murali M. Natarajan, Managing Director and CEO; Ravi Kumar, Chief Financial Officer; Ajit Kumar Singh, Chief Investor Relation 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 Mr. Murali M. Natarajan. Thank you, and over to you, sir.
Thank you very much. Good evening, all of you. Welcome to the quarter one FY 2024 investor call. First of all, let me sincerely apologize to all of you for delaying this call by 15 minutes. The reason is that we had some technical difficulty in uploading the information, and it took us a while to sort out that technical problem. Otherwise, we would have given you more time to go through all the information.
I am joined by our management team here, Praveen Kutty, who is the head of retail banking. We have Ravi Kumar, who is CFO. We have Sridhar, who is the CRO. You have Venkatesh, who is operations technology and HR head. Then we have rest of the management team. This is about quarter one FY 2024. In the first few minutes, I will give some highlights, and then we will open up for questions.
Our interest income growth has been in line with our average balance sheet growth on a year-on-year basis. As I had mentioned to you in the last call, that in the EBLR methodology, we increase the interest rate of customers as the EBLR is changed by RBI, and whereas the cost of funds impact comes through later. That is why you see some level of reduction in our NIMs.
But it is still higher than, and in line with our business model, which is what we have been talking about. Core fee income seems to be growing in line with the balance sheet. What I would like to mention is that one and a half years ago, we used to have substantial amount of income from PSLC. Unfortunately, that whole income stream has more or less disappeared, although we do sell PSL.
But the rates are so weak that the income is not substantial anymore. But still, we have been able to make up through other income streams. We have had a reasonably good control over the speed at which expense is growing. You will notice that our total income growth, which was lower than the total expense growth last year. This year we are in more or less line with that.
Of course, we will continue to make investments in frontline in order to double our balance sheet in the timeframe that we had mentioned in the strategic areas, core areas like mortgage, co-lending, AIB, construction finance and SME. In terms of credit cost, we are still very much in control of credit cost. Also, there has been a slight increase in NPAs. This is primarily on account of now most of the loans have come out of moratorium.
A very small portion is left, which also would be finished by July. We had some delays in terms of recovery and upgrades. We are confident that over the next one to two quarters, we will be able to catch up on that. As you know, last year, every quarter, we have been able to deliver almost equal to the slippages. We expect our recoveries and upgrades to pick up momentum in the coming months. Overall, usually first quarter is slightly lower, but if you look at our year-on-year deposit growth, it has been about 22.6%. If you look at our loans growth, it is about 19%. This is despite the fact that the TReDS portfolio, which is the invoice discounting portfolio that we were doing on the platform, that dispersal was very low in first quarter.
Because the rates were not so good, we decided not to participate in an unprofitable kind of thing. We think that this momentum will pick up in quarter two or quarter three. Other than that, of course, the rest of the businesses are functioning well, and we are seeing momentum in that. We have opened about eight odd branches in line with our 25 to 30 branches approach. Our capital adequacy continues to be strong.
The entire banking industry, many of the results that have been declared have had some struggle on CASA because the interest rates have been high on term deposit. There has been some flight of money from CASA to term deposit. We have also experienced such a situation, but we are putting more efforts on CASA ratio to try and reach our long-term stated goal of 30% and above. Cost of fund increase is in line with our expectation, and we think that there may be a little bit more increase in cost of funds, although not at the same pace at which it has happened in the last two quarters. Those are some of the highlights I wanted to share with you. I am happy to take questions.
Thank you very much. We will now begin with 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 hands-free while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We take the first question from the line of Mr. Suraj Das from B&K Securities. Please go ahead.
Yeah. Hello, sir. Thanks for the opportunity, and congratulations on a stable set of numbers. A couple of questions here from my side. On the disbursement, I can understand there is seasonality in the first quarter, as you mentioned in your opening remarks as well. I just wanted to check one specific line item, MSME and SME disbursement. I think that is very low as compared to last quarter. It was something around INR 840 crores, and now it is only INR 384 crores. Is this because the TReDS portfolio has come down, as you mentioned in the opening remarks, or there are any other things that has caused this? That is the first question, sir.
