DCB Bank Limited (DCBBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to DCB Bank Limited Q1 FY '23 Earnings Conference Call. Joining us on the call today are: Mr. Murali M. Natrajan, MD and CEO, DCB Bank Limited; Mr. Satish Gundewar, Chief Financial Officer; Mr. Ajit Kumar Singh, Chief Investor Relations Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.

Thank you. Good evening, all of you. I am speaking to you from our boardroom. We have: Mr. Sridhar Seshadri, our Chief Risk Officer; we have Ajit Singh, our Treasury and FI Head; we have Praveen Kutty, who is the Head of our Retail Banking; we have Satish Gundewar, who took charge from Bharat Sampat with whom we have been interacting for many years as Chief Financial Officer. So in the first 5, 7 minutes or so, let me give you some highlights. One of the important highlights that I would like to bring to your attention is that, we continue to be very strong in our recoveries and upgrades. In fact, upgrades is higher than -- much higher than recoveries, and so, it just tells you about the robustness of the portfolio. The slippages are high, primarily contributed by gold loans. Gold loans are contributing to the slippage, also to the upgrade, for the simple reason that the Reserve Bank of India rule that came in, in November of 2021, where every day the previous 90 days, the customer has to be servicing the interest and his debits have to be lower than his credit. So that is a pretty big challenge for small customers. Although we are spending a lot of time in educating these customers, we do find default. And if a particular customer gets into the default in, what they call as out of order, then what happens is that, if they have a related loan like a mortgage or a commercial vehicle or SME, that also gets into NPA situation. So he has to now clear all the overdues to become -- despite that, we have performed quite well on the recoveries and upgrades. I would say that commercial vehicle and mortgage, which is a big product for us, the slippages are pretty close now to the previous pre-COVID levels. And we have had some slippages in our AIB. That is to be expected, especially in KCC. But what we have seen is that, over a period of 12-odd months, our recovery and upgrades are quite good in those portfolios. So that is point number one. The other important point is that, if you look at our financials -- and I'm actually -- instead of focusing on the quarter financial, I want to talk about the franchise strength. If you look at our financials, pre-COVID you will find that operating profit divided by provisions were always in the range of 3.5x, 4x. This quarter we have almost reached 70% coverage. Let me remind you that we do granular secured lending. So therefore, we [indiscernible] at a coverage of 70%. If you look at the operating profit divided by provision, it's like more than 4x, which is the margin of safety, which is the strength of this franchise. Our balance sheet crossed INR 45,000 crores. Costs are cross INR 10,000 crores and grew by 51%, and we are getting the benefit of our attention and focus on our branches in savings account, and that grew by more than 60%. Our Advances growth is 18%. We -- our businesses were almost the same as the fourth quarter. We had lower disbursal in co-lending, and we are looking for more partnership because we set up limits on each co-lending, and then you have to -- when we cross the limit, it takes time for us to get new limits on those lending to get that going, but that is nothing to worry about. Our core lending -- core disbursals are doing quite well, and we expect that to step up further, as we have grown our branches in the last quarter as well as the fourth quarter of last year. Plus, we've also added a lot of frontline stuff. About 85% to 88% of our total staff are facing the customer and supporting business. So our overheads are very limited in our business. We have done well on the operating profit. Core fee income is doing well. Last year, we had the benefit of about INR 54 crores, INR 55 crores of one-off treasury income. The interest rate is not supporting that type of opportunity. This year, we have -- our -- same to same. We had income of about INR 5 crores, INR 6 crores. We don't -- we didn't have any of these treasury losses. So that is what it is. In terms of profit after tax, obviously, it's a very high number. Last year, first quarter was a difficult quarter. We had to make a lot of provisions. As you know, it was the massive, very difficult second wave that we had to deal with. Since then, our recoveries, upgrades have done quite well. Our restructured portfolio is doing -- building up. Most of our recent portfolio is secured, either home loan or loan against property. So that is also doing well. CASA ratio is moving up, which is also a good sign. Our intention is to cross the 30% as soon as possible. NIM, we had a 5, 7 basis point challenge primarily because of excess liquidity which we had to maintain in the start of the quarter, as the business was taking time to pick up. So that dampened the NIM a little bit. But our stable NIM that we expect, should be in the range of 365 to 375 basis points. In Retail and SME business, which is very pure business that we do, is -- costs do come in first. But as we build volume, we expect the cost to average assets as well as cost income to come down. We also expect the slippages, especially of mortgages and commercial vehicle and SME, to be at the same level or below pre-COVID levels, in about 2 to 3 quarters. That is what our expectation is. And we also expect our credit cost to be definitely lower than last year's credit cost. Our intention is to maintain the credit cost in the range of 50 to 60 basis points. We are still -- we are having lot of success in our digital agenda. One of the products that we launched called Zippi Plus, even without any digital marketing, we are getting more than 100 customers opening accounts with us. Our intention is to do digital marketing to step up this, and it's -- I would encourage you and your friends to try out Zippi Plus in the Play Store, and your experience and your feedback would be quite useful to us. With those words, I would like to hand over to operator to -- few of the questions. I'm happy to answer the questions.

