DCB Bank Limited (DCBBANK) Earnings Call Transcript

Look, you're getting it wrong. Deposit repricing is a natural phenomenon. There's a lot of effort going into the bank to get deposits a lower rate, fresh deposit getting a lower rate. We are not relying only on deposit repricing happening automatically. Our front line -- the rates that we currently give are such that you get a -- we were at one point in time, one of the highest deposit-paying banks in the country. Today, that's changing. So it is not just automatic rollover renewal of old high-cost deposits, which is coming through. There's a lot of effort in branch banking, to get a lower cost, fresh customer into the system as well. So is the first point. The second is, without changing anything else, the sourcing profile when it changes, like similar kind of -- when you see the disbursal of mortgages going up and that's bound to happen in Q2, you will find that the the kind of yield that you get on mortgage is far higher than the kind of yield you get on organic loans. So it will definitely add to the improvement of the yield -- if you keep the portfolio quality at similar levels or improved slightly, you continue to get a NIM benefit going on it. As a bank, it will be -- the NIM improvement will be primarily driven by cost of fund reduction and maintaining good quality portfolio. I don't see us wandering into higher-yield segment chasing NIM and then potentially suffering the consequence of that 1 year down the line or on the on the line. So clear strategy is bring down the cost of deposit bring -- keep the portfolio quality momentum going. And that would be the way the trend happening by changing the product mix, the more of LAP more of mortgages by itself. And so SME, frankly, is a INR 1,800 crore book. It cannot alter the destiny of the bank. But at INR 29,000 crores mortgage book certainly can.

We take the next question from the line of Aditya from Securities Investment Management.

Sir, first, one clarification on cost of deposits. So Q2, you see a drop considering the repricing, which is less -- but going forward, from Q2 onwards, do you see that remaining stable or it should increase considering if I look at your last 2, 3 months, we have increased the in deposit rates by 25 to 30 days. And with tighter liquidity in the system, do you think deposits would increase from Q2 onwards?

So Aditya, good question. We want to tell you this. In Q4, we grew 21% liabilities, okay? In Q4. And in Q1, we've grown 20%. So we were very clear that even if it means that you have a higher carrying cost. It is important to get money now than money later. And I'll tell you 5 trend lines. Our cost deposit over the last 5 quarters was 7.12, [indiscernible]. And these are times like [indiscernible] was done in a time in where most banks are scrambling for deposits. In Q1, most banks were scrambling to deposit. We still got 20% growth. And we brought down 14 bps on the cost of deposit. So the best way to answer the question is by doing it and by doing it consistently. And that's what we're seeing. If you can grow by 20%, if you can bring 14 bps down on the cost of deposits and keep your top 20 well within the 7% mark, which you get process without ruining the profile. And you do it repeatedly quarter-after-quarter, especially quarter 4 is traditionally a very difficult quarter. Quarter 1, you would have seen how the various competitive banks have performed -- on deposits. If you can keep it going and there is merit in us squeezing the cost of deposit even further going forward. And it's not just from repricing our deposits alone. That helps. But that's not -- it's only -- every quarter passing quarter, the importance are being less and less and less.

Understood, sir. And sir, if I look at the CD ratio, it has come down. It's now around 80% to 81%. So is there room for that to increase going forward?

Yes. it is 80.49% right now. So you'll see asset -- there is a possibility that asset growth could outpace liability growth and going forward. And we're comfortable with that because we're sitting on stockpiled money.

Sir, the 2 small question is, do we see any benefit from the FCNR scheme launched by RBI? And secondly, any impact of ECL on us?

Yes. FCNR, we are keen on it because their individual deposit, they are long-term deposit. And maybe they are slightly better than cost neutral. So that degree, it's not a bad thing. So we are focused on it. As far as ECL is concerned, there are two things I want to tell you. You've seen how the GNPA and NPA moments, you've seen a credit cost of 26 basis points. And you're seeing that the trend line of how all the three have been going for the last 7, 8 quarters. And for ECL, Clearly, the recently matters, the fact that we are secured heavy matters and also the fact that every quarter, we are adding INR 6 crores to INR 7 crores to a floating provision, which is now INR 210 crores, from which we have not even dipped into it even during cover demonetization or whatever else, never in the lifetime, that gives you enough buffer for us when ECL goes live in April.

We take the next question from the line of Krishnan ASV from HDFC Securities.

A couple of questions your asset quality that you just mentioned, your GNPA has been trending over as well as NPLs is turning over. This is 5 quarters. This is about a year since the tariff tariffs were introduced by the U.S. right? So does that surprise you that why are MSME so resilient? And it's not just you. I mean there's something that we see across the banking system now. And I just wanted your thoughts because you have been -- you have even SME-dominated, bank predominantly. I just wanted to understand your thoughts on what's keeping the MSE engine running. That's one. And the second, I will probably come to once you have answered this.