Yeah. May I answer that? May I answer your question?
Yes, sir.
Yeah. There are two parts to our MSME, SME lending. The substantial part of our MSME, SME lending is the normal CCOD term loan type of product, which is the largest portfolio. Then we had embarked upon TReDS about one and a half, two years ago, and it has performed very well without any NPA, and it has helped us to park our excess liquidity as you generate because there is always a mismatch between generation of deposits and, like for example, you would avail some refinance from NHB. It comes in a big quantum, and it takes time for you to disperse those monies.
So those kind of excess liquidity we park in TReDS. For whatever market reasons, from March 2023 to almost till June 2023, we found that the interest rate that was prevailing in the TReDS was not something that we wanted to participate. That is number one. Number two , also, there was some change that we still have to understand in regulatory guidelines in terms of what is the risk weight that you can assign to the loans that you generate.
Because our understanding of the guidelines seems to indicate that we have to have a specific rating of the principal, else we will have to keep 100% risk weight. With a lower interest rate and a higher risk weight, it does not make sense because it will not meet our 14% ROE. We kind of backed off from that. The dispersal that you see low volumes on SME, MSME is almost 90%-95% because of TReDS.
Okay. Understood, sir. The next question is on the yield on advances. This quarter, if I see on a quarter-on-quarter basis, it has declined by around 12 basis points. I just wanted to know what are the reasons probably behind this because ideally, other banks, they are seeing QoQ rise in the yield on advances.
See, it depends on the mix of product. There has been no change in our strategy or any issues regarding that. Supposing we disperse a little bit more of corporate or let us say, for example, co-lending, we might end up having slightly lesser average yield on advances. We do not expect any major issues in terms of the product mix and the yield on advances. As we pick up more momentum in our core products like AIB and mortgages in the coming months, I believe that unless there is some substantial competitive issue or something, we should not have any problem with this. We still want to maintain that our business model is in the range of 370-375 basis point NIMs.
Okay. Understood. Last couple of questions from my side is, sir, one on the slippages side. There has been QoQ rise in the slippages. I just wanted to check, is this still driven by gold or there has been a rise in non-gold slippages as well? If you can, any qualitative color or if there is in the amount handy, if you can break up the whole slippages into gold and non-gold. The last question would be on the management transition side. If you want to make any comments or anything. Yeah. Thanks, sir.
You can have a look at page number 25 of the investor presentation where we give you the fresh slippages. Some amount of slippages have happened in mortgages, especially home loans, and this has come from the last bit of moratorium kind of customers that came out of moratorium. We probably are left with the end of August, we probably have near zero in terms of moratorium. Also what happened is that in April, we did have a few holidays.
When some chunk of portfolio comes out of moratorium and you have a holiday, it hasn't given us enough time to get these customers to perform. Our collection team has looked at it. We have analyzed the portfolio. We don't see any long-term challenges or anything like that in this portfolio. As a problem, also our recoveries and upgrades did not fully keep pace this quarter with the slippages, which used to be the case for us in the last four or five quarters.
Okay. Understood. Sir, last one, the management transition, if you want to make any comments or anything.
CEO transition, because management transition is a very big.
Right.
Right. No, because I am not aware of any management transition. CEO transition, Korn Ferry has been appointed as the search firm. A search panel has been formed of the board, and we are in the process of shortlisting both internal and external candidates, and we hope to conclude the process well in time for us to be able to make our application to the Reserve Bank of India.
Okay, sir. Understood. Thanks so much, sir, for answering all the questions.
Thank you.
Thank you, sir. We take the next question from the line of Mr. M.B. Mahesh from Kotak Securities. Please go ahead.
Murali, hi.
Hi, Mahesh.
Sir, just one question. I did not get the answer that you gave to the previous one and the opening explanation on the margin side. While you alluded to the fact that it is the EBLR price timing differences on the margin impact, there seems to be a drop in the yield as well. How do you explain that?
Yield is a quarterly sum product mix change. For example, if we have done more of co-lending, which is coming at a lower rate, but lower capital, and less of, let us say, business installment loan, that mix can impact yield. I do not see any concern in our yield. If you recall, kindly look at my transcript in the last quarter transcript. The EBLR works like this, that as soon as RBI changes the repo rate, we change the EBLR plus the margin of, for the standard. We change the rate in our system. Which is what I said that we get the benefit of the interest income. However, the cost of fund takes time to catch up.