[Operator Instructions] We take the first question from the line of Mona Khetan, Dolat Capital.

So firstly on the SME segment. So while we are seeing healthy disbursals -- you've given -- shared this data on segment disbursals this quarter. That is not really translating to growth. So what exactly is happening? Is it the competitive intensity, or just want to [ reach ] into --?

What do you mean it is not translating to growth?

So if you look at the loan growth from a sequential perspective, it's below the overall growth, whereas disbursals are better than the other segments for SMEs.

Yes. So we have had some decent growth in mortgages, loan against property. Gold loans, when you disburse 100, almost 60, 70 of them get repaid. SME, utilization is a challenge always in first quarter because they use a lot of loans in the fourth quarter. And then in the third quarter -- in the first quarter, the utilization comes down and is expected to pick up. One of the products that we do is the TREDs. TREDs is a very short-cycle product. It's a maximum of 90, 120 days. So we pick up the disbursal of that much more than what we do. So that's how the dynamics of the business is. We are pretty confident that, given the momentum that we are seeing on new disbursals, on mortgages, tractors, KCC, and also gold loan, and the new sign-ups that we are doing on co-lending et cetera, we are pretty confident of our traction.

So when we look at some of the larger private banks, they are very -- they're growing very fast. The branch expansion plans are significant. So that you don't see as a risk to your mortgage and SME book, the growth in those books?

The segment that we are concentrating is INR 30 lakhs to INR 40 lakhs kind of average ticket size. And our competition intensity, while it is there, we understand this segment very well. The kind of volumes that we are seeing, the log-ins that we are seeing, we are pretty confident that our growth -- what we are projecting of doubling the balance sheet in 3 to 4 years, should be possible.

And secondly, so when we look at gold slippages, we've seen pretty high slippages from the gold segment in the last 3 quarters in a row now. So do you expect that to normalize here on, because...?

Let me explain the slippage so that you understand. These are all customers average ticket size of INR 2 lakhs to INR 3 lakhs. We are offering a product called overdraft product. When they take loan from, let's say, NBFC, they get a bullet loan, but we are giving them overdraft products where we are trying to make them into -- or getting them into a habit of servicing their interest on a monthly basis, okay, prior to November 2021. On March of any particular year, that is 31st March any particular year, if the customer had serviced their entire interest, that is the last 90 days whatever debit, credit -- the credit is more than the debit, they are not considered as NPA, even if during the quarter on any particular day they had not serviced the interest. That was the RBI guidelines at that point in time. RBI guidelines changed in November to say that, on any particular day -- not any month -- any particular day the previous 90 days, the customer interest should have been serviced, right? So these customers are not so, what we call as disciplined in terms of operating their account. And that is the reason the slippages increase. But when you follow up, they pay all the overdues and become regular. So this is the time we have this product. We expect this, that customers are used to this product. They like this product. But we need to get them to have the discipline of that. There is no risk to the portfolio because it is good. Underlying is gold loan, and you can see that the recovery is pretty much -- in fact, higher than what the slippages are.

