DCB Bank Ltd Q3 FY2025 Concall Summary

Key Takeaways

• NIM arrested its slide: Yield on advances ticked up to 11.44%, more than offsetting a cost-of-funds rise, so NIM changed direction after a period of decline.
• Cost-to-income target reset upward: The bank moved its CTI goal from 55% or below to 60% or below, and its cost-to-assets target from 2.4%-2.5% to 2.5%-2.6%, signaling a longer path to efficiency.
• Mortgage stress easing but not done: Absolute mortgage slippages fell from Rs. 46 cr to Rs. 37 cr QoQ, and bucket-zero collection efficiency improved, though management says it is not yet where it wants to be.
• MFI pain is deepening, with no end in sight: The microfinance book is over 4% of loans and every subsequent month looks worse than the last; management offered no timeline for a turnaround.
• What to watch next quarter: Whether the long-awaited promoter capital infusion actually closes, the pace of NII growth catching up to 20% topline growth, and any sign of stabilization in the MFI portfolio.

Margin & Profitability Path

• NIM inflection point reached: The yield on advances uptick (11.44% vs 11.38%) more than offset the cost of funds increase (7.20% vs 7.17%), arresting the slide and changing NIM's direction.
• NII growth still lags the balance sheet: Top-line growth is 20% while NII growth is 15%; management's ambition is for NII growth to reflect balance sheet growth with a lag, and when that happens NIM should inch toward 3.3%.
• Yield improvement driven by mix, not co-lending: The shift from home loans to business loans lifted yield on advances, not the co-lending book.
• ROA target is 1%: Management is aware and working on it, directionally moving right each quarter, with cross-sell as a key lever.
• Cross-sell push targets dormant mortgage customers: The bank is "unashamedly, shamelessly" going back to old mortgage customers to offer second and third financial products, and core fee income has improved over the last 3-4 quarters partly from this.
• PMAY may reshape the home loan vs business loan mix: The current PMAY scheme hits DCB's sweet spot (~Rs. 25 lakh loans, 5-year book stay, 11.5% max interest rate, subsidy tied to non-delinquency, low RWA), and once final guidelines come the bank may ramp up home loans, but till then business loans will dominate.

Kutty: "In the chase for higher NIM, we are not going to move out of the risk framework or the business strategy framework that we have put for ourselves... The market, frankly, is red in its tooth and the claw. It bites you back very badly during tough times."

Asset Quality: The Two Stress Pockets

• Mortgage slippages improving but still elevated: Absolute slippage decreased from Rs. 46 cr in Q2 to Rs. 37 cr in Q3; bucket-zero collection efficiency improved to 99% for LAP and 98.9% for home loans. Management says it is getting better but is not yet where it wants to be.
• MFI book is the deeper worry: Over 4% of the book is in microfinance, which is going through industry-wide pain; higher NPAs are coming from that component, and recovery is slow because MFI slippages do not yield immediate recovery unlike the normal book where recovery happens in the first 2-3 months.
• MFI outlook is deteriorating: Every subsequent month looks worse than the previous month, and management admitted it does not know how long the pain will continue.
• Write-offs concentrated in MFI: Higher write-offs this quarter (Rs. 84 crores, including haircuts, sacrifices and OTS) were mainly on the MFI portfolio; the CV story is over. Management will pursue collection strategies before writing off MFI exposures further.
• Management declined to disclose MFI provisioning policy or separate portfolio numbers: The MFI book is submerged in the "others" column and not big enough to show separately; internal provisioning policy was not revealed.

Kutty: "Every subsequent month looks like worse than the previous month. So, that is a very pessimistic answer. But I wish we see an improvement happening, but right now the honest answer is we don't know."

Cost & Efficiency Reset

• Cost guidance targets revised upward: The bank changed its CTI target from "55% or below" to "60% or below" and its cost-to-assets target from 2.4%-2.5% to 2.5%-2.6%, acknowledging a longer path to efficiency.
• Near-term cost milestones set: The bank aims to bring CTI down from 64.8% to ~62.4% and cost-to-average-assets under 255 bps (from an internal milestone of under 260 bps already achieved), though management says this is not easy given growth momentum.
• Cost reduction came from multiple levers: A combination of productivity increases, selection and deselection of performers, headcount reduction where efforts failed, and disciplined management of other expenses drove the improvement.
• Headcount reduced quarter-on-quarter: The bank trimmed its workforce as part of the cost measures.
• Fee income target set at 1.1%: Up from 1.04% currently, with cross-sell to dormant mortgage customers as a primary driver.

Kutty: "We break up the milestone into smaller bite sized pieces so that we overachieve that rather than give a number which is far too distant which we really haven't done for the last few quarters."

Co-Lending & Gold Loan Dynamics

• Co-lending surged as a key partner resumed origination: One of the bank's biggest co-lending partners restarted business after a brief pause, boosting growth across home loans, school finance, unsecured business loans, gold loans, SME and commercial vehicles.
• Gold loan demand spiked on MFI slowdown: The microfinance stress drove a surge in gold loan demand, helping both the organic and co-lending book.
• Co-lending philosophy is built on non-overlap: The bank partners only with entities not in the same product, segment or location, maintaining clear Chinese walls; it is comfortable with current book growth and yield, and may enter new products, segments or locations after gaining experience.
• Management deflected on whether co-lending has breached an earlier 8%-9% cap: When asked if co-lending at 11% exceeded a previously stated target, management said it was not sure it ever stated an explicit percentage publicly, then discussed philosophy without confirming or denying the specific cap.

Capital & Balance Sheet

• Tier-2 capital raised during the quarter: The infusion, plus borrowing mix adjustments to manage cost of funds, caused the CD ratio to worsen even though customer deposits grew handsomely.
• Promoter capital infusion still pending: Management expects it "anytime," with only minor information left to provide to the RBI, but the timeline remains vague, the same answer as last time.
• CD ratio target is lower: The bank wants to bring the CD ratio back down by growing deposits more than loans; there is no strategy change.
• Deposit growth strong at 20%+: Achieved while keeping top 20 deposits at 6.97%; savings account growth was 17%.
• Credit demand is sufficient: The bank is able to pick and choose in its chosen segments.

Kutty: "Hopefully, next review you probably will ask this question, we will not be answering this question."

Guidance & Commitments

Key Metrics