Cost of funds have in this quarter, and in fact, it started increasing. Our cost of fund increases from March itself, probably the end of February to March itself, and then we see that cost of fund playing out. That is why last quarter also, I said that we should not say that the NIM of 4% + is a kind of a sustainable NIM. That is what my explanation is.
Looking at your funding mix today and the term deposit book, we are currently at about a 6.7 on the cost of funds. Where do you see this kind of peaking out in the next two quarters?
I feel that right now the interest rates are not increasing at the same pace as it was increasing last two quarters. We also have done some work on changing the profiles that we go and target in terms of deposits. Third point is one more thing which I have to see is that we have repaid a lot of our Tier 2 bonds, I think by November or January? November, right? By December, we paid off. Then we took INR 300 crores of this thing in almost by end of March. Little bit of that cost impact is coming from Tier 2 also. That is why the fourth quarter NIM was slightly higher than the previous quarters.
Okay.
Also, we have had a slightly higher slippages, so that also would have had some 3, 4 basis points of hit in NIM for this quarter.
Okay. My last question on the reduction in employee headcount from 9,900 to 9,579.
In order to scale up our business, we had a particular methodology by which we were giving headcount to all our business managers and respectively to the functions that are supporting this front line. In our internal meeting, we wanted to raise the bar and improve the productivity. We agreed on new set of productivity norms for the various units, and we impose that productivity. In that productivity norm, what happens is that if a particular unit does not meet the productivity, they get less replacement of headcount till they reach that type of productivity. The whole adjustment period is going on in terms of everyone working towards a better productivity in terms of dispersal, in terms of number of files they process, and so on. This headcount increase should start picking up again from this quarter.
Okay. Sorry, just to clarify, as a consequence of this, does it have an impact on growth but improvement in cost to income?
No. Because see, what happens is when you hire a set of 100 people in the front line, X percentage is anyway unproductive for a while, right?
Yeah.
That means if you don't replace that doesn't mean that our dispersal or volume is impacted. We're very sensible about how we want to do these replacements. It doesn't affect our dispersals area.
Perfect. Okay . Thank you.
Thank you, sir. We take the next question from the line of Mr. Darpin Shah from Haitong India. Please go ahead, sir.
Yeah, hi. Thanks for the opportunity. Even on the asset quality front, while you explained about mortgages, that there were slippages because of moratorium, there is a slight increase in NPAs in the corporate book as well. If you can just highlight what happened there.
Yeah. See, there are two things that I find very difficult all these years to explain. One is any slippages from a very small corporate portfolio that we have. Another is NIMs because it has got so many moving parts. Having said that, what happens is that if any account is even under some stress where they are paying with delays, and then if there is any creditor goes to NCLT, then automatically the account becomes NPA because there is no funds. Even the monies that are coming through from the customer to bank get stopped because it is all controlled by the Resolution Professional. I mean, I am just describing the process loosely. That is what happens in that. So, one such account has flown into this thing, and we are working towards getting recoveries.
Corporate recoveries are usually the very difficult ones because you have to work with several banks to make that happen, and that is what it is. Other than that, on mortgage, I explained that last part of the moratorium and all people are coming out of the moratorium, and we had very less number of days to collect from this, both from a recovery and upgrade as well as slippages. Therefore, we went deep dive into the portfolio to see whether there are any challenges. We haven't found any major issues or concerns for us, and we hope to pick up momentum on this in the coming quarters.
Fair enough. Just one last data point keeping question, if you can provide the breakup of provisions, standard assets and NPAs and floating provisions.
One minute. Where were Vishal. Just give me a second, Darpin.
Yeah.
We have a floating provision of INR 4.
Mm-hmm. Yeah.
Standard asset provision of INR 4, and the rest of it, NPA provision of INR 30.
Okay. Thank you a lot for this.
Yeah, thanks.