So across a couple of products, including non-gold and gold, the slippages have largely been impacted by the out of order circular as well as the November circular, as you mentioned?

Out of order circular of November. Out of order circular was always there, but in November, it changed to every day 90 days. That is a change actually. And I've explained this even in my previous call. I'm sure -- I don't know how the other banks are dealing with. We have started -- right from November we have started following that circular. And it [indiscernible] the SMEs also, but some of the SMEs have understood this issue, and have started becoming more disciplined about servicing their interest. They're not bad customers. They are just -- and you know that sometimes SMEs get their cash flows in a slightly erratic manner, so they don't service it. So it becomes NPA. Then they service all the interests and become standard and start operating their account like a normal account.

And so, thirdly, on the EBLR loan. Do you see yourself passing on the entire rate hike to borrowers? Or there could be some compression if risk premium is there?

No. We will be passing on the -- this thing. We've already -- yes, 40 basis points we've already passed. 50 basis points will get passed on -- in August.

And the reset is 3 months?

Yes.

And just finally, what would be your slippages from the ECLGS?

That's all contained in the total slippages. As you know -- I've kept telling you, I don't know why we get this question again and again. We had INR 2,000 crores -- INR 3,000 crores of sanctions. We only disbursed about INR 1,000-odd crores of ECLGS because we knew that customer A will have difficulty. Because the customer who's doing a 10-year loan suddenly has to start paying after 1 year the principle also, it gets too compressed and it will burden the customer, right? All slippages that we have reported includes the ECLGS slippage, restructured slippage. Whatever slippages that happen, all have been reported.

Sure. But if I look at the restructured -- the outstanding has remained same versus last quarter or hardly any difference, which means that the slippages have not been...?

It has dropped by INR 60 crores, but what is wrong with that? He has a restructured portfolio and he's paying his installment.

Right, but just wanted to get a sense that out of this INR 1,000 crore or -- have there been any slippages in the last few quarters?

What is INR 1,000 crores?

Of ECLGS disbursals.

Like I mentioned, it is part of the slippages and upgrades, but slippages also -- have upgrades also on those.

We take the next question from the line of Rohan from Equirus Securities.

Sir, what was the quantum of NPAs that got upgraded during the same quarter from the slippages?

I don't have that number, and why do you need that?

Just want to understand what was the slippages -- existed for the recovery within the same quarter?

Some of the slippages on gold loan would be within the quarter. Quite possible.

That's what I just wanted to understand. Secondly sir, what is your coverage that you are carrying on gold loan NPA? Is it the regulatory...

Gold loan NPA means?

Under the provision that we are carrying on the gold loan NPA?

Again, I'm not understanding the reason for the question. The total coverage ratio is 69% something. Including gold, it is like 70%. Excluding gold, it is about 72-odd percent. Gold loan actually doesn't require any coverage. We never lose money in gold loans. But in any case, we will provide the 15%, 20%, 30%, whatever percentage, depending upon the ageing.

And sir, the credit cost guidance of 50 to 60 basis points, that is for FY '23 or how are...?

On a steady state, we expect credit cost to be 50, 60 basis points -- more like 50, 55 basis points. And we do expect credit cost to be depend -- I mean, based on what trend we see in the last 2 quarters, we do expect credit cost to be lower than last year in this year.

And the steady state is expected by when?

Steady state is as and when we kind of come back to normal slippages, which we expect in about 2 to 3 quarters. Normal slippages means we are talking about pre-COVID slippages for commercial vehicles, home loans, mortgages, like that.

And sir, lastly, we have ended on almost 20% new employees in last 3 quarters?

Yes.

Just if you can elaborate on how they're deployed and what are your thoughts over there?

