DCB Bank Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Slippages dominated the quarter: Four old corporate accounts and the lingering effect of the everyday-90-day interest rule on gold and SME OD loans pushed slippages higher, with management expecting elevated levels for another two to three quarters.
• NIM and credit cost targets held firm: Management reiterated its steady-state NIM ambition of 365–375 bps and a composite credit cost of ~50 bps, arguing the business model is comfortable with this spread.
• Fee income offset a PSLC shortfall: Core fee, processing fees, and third-party distribution performed well and compensated for lower PSLC income, with a target to lift the fee-to-assets ratio to 110 bps from ~90 bps.
• The deposit war is real and costly: A tight, competitive deposit market forced near-weekly rate reviews, and the cost of deposits is expected to rise further as the bank chases retail deposits to avoid an LCR problem.
• What to watch next quarter: Whether the cost of deposits rises faster than yields, given a 50 bps MCLR reset is still to come, and whether gold loan NPAs begin to stabilize as customers adapt to the new servicing rule.

Asset Quality: The Slippage Story

• Corporate one-offs: Four old corporate accounts slipped this quarter, adding ~₹100 crores to corporate NPAs. Some lenders have taken these accounts to NCLT, delaying resolution and payments. Management does not expect this kind of corporate slippage to recur and is hopeful of resolution in the coming months.
• The everyday-90-day rule is the root cause: Elevated gold loan and SME/MSME working-capital NPAs stem from a November 2021 regulation requiring OD customers to service interest on an everyday 90-day basis. Customers slip into NPA when they miss this discipline, but recoveries and upgrades bring many back.
• Gold loan NPAs will stay high for a while: Management expects elevated gold loan NPAs to continue until a majority of customers are disciplined to the new rule. An alternate installment or OD product is being explored but is not yet fully tested for customer acceptance.
• SME stabilization is two quarters away: Post-COVID stabilization is improving, but some old overdues still cause slippages. Management expects SME/MSME NPA stabilization in another two quarters.
• Upgrades and recoveries are a deliberate strength: Upgrades are higher than recoveries, reflecting portfolio quality and the effort of the ~1,000-person in-house collection team. The bank aims to retain upgraded customers for future earnings.

Murali M. Natrajan: "Upgrades and recoveries are not an accident, it requires effort, and it also is reflective of the portfolio quality. So, it is not some luck that we have had on upgrades and recovery."

Margins, Yields & the Deposit Battle

• NIM ambition is non-negotiable: The bank targets a steady-state NIM of 365–375 bps, monitored weekly, and believes its product mix, segments, and credit and collection structures support this range.
• Yield transmission has been slow: Yield increases have lagged competition because of the product mix (mortgages, KCC, tractors, gold loans, SME). MCLR resets only four times a year, creating a lag, while the EBLR-linked book, a recent portion of the portfolio, has already passed on increases. Another 50 bps is still to be passed on next month.
• Deposit costs are heading up: The deposit market is tight and competitive, forcing rate reviews almost twice a week. The cost of deposits and cost of funds are expected to rise due to the term-deposit rate battle.
• Retail deposits are a regulatory imperative: Institutional deposits receive very different treatment under LCR rules, so all banks must pursue retail deposits to avoid an LCR problem. DCB’s RNP CASA is moving well, but wholesale deposits may increase quarter-on-quarter to bridge liquidity while retail deposit momentum builds over 45–60 days.

Murali M. Natrajan: "You have to be at the market at that rate, otherwise, you don't stand a chance to get that deposit."

Fee Income & Operating Leverage

• Core fees filled the PSLC gap: PSLC rates were low this year, leading to lower PSLC income than last year and below expectations. Core fee, processing fee, and third-party product distribution performed very well and compensated for the shortfall, driven by frontline focus on fee income and cross-sell.
• The fee-income target is 110 bps: Management hopes to improve core fee income further and has set a target of 110 bps, up from the current ~90 bps.
• Cost-income ratio is on a downward path: The target is to go below 55%, which will take three to four quarters. Operating costs are rising in line with frontline investments, but year-on-year expense growth is expected to be lower next year because the capacity platform will have been built.
• Disbursal volumes are stepping up: Disbursal volumes increased in line with frontline capacity building, with growth led by mortgages, home loans, KCC, tractors, and gold loans.

Balance Sheet Growth & Capital

• Doubling the balance sheet in three to four years: Management is confident of this trajectory, supported by investments in frontline, product, process, and systems.
• No capital raise needed for at least a year: At 15–16% growth, the bank is self-funded through September 2023. Faster growth to double the balance sheet may require capital, but markets must also be favorable. Half-year profit is not yet included in the tier-1 computation.
• Branch expansion is on track: The intention is to grow the branch network by 25–35 branches per year. Most branches are opened in Q3–Q4 and start performing by Q1 of the following year; last year’s openings are now contributing. The bulk of deposits come from the top 60–80 locations, while 25% of new branches must be in unbanked locations, which take two to four years to break even.

Restructured Book & Write-offs

• Restructured book is performing well: Collection efficiency is improving, and a very minuscule amount of unsecured loans were restructured. The moratorium portion declined from ~₹700 crores in September toward ~₹400 crores by March 2023 on a monthly roll-off basis.
• Write-offs were fully provided: ₹41 crores were written off this quarter across various products after a review of recoverability timeframe. All were fully provided, and there is no change in strategy.
• Provision components disclosed: Q2 FY23 provisions included a floating provision of ₹4 cr, a standard restructuring provision reversal of ₹11 cr, a regular standard asset provision of ₹7 cr, and an NPA provision of ₹31 cr.

Gold Loans: The Unfinished Model

• Small-ticket gold loans are operationally intensive: Many banks have not increased gold loan rates despite EBLR and cost-of-fund increases. DCB acknowledges it has not cracked the efficient model used by some gold loan NBFCs and is still some distance from that ability to service those customers.

Murali M. Natrajan: "I would put my hand to heart and say that, we have not been able to crack the model followed by some of the gold loan NBFCs. They do it very efficiently. So, we are still a little away from that kind of ability to service those customers."

Guidance & Commitments

Key Metrics