Thank you. A reminder to all the participants, anyone who wishes to ask a question may please press star and one on their touch-tone phone. We take the next question from the line of Mr. Rakesh Kumar from B&K Securities. Please go ahead, sir.
Yeah. Thanks, sir.
Yeah.
Yes, sir. Quite good set of numbers, sir. So good performance overall. Sir, on the PSL thing, we have seen that in PSL Agri, micro enterprises and PSL general also, the weighted average premium has actually come down. But PSL small and marginal farmer, the weighted average premium is close to 2% and remains the same across the last five, six years. So, are we trying anything to do on the small and marginal farmer PSL to sell any PSL possibly there? And what is the reason that rates have dropped so much?
I think the rates are dropped much. What we understand from the market information is that the Udyam certificate, which was one of the difficult thing to get, and we had done a fantastic job of getting all the Udyam certificates on the MSME, also was helpful for us to get the revenue. Plus, I think there was some more time given by the regulation in terms of obtaining these certificates.
That is also the reason why I think it has dropped, and probably there are more sellers in the market because of which the price is reduced. On small and marginal farmer, we do have a separate unit within the Agri unit working on that. But the challenge there, and not that I am saying it is not doable, but the challenge is the collection cost for these small customers is very high.
Because we are talking about ticket size of INR 5 lakhs and maybe INR 3 lakhs and INR 4 lakhs, that kind of marginal, and the holding will be less than five acre, Ajit, right? For marginal farmers. Therefore, it is also a challenge in terms of both operating cost and collections. But having said that, we are working on it. We are also tying up with some, what do you call, Agri tech kind of companies who have been able to scale up to some level for giving to these marginal customers.
We are trying to tie up with them to see how we can improve that. We are putting some money into technology to make this whole process a little bit better so that we don't fall short of this small and marginal farmer thing because that seems to be getting the maximum amount of pricing in Agri. You are right.
Yeah, because it fulfills for couple of other categories, the shortfall also.
Yeah. The way it works, I think, is that something can be counted in Agri weaker section and small and marginal farmer, depending upon the size of the loan and the category.
Correct.
Yeah.
Okay, sir. Thanks a lot for your clarity on this subject matter, sir. Thanks. That's it from our side, sir. Thanks.
Yeah, thanks.
Thank you. We take the next question from the line of Mr. Gaurav Jani from Prabhudas Lilladher. Please go ahead, sir.
Thank you for taking my question, sir. Two broader questions. Firstly, on asset quality, could you quantify the slippages from the restructured pool this quarter of the INR 340 crore?
Sorry?
Can you quantify the slippages from the restructured pool that came through this quarter?
I have mentioned even in the past calls that there are slippages from restructures, there are slippages from the non-restructured standard, there are slippages from ECLGS. All that put together is INR 340 crore. There are also possibilities that there are customers who have paid all their dues, upgraded maybe six months ago, one year ago, who may have slipped into NPA because that is the nature of the SME business. If they have got some cash flows, they may have slipped into NPA. To give you a sense, on our restructured portfolio, we are already holding at least about 14%-15% of provision.
When an account from a restructurer moves to NPA, the provision also moves along with that. Second point is, we did not restructure anything which is unsecured. Probably minuscule of our portfolio unsecured would have restructured. It is secured portfolio, and I can say that much of the slippages in this quarter at least have come from home loan kind of business and self-occupied property. We do not see any concern in terms of its recoverability over time.
Understood, sir. Thanks for the detailed answer.
Also, Gaurav, if you have seen that we have shown demonstrated ability in terms of our recoverability of this portfolio over a long period of time.
Sure. I get that. No, sir. Where I was coming from is, we have a restructured pool remaining of INR 1,600 crore. This is your opening remarks. I think we expect this to come up for repayment by July, right? The entire portfolio.
No. We have been giving you some numbers. Not all the portfolio is in moratorium. By August, even the small amount of portfolio, which is maybe 150 or whatever crores, would be out of the moratorium. When we restructured, it is not that all the portfolio was given moratorium. Please correct that in your thinking. X percent of the portfolio, I think I have given some number in the past, I think couple of quarters ago, you would see that number. All the portfolio restructured is not in moratorium. Please understand that. Some part of the restructure was in moratorium, and that is also getting over by August 10.
