DCB Bank Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Growth held up, NIM under pressure: Advances grew ~19% and deposits ~23% YoY, but rising cost of funds compressed NIM; management expects stabilization in about two quarters.
• Asset quality is a two-quarter story: Slippages ex-gold improved to 2.69%, and upgrades plus recoveries jumped to INR 289 crores (73% of slippages), but the restructured mortgage pool still needs time to normalize.
• Portfolio mix tilting toward yield: The bank is deliberately increasing the share of business loans (LAP) within mortgages and shifting away from low-yielding TReDS, aiming to add basis points to NIM over the next year.
• Credit cost guidance improved: Management now sees credit cost at 35-38 bps, down from the earlier 45-50 bps, based on current portfolio behavior.
• What to watch next quarter: Whether the two-quarter clock on NIM stabilization and slippage normalization actually delivers, and the pace of the LAP mix shift.

Margin Trajectory & Repricing

• Cost of funds hit NIM: The increase in cost of funds had a direct impact on NIM during the quarter, and deposit repricing of existing term deposits is expected to take another two quarters to complete.
• Portfolio repricing is the offset: Mortgage, LAP and home loans with short fixed-rate periods are coming up for repricing in the coming months and will accelerate over the next year. The MCLR portfolio passes on rate increases on a fixed quarterly schedule. Management asks investors to bear with the cost-of-fund increase for about two quarters, after which volume growth should deliver the full benefit of interest income growth.
• Business model NIM target intact: The bank's stated NIM target is 365-375 basis points, though near-term challenges from funding cost repricing and renewals persist.
• LAP mix shift to support yield: Over the next year or so, the bank will keep increasing the share of business loans (LAP) within mortgages, which management expects will add a few more basis points to overall yield and NIM.

Natrajan: "Our business model is at 365 to 375 basis points. But there are near-term challenges... What we believe is that over the next quarters, we still have to deal with this cost of fund, which is coming through re-pricing, renewals and so on. But post which volume growth should give us the full benefit of interest income growth is what our thought process is."

Asset Quality: The Restructured Overhang

• Slippages concentrated in post-moratorium mortgages: Customers who exited moratorium take 3-4 months to resume regular payments. If they miss three payments and then make one, the account remains NPA. Upgrades are running higher than recoveries, meaning more customers are being brought back to regular-paying status than are being recovered through lump-sum settlements.
• Upgrades and recoveries building: The quarter saw INR 289 crores in upgrades and recoveries, up from INR 211 crores last quarter and covering 73% of slippages. Management expects this number to continue building and reach similar levels to last year in about two quarters.
• Slippages ex-gold improved: At 2.69%, slippages excluding gold loans were lower than the previous quarter. Management believes intensifying collections on the restructured pool should contain new slippages from mortgages.
• Gold loan NPAs manageable: Gold loan NPAs stand at INR 42 crores with full security, and the bank has demonstrated ability to reduce gold loan NPAs to pre-COVID levels.
• SME and corporate slippages are episodic: SME slippages reflect cases with full security where customers missed payments and then returned to normalcy. Corporate slippages were small additions to existing NPAs due to the November 12 circular on interest servicing, with customers subsequently repaying.
• Restructured book is the source, not the flow book: More slippages are coming from the restructured book than from the non-restructured book. Recent slippages from customers exiting moratorium will take about six months to mature into settlement, upgrade, or recovery action. The restructured pool is mostly home loans or LAP, with a very small commercial vehicle component and no unsecured or BC loans.

Natrajan: "I think we have to give ourselves another two quarters, at least, I feel. The reason for that is that all these small customers who had gone into restructure and moratorium, some part of them take time to come back to the rhythm of repaying their loans."