See, primarily the MSMEs that we look at is from the service and not from manufacturing, okay? And as far as services are concerned, we clearly do not -- not seeing any impact of tariff or inflation so far. I was more concerned about inflation. I expected that the bounce rates or the slippages would increase because petrol prices were to increase by INR 15 over a 2-month period, it has to result in squeezing on the wallet somewhere. But one of the things I can tell you is that we have moved up the ticket price. So, we did some mortgage DA in 2024, and that really bit us badly with the small ticket secured lending -- secured DA that we did from some originators. And that has not kept us in good stead. So at that time, we decided we'll -- not only will we not do any DA on small ticket but increase the average ticket size significantly. So partly, I would say that it's because you've gone to a slightly more resilient customer. But even if when I speak to other CEOs of other companies and -- or credit bureaus, there is no indication of any big problem coming in the kind of segments that we deal with.

And what seems to be answering the inflation? Because even in services, right, including banks and financial services, I think the general cost of new business is now higher than what it was say 6 months, right? So what is it that's keeping inflation at an edge?

I just hope it's not the loan supply. There is supply. There is no restriction of credit, right? So I just hope it's not a supply -- but otherwise, you're seeing then you can add for customer visits, et cetera, and finding increasing targetization everywhere. Both the hieght to the cup and the diameter of the cup is reducing, for every copper chai that you're having, whether in rural India or suburban India, just to give you an example. So there is some bit of pressure, but that's not really reflecting in the financial system. And frankly, loan demand is significantly we have an option to pick and choose. You can pick and choose the right kind of customers that demand across you're able to command our ability to choose. So that's why it's not reflecting anyway. But I generally believe that petroleum price increase will have a ripple effect on multiple other costs.

Got it. So my second question is about the DMS. You mentioned the still has some [indiscernible] -- so the cost of deposits had up the group on the way down. Is this despite the the hike in incremental cost of funds? Because what you expected 6 months back is a very different environment now, right? So do you see -- and the RBI quite stubborn with rates. So they're not leading on rates. So there is no EBLR benefit coming through for banks yet, right? So how are you so confident about NIMs going up in [indiscernible].

See, I think the answer lies in inefficiency. As a bank, I think we have been giving a higher rate than what required for the kind of growth that we had for a decade. So we are putting more money in the market than what is required, and that's so honest answer. One way of looking at this, if you were there in the Investor Day presentation, I spoke about it. The difference between dollar rate and the -- Yes, that delta is decreasing, and that is good enough for bringing down the cost of funds and cost of deposits. But that is not -- even after the reduction, there is enough for the are [indiscernible] real customers to come to us because 40 bps over what some of the bank give is also good money. You won't have to give [indiscernible] 120 basis more than what the biggest ones are giving. So the movement from [indiscernible] is helping us in the cost of funds on cost to profit and cost of funds. And any reduction thereon is still enough in the -- in our pricing to attract good customers. So in a sense, I'm kind of shooting my shoe on the foot when I'm saying this, there is that opportunity. There is an efficiency improvement that we can do. And the core theme of the brand for the last 3 years have been an MDCO has been about improving efficiency in terms of productivity, in terms of cost of funds, in terms of capital utilization in terms of output per person. So I really think we are a very generous company earlier. Now we are being a bit more leaner, meaner, fitter and that's reflecting in the kind of bottom line that you guys are seeing for the last 4, 5, 6 quarters.

We take the next question from the line of Param Subramanian from Investec.

So first question is on the cost to assets. So you are at 2.4%, you are already doing better than the medium-term target that you set for yourself. So can you assume that very much or near the bottom here? Or are there more efficiency gains that we can see?

In the last quarter, I said that I would expect the number of people increasing to 1,500 to somewhere around 13,000. I still hold on to it. We probably will be leasing people because -- for all the talk on digital, we still require [indiscernible] in increasing the sales volume. So some bit of the efficiency improvement will get consumed by the incremental staff salary. But I would tend to think that we would be under the guidance that we've given. We'll try and keep it within the [indiscernible] mark for the full year.

Great, sir. Perfect. Secondly, for some of the mid-sized banks have called out sort of a lending rate sort of pressure on the gold loans. So if I can understand what is, say, broad gains on your gold loan portfolio? And is there a pressure -- pricing pressure you're seeing there, say, led by public sector banks that could say about your margin?