Understood. Sure. Sir, if I had to question you on the recoveries. Could you elaborate as to what led to slower recoveries this time around, and how should we look at.
I think.
The trend for.
I would say a combination of things. We looked at a combination of things. I think we dealt with a few extra holidays in April. Usually, the first quarter is a bit slow. Second thing, some part of north was not accessible because of the disruptions in floods. But when we look at the portfolio comparison with what we have done recovery in the past and this, there is no difference in that. So over a period of next one to two quarters, we will pick up speed on this portfolio as well.
Understood, sir. That's helpful. Sir, lastly, on the margins, if I look at your data disclosures correctly, for the entire of FY 2023, would we have made about 3.9% overall margins for FY 2023?
Yeah.
3.93, was it? What was it?
Yeah, full year was 3.93. Yeah.
Yeah, sure. Sir, where I was coming from is, basis this, how should we look at entire FY 2024? While you did mention your guidance of 3.65% to 3.75%. Are we to understand that.
I think with my guidance, there was some advantage we had last year also was because when you get a recovery of a NPA, you also get the overdue interest and so on, which helps in your NIM. We had some advantage. In the early part of the last year also, cost of fund was much lower than what it is currently. Our intention is always to make sure that the mix of products on the loan side and the mix of products on the deposit side is such that we make at least 365 to 375 basis points. Our intention is to make it at the higher end of the 370, 375 basis point NIM, because that is how our business model works.
Also, keep an eye on always this meeting the Agri target, small and marginal farmer target and all, so that we do not get penalties from NABARD and SIDBI, which results in reduction in NIM. That is basically how we kind of work on this.
Sure, sir. Thanks. That is it from my end. I appreciate your answer.
Thank you, sir. The next question is from the line of Mr. Rishikesh Oza from Robo Capital. Please go ahead, sir.
Hi. Thank you for the opportunity. My question is with respect to the OpEx. What OpEx growth do we project for FY 2024?
We do not give guidance on OpEx growth. Our intention is to grow OpEx slower than our income. Our intention is to continuously work on frontline productivity. I gave some details on how we are trying to work on frontline productivity. So over time, we want to have at least a difference of 2%-3% between the income growth and cost growth. That is the way we are functioning. Our intention is to reduce the cost to average assets.
So this quarter, you would see that there has been a slight dip in cost to average assets. Over time, we believe that we can achieve a 55% cost-income ratio. Given that we are a pure retail SME, and you can see anyone who is very retail and very SME, examples are there nowadays that their cost-income ratio is nothing less than 60%. Right? So that is how we are functioning.
Okay. That was helpful. Thank you.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question, you may please press star and one on your touchtone phone. Anyone who wishes to ask a question may please press star and one on your touchtone phone. We take the next question from the line of Mr. Ram Kumar from Madhuram Capital. Please go ahead, sir.
Hello, sir.
Go ahead, Ram.
My first question is on guidance. In a few quarters back, you have mentioned about doubling the income and profit by three-four years. Are we still in line with that or is there any change on that?
I want to say that I do not think we have ever given any profit guidance. You may want to check what guidance we have given on profit. I do not believe that we gave any guidance on profit. Our intention is to double the balance sheet every three-four years. We are very much on that track is what I would like to believe. The kind of investments we are doing and the kind of investments we have done in frontline, without changing any of our strategy in terms of granular retail and SME and Agri portfolio, we believe that we can double our balance sheet.
Nice. My second question is on, recently, Tata Asset Management and DSP planning to double their holding around 9% in DCB Bank. Do you have any details on when that is going to happen?
The details have been published on the stock exchange and it is public information. What the strategies of these companies are in terms of acquisition, you may have to ask them because we don't have any visibility on their plan on this. Whatever the plan they have explained, we have put it on the website.
Okay then. Thank you. Thank you so much.
Thank you, sir. A reminder to all the participants, anyone who wishes to ask a question may please press star and one on your touchtone telephone. We take the next question from the line of Mr. Samir, an individual investor. Please go ahead, sir.
Yeah, hi. Thank you for the opportunity. Am I audible?