They're all deployed in various businesses, mortgages, home loans, gold loans, CASA, term deposits, KCC, tractors, like that, and operations because we have to support them -- operations, credit operations, like that. And some we have added to our technology as well.

So it's across the whole -- and no specific segment per se in terms of focus areas?

What do you mean by segment?

No. As in, in any particular segments which we would have in trying to focus more, for example, cross sell or something like that, where we will be strengthening our bench by this-this segment?

We have added people to mortgages, home loans, KCC, tractors, gold loans, all our businesses, depending upon the potential, depending upon the geography, depending upon the branches. Obviously, we add salespeople, then we have to add credit people, then we have -- in some proportion we have to add the credit people. Some other people have to be added for operations to support this. So like that, we have added across the board.

We take the next question from the line of Renish Patel from ICICI.

So sir, 2 questions. One is sort of on the clarification. So we have mentioned that we target gross NPA to be below 2.5% and Net NPA below 1.5%. This is for FY '23, or this is a slightly medium-term guidance?

We said way forward means we are talking about a foreseeable future, 3, 5, 6 quarters, like that. We don't give any guidance on particular year. Okay? And you see there, we are talking about 4 to 5 quarters, like that. We are not giving any guidance for any particular, specific financial year.

And sir, just last question on the...

If you recall pre-COVID our NPAs were always below 2% on gross and net 1%. Now in COVID, lot of slippages happen, and you can see that they are doing a remarkable job on recoveries and upgrades. You can't find a single bank that has almost 100% recovery and upgrades -- in fact more upgrades than recoveries, okay? So based on this and based on the kind of growth that we are having, we expect NPAs to come down to 2.5% over a period of time.

And sir, last sort of strategic question on the -- let's say, over the next 3 to 4 years when we expect our balance sheet to double. So by and large, we expect the same product mix which we have currently? Or there will be some products which will grow at a faster [ cliff ] and maybe our product mix could change over a period of time?

First of all, we will continue to be granular. Second, we will continue to be secure. That is not going to change, okay? 84% of our loan is below INR 3 crores. Top 20 exposure is below 5%, okay? So we are not going to change that strategy. What is likely to happen if we are able to execute our plans well is that, mortgage, which is around 47%, 48% both put together, that is AIB and Retail put together, could be higher than 50%, 55%. And gold loans could increase in the -- this thing. And because we have to achieve the agri target, KCC and tractors also would be -- so the lead would be mortgages, KCC, tractors, gold loan. And we also expect co-lending to contribute anywhere from 4% to 5% of our book, provided there is no change in regulations on co-lending. The current norm seems to indicate that we can achieve that kind of growth.

We take the next question from the line of [ Neil Mehta ].

Just wanted to get with you on what's the duration of your treasury portfolio you'll be considering with the rise in interest rate scenario?

What portfolio?

Treasury portfolio. The portfolio of bonds in our book.

I don't think we disclose that detail. All I can say is that in this quarter, we did not have any loss in our treasury. I think we made a small profit of about INR 5 crores. And last year same time because interest rates were moving in the right direction from a profit point of view, so we were able to book about INR 50-odd crores of profit.

And sir, if you could also disclose the percentage of the books in floating rates of loans?

Again, we don't disclose that detail. I've also already mentioned that our portfolios, except for tractors, commercial vehicles and to some extent gold loans, rest of the portfolio are all linked to either EBLR or MCLR depending upon when they were originated. And we -- contractually every quarter, every 3 months, we pass on the increase as and when we do that.

We take the next question from the line of Jai Mundhra.

So this is a slightly longer question. So hope to have your patience. So if I look at last 5 -- the 4, 5 quarters, the slippage -- there are slippages and there are recovery upgrades as well. So GNPA is more or less, less static. During the last 4, 5 quarters, the write-off, of course, has been miniscule. And it looks like that is also one of the reasons why your specific credit cost is also muted, right? This quarter if I were to calculate, credit cost is around 45, 50 basis points. So it is clearly coming because the portfolio by design or by choice is such that the write-offs are not -- have not been there in the last 4, 5 quarters. Now the question is, sir, when you say 40 -- 50, 60 basis point credit cost, should one assume that the portfolio quality would remain more or less similar in the sense that you may not need too much of a write-off, or there is something else also?