Look, when I ask the frontline, the sales folks, they will always say there's [indiscernible] a single salesperson will ever say there's no pressure. But the fact of the matter is -- and you can check it out like I told [indiscernible] earlier, you call of a branch, you check -- walk into a branch, you will not get more than 75% LTV. There's a band next door for the gold loan company next door will give you 85%. And 10% is a lot of money. So you're able to grow the way we are able to grow without giving 85% LTV and keeping LTV down by 10 percentage points. Why would you face a pressure? There is enough in the market. Maybe we haven't seen that, that pressure is coming in, either pricing pressure coming in or the market pressure coming in. But if we do, then we'll probably revisit how we do the gold loan business. But if you see Q4 and Q1, both -- we haven't seen too much pricing pressure or LTV exposure pressure coming into us. from an organic perspective, I'm not talking about co-lending at all. We're talking about our own book.

Fair enough. If you're comfortable sharing, what is the broad portfolio yield on your book?

We don't keep product- wise...

We take the next question from the line of Vaibhav Mehta from Axis Mutual Fund.

Sir, my question is regarding with the branch additions and an growth vision that we be having, I think that you've seen the number of addition to the past 3 quarters to now flattish. But going forward, what would be our vision for that? And what will be the markets we would like to penetrate going forward?

Maybe another 20 branches this year. So there are very branch focus for our growth. So maybe an will be a good number to have at end of the year, maybe slightly more than that. But that's not -- at least for the next 2 to 3 years, I don't see branch being central to our growth story. Where will the [indiscernible] prices come in? Mostly second, third branch in the existing cities, which are which are doing well. So increased penetration in existing neighborhoods would be the way to go. But otherwise, it will be more people increase than the branch -- and proportionately, people increase than branches increasing.

We take the next question from the line of [indiscernible] from PPL.

Looking a bit ahead, your tenure is still April of 2027. So has the bank board indicated anything about an extension? And if the Board decides to offer an extension, what would be your willingness to accept it? And secondly, any update regarding the fund raising plan of the bank for the current financial year?

Yes. So has the branch spoken to me? No -- sorry, has a Board spoken to me? No, I think it's a bit too early. What my personnel choices are, I mean I've been was back for 19 years. I can work through another 19 years in the same bank, the energy, willingness and got a great team, which you're working with. So no two ways about it. But again, it's a Board's call or [indiscernible], that's a simple answer to your question. And with regard to fundraise, we are right [ 14.26 ] was a Tier 1 cap 3 months back. Now that has gone to [ 14.9% ], right? And if you were to look at 1 year back, Y-o-Y, our capital adequacy has gone up from [indiscernible] right? And overall, if you look at Tier 2 include, CAR has gone from [indiscernible] so that's very big because like you -- all of you know, banking is an industry which is very gathering capital. So we're in a good space controlling -- but the reason why we want to have capital is not to consume capital, it's to expand on it. I think the model is more or less proved, right, that we can run a secured book of where [ 13.5% ] definitely. And next year, you will see [ 14.5% ]. That model comes into place and we demonstrated a look, it is very much possible to run a [indiscernible] kind of ROE book. Keeping it secured the kind of small ticket secured granular assets that we have. So then the whole idea is how do you get incremental capital for the next phase of growth, maybe what is good enough for the next 3 years. Last time we raised capital was 8 years back, maybe 8, 9 years back. So for the next 3 years, what is required, we'll give it up. So there's no urgency. But we are open. We're having conversations. So we had an AGM where an enabling resolution was passed for the INR 1,400 crores of Tier 1 and the total of INR 2,000 crores capital raise that has gone through pretty smoothly. There are -- there is -- obviously, with the kind of consistency that we are bringing in, there is interest. But the timing, quantum and pricing will be decided by the Board.

Thank you. We take the next question from the line of Devam Modi from deco.

Sir, firstly, on the noninterest front. So given that our sort of fee income is partly liability linked, and we have seen a very strong deposit growth, plus there is a potential of higher advances growth during the year given the disbursement run rate and the existing CD ratio. Could one expect the current outperformance of core fee income in the first quarter to only extend and grow in the remaining part of the year? And also, any branch level interventional initiative we've taken to enable this as of now?