Yes, sir. Please go ahead.
All right. Just one question. Mr. Murali, you covered about the slowness in the SME and MSME disbursement this quarter. Thanks for that. From a current quarter perspective in Q2 and Q3, do you see it kind of normalizing, the disbursements in that area, or the two problems that you mentioned about risk weight and the low interest in that portfolio still persist?
My answer was very specific to TReDS. Not SME, MSME. TReDS is part of SME, MSME. Would you like me to explain it in a little bit more detail?
Sure.
Yeah. TReDS is a platform, as you know, where large companies and medium companies put up their bills, which is basically some kind of a material supplied by SMEs to those companies. Okay? We have a recourse to that principal in case the SME does not pay the bill. We immediately give the money to the SME with some fee and some interest income. Then at the expiry of, say, 90 days or 120 days, depending upon the tenure of the bill, the SME pays. If the SME doesn't pay, the principal has to pay that outstanding. It's a very good product for short-term financing for SMEs, and it is PSL. We have been very successful in this for the last almost one and a half, two years.
Of course, we use this as a short-term measure to soak up the excess liquidity that we may have. If we find some other avenues for putting our excess liquidity rather than in TReDS where we get a little bit better margin, we do that. We found that for the last three, four months, the interest rates that we were expecting based on our cost of fund was not something we were able to command in TReDS.
The second problem that was there was there is some clarification we just need to know as to what is the risk weight of these loans because if it is going to be 100% risk weight, that kind of margin that we are making doesn't make sense because that won't give us the return on equity. That is what I explained. We do hope that that will happen, but irrespective of that, our core business in terms of Mortgage, SME, MSME, CCOD, construction finance, Agri, co-lending, tractor, all that is all moving pretty much on track.
Okay. Thank you so much.
I hope that was useful.
Yes, it was. Thank you.
Yeah, right.
Yeah.
Thank you, sir. We take the next question from the line of Mr. Darpin Shah from Haitong India. Please go ahead, sir.
Yeah. Thanks again for the opportunity. Sir, I was just looking at the data on collection efficiency on slide 27.
Yeah.
If you can just highlight. Generally, what we hear on ground is that things are significantly better, collection efficiencies are better. But if I look at our numbers on a year-over-year basis also, if you look from June to June, it looks largely similar or slightly lower, especially in the home loan part. If you can throw some light there.
You see, if you look at two aspects, one is bucket zero. Bucket zero, like a 99.1% versus 98.6%, I wouldn't really lose so much sleep over that. Even in business loan, you see current 98.3% versus 98.4% here, I don't see too much of a difference. In home loans, since almost like 100 or 150 crore or something like that portfolio came out of moratorium in April, and we had very less number of days. If you see April is the one where you see a lower collection efficiency in home loans at 96.5%.
Correct.
I don't see any long-term issue at all. It is basically a timing issue. Customers who come out of the moratorium, even in the past I explained, they need a few months to kind of get adjusted to this whole thing because they have not paid in the past. Not all our portfolio is in moratorium. All the moratorium will get over by August end. Very little of the moratorium is left.
Despite loans coming out of moratorium last year, you can see that there has been very decent performance on slippages and recoveries and upgrades. It's more of giving a little bit more time for this matter. These are all self-occupied property. On the ground situation, as far as I know, it's very similar. There is nothing alarming in the ground situation. I don't know what other information that you have which you are referring to.
No. What I was referring is when we talk to other lenders, they seem to be quite positive in terms of slippages or recoveries. In terms of the collect.
Darpin, please show me one bank that has done 100% recovery and upgrade last year. Everyone is very positive, I understand that. But what is the demonstration of the recovery and upgrade? Even this quarter I haven't seen. We are at about 62%. This is probably one of the lower ones as compared to what we did last four quarters. We are confident of improving it further.
Okay. Thanks for this.
Yeah.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star and one on your touchtone phone.
Okay, operator, if there are no questions, then we can wrap up this call.
Sure, sir. Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you very much for logging in. Again, my apologies for delaying this call. Look forward to talking to you again next quarter. Thank you very much.
Thank you. On behalf of DCB Bank Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.