Portfolio quality is not impacted by write-offs. Write-off only reduces the Gross NPA. Portfolio quality is impacted by the slippage, recovery, upgrade and the consequent credit cost. Write-off does not impact the credit cost.

Sorry, you're saying write-off does not impact the credit cost?

Yes. Because you normally write-off only 100% provided portfolio. We don't write-off portfolio -- and we write-off portfolio very miniscule because we don't see showing a lower NPA by just doing write-off. We have to show NPA -- lower NPA -- achieve lower NPA by recoveries and upgrade. And if you see mortgage, which is more than 50% -- almost 50% of our portfolio, the NPAs have consistently come down. You can see that, right? And commercial vehicle has been pretty stable. Some uptick is there in SME. Part of it is because of the November 12 circular. We are pretty confident. There are some slippages that have happened in AIB portfolio, which is KCC and all. It is more situational, and we are pretty confident about that as well. Right? And our MFI portfolio which slipped during the pre-COVID -- I mean COVID time. We have provided more than 90%, or even 100% in some of the portfolios. So improvement in credit quality will come by lesser slippages, better -- continued better recoveries and upgrades. That is what we expect. And we have already had 70% odd -- almost 70% coverage ratio. So therefore, we were covered to a great extent on our NPAs.

Right. No. So I'm saying, sir, for the full year FY '22, the total write-off were very -- previously at INR 80 crores, INR 85 crores. Right? And this was clearly the period when a lot of unrecoverable assets would have come through from previous COVID wave. And of course, the second COVID wave was also very problematic. So I'm saying that year, the total write-off was INR 80 crores only, and hence, your credit cost was less impacted. Would that be a right sense to -- sort of a forecast that despite higher slippages, the write-off may not be very high?

Once again, I'm telling you that credit cost is impacted by provision. Provision is impacted by gross slippage minus recovery and upgrade. Write-off our bank does -- normally 100% provision is done on a particular portfolio, or we find something for any reason is completely not recoverable, okay? We do secured lending. So we don't assume that anything is not recoverable, and we are demonstrating that by actually having upgrades and recovery. So I suggest that you leave the write-off connection on this credit cost. What we expect is, consistently we will be having lower slippages, and continue to have good performance on our recoveries and upgrades. We have almost 900 plus people in our collections in-house, not outsourced, in-house. So we are confident now that the economy is bouncing back. SMEs to whom we have lent are having better cash flows. So we are confident that we'll continue to do well on our recoveries and upgrades. That is how our credit costs will be lower.

And second question is, sir, on your loan growth. So while we go by this thing of doubling the balance sheet in 3 years or 3.5 years, if I look at last 3, 3.5 years, the cumulative loan growth in the loan book is around 30%.

Look forward. We took a defensive position in 2021 and part of 2020. We've already added people and branches. We have added capacity in all our products, like I explained a few minutes ago, to another investor. So based on the investments we have done in the branches and the front line and the capacity, we expect to double the book in 3 to 4 years' time.

Right. So that essentially means, sir, there is less -- incrementally, there is less COVID impact and there is less competitive impact, right? This is...?

COVID impact I don't know. Competition impact is always there. From 2009 since I took charge, we have always operated under competitive pressure. Despite competitive pressure, we understand this segment. This segment is very large. We understand our product. We have distribution. We have capability, and that helps us to continue to march forward on this journey.

[Operator Instructions] We take the next question from the line of Rishikesh Oza from RoboCapital.

My first question, [ considering ] the OpEx, which is up quarter-on-quarter, can you please comment on that? And are they like going to be at elevated levels for this financial year?

