DCB Bank Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Steady quarter, confident medium-term path: Gross and net NPA both declined, recoveries nearly matched slippages, and collection efficiency stayed strong across key portfolios, even as PSLC income collapsed and suppressed operating profit growth.
• Cost-to-income target reaffirmed with a clear path: Management sees a line of sight to the 55% cost-to-income ratio, citing a successful 2015–2018 precedent, though it will take 3–4 quarters to get there.
• Mortgage is the declared anchor for years: The mortgage book, already ~50% of loans, is the stated key product for at least the next 4 years, with the share likely rising to ~55%.
• Gold loan NPA noise masks core improvement: Gold loan slippages, driven by small-customer indiscipline and a regulatory circular, skew headline numbers; excluding gold, mortgage, CV and SME slippages are nearing pre-COVID levels.
• What to watch next quarter: Whether the promised income-growth-outpaces-expense-growth trajectory begins to show, the pace of gold loan migration to installment products, and any stabilization in PSLC rates.

Asset Quality: Core Normalizing, Gold a Known Irritant

• Core slippages converging to pre-COVID: Mortgage, CV and SME slippages are steadily moving toward pre-COVID levels, with management expecting that convergence in another 1–2 quarters.
• Recoveries and upgrades offsetting new stress: Recoveries and upgrades were almost equal to slippages this quarter, keeping net accretion contained.
• Gold loan portfolio is the outlier: Small-ticket gold loan customers show indiscipline, and a November 12th circular means even 3–10 day delays trigger NPA classification, skewing overall slippage numbers to 4%–5% if included.
• Gold loan fix is structural, not quick: The bank is encouraging migration from bullet gold loans to installment loans, but management expects elevated gold slippages to persist for 3–4 quarters as customers transition.
• Mortgage portfolio quality is solid: Delinquencies are very much in control, slippages and recoveries are almost equal, and a portfolio sold to ARC performed very well.
• Restructured book fading as a concern: No major worry remains; slippages from the restructured pool are expected to continue declining.

Murali M. Natrajan: "As far as mortgages, CV and SME, MSME is concerned, I believe the monthly slippages that we are seeing, are steadily moving towards the pre-COVID level. So, give it another one or two quarters, I think we should be there. But you should exclude gold out of this, because gold is something that we really don't lose sleep over slippages."

Income Headwinds: PSLC Collapse Masks Fee Momentum

• PSLC income crashed year-on-year: The rate earned on PSLCs dropped substantially due to market conditions, producing much smaller income this year and suppressing overall income and operating profit growth.
• Core fee lines are performing: Processing fees are doing very well, and insurance and investment income improved 15%–17% year-on-year.
• Treasury and IPO income also weak: An unfavourable interest rate environment pulled down both treasury income and IPO-related fees.
• PSLC is not written off: With 60%–65% of loans qualifying as PSL, management expects market demand to return over time and is not giving up hope on the income line.
• Other income target remains 105–110 bps: Currently running at ~80 bps, with Q4 typically a strong quarter for fees and the trajectory described as good.

NIM: A Question Management Would Rather Not Answer

• Timing mismatch is the core dynamic: The bank has already passed on 190 bps of EBLR-linked rate increases, but term deposit rates were only recently raised and are not yet fully reflected in the cost of funds, creating a near-term NIM squeeze.
• Product mix matters month-to-month: Originating more home loans in a given month mechanically results in lower reported NIM, making the metric sensitive to disbursement composition.
• Rate pass-through is not a customer problem: No significant challenge seen from customers on rate increases; EMIs have mostly stayed unchanged, though some stress appears when customers move from unbilled to billed status with rate increases.
• Fixed-rate corporate and NBFC loans reset naturally: Rate increases are passed on in the next cycle, when borrowers repay after ~3 months and take a new loan at the higher rate.
• Gold loan rate pass-through is low-stakes: Some increase was passed through, but it is not a big concern because gold loans typically repay within 6 months anyway.

Murali M. Natrajan: "I was hoping that you will not ask me any question on NIM. My team said what are you going to answer. I said I hope they don't ask me is what I wanted to say."

Mortgage & SME: The Two-Gear Growth Engine

• Mortgage is the declared multi-year anchor: Mortgage will be the key product for at least the next 4 years, with the book share likely rising from ~50% to ~55%, backed by a management team that believes it is genuinely good at the business.
• Repayment rate decline is a math artefact, not a warning: Repayment as a percentage of the prior quarter's loans is falling because mortgage origination is accelerating; in the early years, installment loans show low repayments as customers pay only interest, with principal catch-up expected in 1 to 1.5 years.
• Mortgage disbursement share is lower than outstanding share: Mortgage was ~30% of disbursements versus a 42% outstanding share, because SME disbursement was proportionately higher at 20%; separate sales teams and channels mean there is no cannibalization.
• SME/MSME growth is deliberately slower now, faster later: The share in the loan book declined from ~10% to ~9.1% despite strong disbursement, because frontline investments were made only in the last 3–4 months, products were revamped, and the bank deliberately reduced its focus on CC/OD due to erratic utilization and NPA risk from the November 12 circular on small undisciplined customers.
• Demand is holding up despite rate hikes: No impact yet visible on mortgage demand; inquiries remain high and conversion rates are normal, true for both LAP and home loans.

Murali M. Natrajan: "Mortgage will be our key product for at least the long-term planning that we have done for the next 4 years. Mortgage is our key product, and we are pretty good at it. We understand the business..."

Operating Costs: Investing Now, Leverage Later

• Cost-to-assets is still above the 2.4% target: The ratio continues to increase on an absolute basis because employee additions are ongoing; the model is to hire frontline employees, make them productive, and get business.
• Cost-to-income path is clear but not immediate: Management expects to deliver the 55% cost-to-income guidance, citing the successful 2015–2018 precedent, but it will take 3 to 3.5–4 quarters; the direction is described as alright.
• Income growth is expected to outpace expense growth next year: The trajectory is expected to look much different, with income growth overtaking expense growth, as the frontline investments made now begin to generate returns.
• Hiring will not stop: To grow the loan book 20–22% when 15–20% of the book comes back as repayments each year, the bank must keep adding people; the ambition to reach a ₹100,000 crore balance sheet makes continued hiring non-negotiable.
• Lower cost-income ratio is the bridge to ROA/ROE targets: Achieving the cost-income target will help deliver ROA above 1% and ROE closer to 14%.

Murali M. Natrajan: "No, we want to reach Rs. 100,000 crore balance sheet, why would we stop hiring employees. Our business is about hiring frontline employees, making them productive, getting business, that's our model."

Guidance & Commitments

Key Metrics