Provisioning & Coverage

• PCR declined but remains ahead of RBI norms: The bank's provision coverage has been ahead of regulatory requirements for many years. Specific provisions are held for certain assets where recovery efforts are taking time, with an overlay to represent risk to the Board and Audit Committee.
• Restructured advances carry separate provisions: INR 194 crores of provisions are held against restructured advances, plus a contingency provision of INR 43 crores not counted in net NPA. Management expects recoveries and upgrades to improve, which will allow these provisions to run down.
• COVID-era provisions unwinding: Provisions held on both NPA and non-NPA books have been coming down because when an account moves from restructured to NPA, the provision moves with it, and recoveries or upgrades mean the provision is no longer needed. COVID-era provisions will continue to decline as those challenges recede.
• Credit cost guidance revised down: Management previously guided 45-50 bps of credit cost; based on current portfolio understanding, it now sees 35-38 bps as achievable. The bank's stated intention is to take PCR up to 70% over time.

Natrajan: "I used to give a guidance of 45 basis points, 50 basis points. But from the current portfolio, it looks like it can even be like 35 basis points, 38 basis points."

Loan Growth & Disbursement Mix

• Disbursement growth negative YoY due to TReDS: The bank substantially toned down its TReDS product because public sector banks are offering far lower rates. Excluding TReDS, YoY quarter-on-quarter disbursement growth was "quite impactful." The low-yielding TReDS book has partly shifted to better-yielding short-term corporate loans.
• Portfolio remains granular: 85% of the loan book continues to be at INR 3 crores or below.
• Mortgage repricing mechanics: Small-ticket mortgage loans are given at fixed rates for 6 months or 1 year depending on customer preference, then reprice. Yield on these small-ticket customers is higher than the average portfolio yield. When interest rates are passed on, the standard practice is to increase tenure rather than installment; when rates come down, tenure shortens.
• Pre-closure behavior normal: Despite a declining-rate environment, pre-closure rates remain within the bank's modelling expectations, and management expressed no concern.
• CV business takes a back seat: The bank will count on cross-selling commercial vehicle loans to existing customers but will concentrate more on business loans and home loans, which management expects to contribute almost 60% in the coming years.

Deposits, Funding & CASA

• Deposit growth strong at 23%: Branch scorecards were changed to ensure deposit momentum remains strong, and fee momentum is also performing well.
• CASA growth remains difficult: Market conditions have not been easy for CASA growth. The bank will put more effort into CASA to prevent cost of funds from going out of control.
• Savings rate strategy is retention-driven: The bank increased its savings account rate to 8% in the INR 10 lakhs to INR 2 crores bucket. Management argues that for retention of those customers, the effective cost is still less than term deposit rates, and most customers come in at smaller balances. The bank declined to disclose the proportion of deposits in this bucket.
• Funding profile diversified: Interbank deposits increased but top 20 deposits remain below 7%. Co-operative bank customers provide non-callable deposits. Retail term deposits continue to grow.

Natrajan: "So I would like to argue that for retention of those customers, we are actually paying less than term deposit rates. So that is our approach on those things."

Operating Levers & Productivity

• Cost-to-assets declining with growth: The cost-to-average-assets ratio is expected to keep coming down as the portfolio continues to grow. Q1 cost is typically higher without corresponding balance sheet growth due to salary increases. The bank has a goal of 2.4%-2.5% cost-to-assets.
• Headcount building for future growth: After a lower headcount last quarter, this quarter saw an increase as the bank builds capacity. Management will not slow down adding employees on a YoY basis and will keep steadily adding frontline employees, though percentage growth will decline as the base grows.
• Three productivity legs: Feet-on-street led productivity increase, partnership footprint expansion (co-lending on the asset side, partnerships like Niyo for savings accounts), and a slow-but-emerging digital do-it-yourself channel.
• Attrition is the frontline challenge: The single biggest problem with new hires is high mobility; employees get jobs easily and hop frequently. Management believes the best way to arrest attrition is to ensure early success for employees, and says it is "much better than what we were before" on this front.
• Fee income has no one-offs: PSLC income has declined significantly from INR 80 crores two years ago to INR 3-4 crores this year due to demand-supply challenges. The bank hopes to grow fee income in line with balance sheet growth YoY. The increase in commission income partly reflects IRDA regulatory changes and reclassification, with actual third-party business also gathering steam.

Natrajan: "The single biggest problem that we have with new hires, feet-on-street, etc, they are extremely mobile and they get job at a drop of a hat and they keep hopping around all the time."

Guidance & Commitments

Key Metrics