Look, core fee income -- by definition, core fee income is something which is replicable and recurring in nature, okay? So I'll tell you what is working well for us? What can work better for us what can improve. So mostly, our fee income is driven by -- core fee income is driven by third-party distribution and processing fees. Q1 usually is [indiscernible] in terms of asset disbursal. We expect that to continue to -- not to continue to improve in Q2, Q3 going forward. So crossing match but naturally, just by extension of logic, should go up. Third-party distribution usually is a great quarter and Q1 is a very sleepy quarter. We've managed to kind of change that, okay? That's a big move because usually, 4 months' worth of output happens in Q4 and 2 month worth of output happens in Q1. We managed to kind of change that Q1 beer. So that also logically speaking, we should see improvement happening in Q2 and Q3 because that's a natural flow of things. Where -- the area where we need to improve it more is trade finance income. It is tied to how well we do current account in SME. And if you've heard me speak to the earlier folks, this -- either you can call it inefficiency or you can call it an opportunity. Getting the current account SME right will buy force of nature, improve or trade finance and that is recurring income, that's core fee income. That, I think, is a real big opportunity. The other 2, we're doing fairly well and we'll continue to do fairly well. So trade finance house where we build it up, which will also partly address our current issue and partly address our SME momentum is one area where we are focusing that. We're putting a lot of effort not seeing great results, but we're patient about it. Things don't happen overnight in retail banking. So putting the effort you saw now your read maybe after 3, 4 either years or quarter.

Any branch level initial intervention that you have taken that seems to be working well on this front?

A huge number. I mean there's like there are -- there's nothing on branch. I mean there are 480 branches. And each branch is different. I mean, so it is not a one measure, one size fit all. Some just go canbusters on gold loan, some are full term deposit oriented. Some are practically current account -- it really depends upon what kind of markets, what kind of competition is there. So the sum total of that is what you see as the output coming in either in the balance sheet or on the fee growth or even in the asset growth. So it's different horses for different causes.

And finally, sir, we do recognize that you have -- I mean, you have done a very disbursement in this quarter. But at the same point of time, there seems to have been a high rundown as well. So any thoughts on that front and whether that was on the balance transfer side? And what would be the general churn in the mortgage book and the overall tenor of the same?

Okay. In the mortgage book, there are two things we do look at. One is that, like I told you, we did some wrong calls in '24 and got some DAs which contributed to NPAs, it still does. So we stopped that completely. So if you see the knowledge book today, it's practically fully organic, right? And secondly, the dispersal of today will lead to the growth of tomorrow. So if you have a 35% increase in reversal, it is unlikely that you will see the 35% increase in growth. But if you continually do a 30%, 35% increase in disbursal over the Q1 of last year, Q2 last Q3 last year and Q4 last year. Then you will see that the growth will not be 9% as you see currently seeing. It will be upwards of 20% to 23%. If you ask me, how are we on the premature closures, the noncontractual closures. Q1 and Q4 are -- and Q1 is slightly better than Q4. So I almost said are equal. Q4 was more aggressive. There was far more of takeovers. Q1, there has been less of takeover. So on the mortgage book, happy to see the lead indicator of growth coming in, which is disbursal. And if we continue on the same part, they cannot be two ways about growth not coming through. because we have a good -- a very good retention management system, prey, highly tech-driven AI plays a big role in identifying the goods and the bads, property defaults. So I think it's reasonably well managed. I don't lose sleep over mortgage growth.

And gentlemen, we take the last question from the line of Khushwant from CPAC.

Can you remember, in previous quarters, most of the banks one common question that was coming was the impact of crude oil prices and more and stress coming into the banking system in the later part of the year. Just wanted to take your thoughts on that.

So I believe that then, and I believe that now also -- but honestly, I don't see impact of that hitting us. And it is because of these fears that we significantly increased our liquidity, we increased our deposit growth significantly. That is the reason why we kept our LTV very conservative and went after gold loans in Q1. But monthly look at the slippage ratios, non-good slippage ratios, bounce ratio, which we don't publish otherwise, but these are the early indicators of 12 MOB, 12 months on board, 30-plus, 90-plus, there is no indication to believe that there is going to be a problem in terms of repayment. There is not historical facts. So that's what it is. So we just stockpiled liabilities and turned our sourcing engine towards safer assets. But frankly, that clearly, Q2, Q3 were the mortgage business, mortgage sourcing will significantly increase, has already increased in July, similar with SME and MSME. So all other asset products started kind of rolling it in -- that's our indicators. And if you look at externally because of rise bureaus on business see any impact of that in this particular target market. By saying that, I mean the ticket size of [indiscernible] in locations that we are currently presenting we just don't see any negative impact.

Thank you. Ladies and gentlemen, that concludes the question-and-answer session. I now hand the conference over to Mr. Praveen Kutty for his closing comments.

Thank you very much for all today in the call. So we hope to keep getting the same kind of questions and same set of answers and the same set of results and the whole idea is to bring in the consistency of of performance, not just on growth alone, but also of all the engines of growth. We are focused on it. What we didn't speak about in this particular meeting is the kind of investments that we are continuing to make in technology, the incrementally use in AI, et cetera. But hopefully, we will come back to you next quarter with the results of quarter 2. And you will see how well our stock of being consistent, being predictable and being sustainable is there's nothing to prove as much as results improve. So keep watching off our results. Thank you very much.

Thank you. On behalf of DCB Bank Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.