From the last quarter, or even from the third quarter of last year, we have been investing in front line. Like I explained, it is broad-based. We are investing in mortgages. We are investing in KCC, tractors, branches to support them in credit and operations. So I expect credit -- sorry, operating costs to be high in this year. But moving forward, we expect -- like we have guided in about 4 to 5 quarters, we expect cost-income ratio to be 55% or below, and also reduction in our cost to average assets, as we build our loan and deposit book.

We take the next question from the line of Rakesh Kumar from Systematix Shares.

Sir, just a very basic question here. Like I have seen cost of deposit number go from -- very marginally, it has come down. We have a relatively lower CASA deposit percentage as compared to the system. And interbank term deposit number is close to around 13%. So -- and we are in a rising interest rate scenario. So what is helping us to reduce our deposit cost?

See, the deposit rate for term deposit or even for our savings rate, if you don't offer competitive rates, especially for a bank of our [ type ], we will not be able to attract the right type of -- right level of deposits. So the comparison set of our bank -- we have to always compare our deposit rate with those banks because we are in the market competing with some of those. Now our intention is to grow our savings deposits. We have graded pricing on savings deposits, and we expect those to be sticky. And also what we found is that, if we get a deposit of savings this month, by 12 months, that deposit at least increases by 30-odd-percent, even without any great effort in cross-sell and so on. So we expect that to help us in managing our cost of funds. However, I can tell you that deposit rates are increasing, and we have to remain competitive. We need to make sure that we don't take -- we keep granular deposit portfolio because our top 20 deposit, as you know, is about 6.2%. So we may have to match those rates in term deposit and all in order to support our liquidity requirements. The good news that we also have is that our portfolio is all refinanceable. We do get refinance from SIDBI, NHB and NABARD. We do -- 60-odd percent of our book is PSL. So we are required to keep only 40%. So we get a lot of refinance support, which comes on a longer term, plus it does not attract SLR, CRR. Last point is that, if you keep our -- keep your slippages in control and have decent recovery and upgrade, NIM also does not get damaged by any reversals and so on. So there are a lot of factors that play into it. Also you have to achieve your agreed target. If you don't achieve your agreed target, then you will be lumped with long-term RIDF which will be coming at a very small -- low rate. So there are so many factors in this cost of funds and margins, which all have to be managed.

Sir, just to slightly reverse this question. If you look at March 22 and June 22 number as given in the press release, so, like there is a strong growth that we have seen in the investment number as compared to Advances numbers. So is it better for us to keep rate -- deposit rate lower so that we don't require that much of resource, because anyway, we are sitting at the excess security? So is that also the thought process?

No, some part of excess liquidity has to be kept to ensure that you meet all the LCR norms, and some part of excess liquidity is created because of short-term lending in corporate. So this is our daily activity. Every day we monitor all these items. And first quarter usually is not a very great quarter in terms of business because April starts off very slow. So you've probably had some excess liquidity at that point in time. So we expect all that to normalize in the next quarter or so.

We take the next question from the line of Mahesh from Kotak Securities.

Murali, just one question. If you can just give us an update of the situation of your borrowers in terms of how are they feeling in terms of the recovery in business environment?

Which one?

How is the -- what's the general feeling of the business on the ground?

The business on the ground feeling is pretty positive, not much issues. I mean, like, I don't think when -- sales meeting or balance sheet meeting that we have, we are finding any resistance or any issues. We had -- today in our Board meeting, we had invited Crisil to come and present to us about the challenges of the economy to our management team and Board, and we've got a very balanced view from this very learned and expert, Dharmakirti Joshi and his team also. We asked questions around SME, micro-SME and so on. And they also understand the robustness of this sector. So on the whole, while there are challenges in terms of inflation and other pressures, I don't see too much negativity in the sentiment of our sales team or frontline. Partly -- but partly, that's the other thing. Like, if the inflation is like that, then your salary adjustments have to be in line with those kind of pressures. And that is part of the reason why you see a little bit of cost increase in our first quarter in terms of the salary increase as well.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you very much for all of you to log in to this call. Look forward to talking to you again next quarter. Thank you.

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