DCB Bank Limited (DCBBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to DCB Bank Limited Q1 FY '25 Earnings Conference Call. Joining us on the call today are Mr. Praveen Kutty, Managing Director and CEO; Mr. Sridhar Seshadri, Whole Time Director; Mr. Ravi Kumar, Chief Financial Officer; and 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 very much, and good evening, everybody. This is Praveen here. I want to take you through the highlights of the last quarter, starting with deposits. Our deposit growth has been slightly above 20% Y-o-Y, and the CASA growth was about 18% year-on-year. Our focus on CASA -- as savings account and savings growth has been 21% year-on-year. During the last quarter, we crossed the INR 50,000 crore total deposit mark, in a market which has a tightening liquidity, we improved our CD ratio to 81.6%. And our LCR is well over the 120% threshold that we kept for us internally. On the loans front, we have had a loan growth of 18.9%. Our restructured book now is 2.34% net, considerably less than what we started off with. Our credit cost is very comfortable though there is a slight elevation in the NPA ratios. And our provision coverage ratio is 76%. These are top line numbers. On the profitability front, our NIM has come down to 3.39% in this quarter, and our fee has hit a high of INR 143 crore. The core fee income is robust at INR 114 crores. The cost-to-average assets in Q1 '25 is 2.71%, slightly less than the 2.73% of the same quarter last year. On the nonfinancial front, we had some -- we had 2 very important technology upgrades during the quarter. One was that we upgraded our treasury system. We have a new TCS system, which is there for our treasury. And also, from a cybersecurity perspective, we have an upgraded SIEM system. In the last quarter, we have made some basic rejig, which I think is important for the bank from a future growth perspective. This is mainly on the assets front. Mortgage is undergoing a bit of a revamp, it's a bit of a rejig, we are reorienting ourselves to business loans. Mostly, if you look at our mortgage book, it is cut half in home loan and business loans. Increasingly, we would be pursuing business loans within the framework that we currently have. The second element in the mortgage revamp is that we are reclaiming the INR 50 lakh to INR 1 crore space, very well within the MSME, self-employed segment. Over a period of time, from 2016 to now, there has been a steady decline in our ticket size. So we have moved with a SKU, a favoring affordable housing and small ticket LAP. I think nothing wrong with that. The only thing is that, from a productivity perspective, there is a market out there, specifically the INR 50 lakh to INR 1 crore range, which is a space that we are comfortable with. So there is a greater thrust on getting that going, in addition to the affordable housing and the small ticket business loan that the bank anyway does. The second area of modification is our focus on engagement. Our SME book will be more focused on the overdraft product that we have. Currently, the SME that you see, if you were to look at the investor presentation, it comes -- has a combination of TReDS and the traditional SME, MSME products that we have. Over the next -- in the future, you would see the reliance on TReDS coming down and overdraft coming into play. It will help the yield. It will also help cross-sell. It will also help increase the fees. The second part of the engagement is on the CASA front. There is -- while we have grown savings account by 21% Y-o-Y and CASA also by 18%, there is increased thrust on improving the CASA even further as we go along. And this would come from focusing on engagement at multiple levels, both digitally as well as a relation manager-based engagement. The third element is a greater use of data analytics to deepen and widen relationships within the bank. So we have a dedicated team solely focused on increasing product penetration within the bank. This, ladies and gentlemen, is a summary of the last 90 days. And if you have any questions, feel free to ask. I've my leadership team also here with me. Feel free to ask the questions, and we'll provide you with the answers.

[Operator Instructions] First question is from the line of Rohan Mandora from Equirus Securities.

So I wanted to understand on NIMs and the completion that has happened this quarter, especially on the yields 20 basis point decline. So is there any one-off here? Or how should we look at the yields trajectory going ahead?

Rohan, the NIM completion primarily comes from 2 components. We have had the last leg of the term deposit renewals, the term deposit that we booked -- the long-term term deposit that we booked in the past have come up for renewal. And now they are repricing themselves to the current rate, it is obviously higher than what we have got booked 2 to 2.5 years back. So we are the last leg of it. Probably, we actually stabilized, it will flatten out by middle of third quarter. What you also can see is that if you see a trend line of the cost of deposits, the rate of increase is coming down. From a 6.77 bps, it was increased by 18 bps from quarter 2 to quarter 3 and then subsequently began 13 bps from quarter 3 to quarter 4. And from quarter 4 to quarter -- the first quarter of this year, we're seeing a 2 bps increase. So we'll see a stabilization of that coming through. So that's one element to it. The other element, Rohan, is that there has been some regulatory changes on the loans front, which has resulted in interest reversal, which we believe is a onetime thing. This also includes the change from penal interest to penal charges, which -- the circular, which Reserve Bank has come with. We implemented that. We have also ensured that incremental disburses or loans, the interest charge is from the DD handover date. So on an ongoing basis, we can see the NIM rising up because we don't expect too much of one-offs to continue in the future.

Sure, sir. So here, sir, if you can quantify what was the total impact due to the regulatory changes on the yields?

That's something which I don't think we can tell you right now. The only thing is that there are 2 components we can speak about. One is about the penal interest component being replaced with penal charges. And you see a slightly elevated fee income also coming through correlated to that. And the second part is for ensuring that the loan disbursal interests are accrued from the handover date and not necessarily from the disbursal date.

Sure. And sir, so with these changes, like the NIM guidance that we gave particularly gave 365 to 370 basis points, does that change for a steady state?

Not really. On an ongoing basis, we should -- as you know, NIM has got multiple components, yield, cost of funds, the slippages, aging of provisions, right, plus any one-offs that may happen. We expect the one-offs -- the June booking may have some bit of spillover into July. But beyond that, we -- I don't think that will happen.

Sure. But sir, for the current financial year, would it be fair to assume that the NIMs would undershoot the guidance because of this impact?

Unlikely. Not because of any particular reason. We don't expect that.

Then, sir, what were the drivers on NIM expansion from the current levels, like in the -- because the cost of funds will go up. On the advances side, like we had explained that certain part of the mortgage book is on the fixed or floating thing. So that may have some impact and...

Three elements, Rohan. One, I repeat. The rejigging of the mortgage book, which would result in higher quantum of business loan over home loan. So the kind of onboarding rates on business loans are significantly higher than that of housing loan. The second thing is that we are focusing on overdraft -- SME overdraft at the expense of SME TReDS. And TReDS obviously is a smaller tenor loan at a lower yield. So we will compensate that with SME overdraft facility. So you will see that there is a difference in the yield that one gets. And the third element, what you said is not a new element as and when the hybrid loans come up from floating -- from fixed to floating, the bank gets the benefit of the increased EBLR, which has not been passed on because of the benchmark changing post the customers coming into the fixed rate criteria.

Sure, sir. Sir, secondly, on the other OpEx piece, what kind of a trajectory should we expect for FY '25?

Our cost to average asset is 2.71%, we would expect that to come down steadily to 2.5%.

Okay. And over what time frame?

In the very near future.

Okay. Sure. And sir, just if you can quantify the amount of construction finance book?

About 5% -- no less than that, about 4%.

Next question is from the line of Viraj from SiMPL.

Yes. And just a couple of questions. First is, sir our presentation, we have a stated guidance to see 1% ROA and 13%, 14% ROE. This would imply a leverage of 13 to 14x. So if I look at the last 14, 15-year history of our bank, we have never operated at such a high leverage. And also, we would have also -- to achieve this kind of ROE, we will also -- we have one of the highest leverage among private sector banks. So if you can just help us understand if we and the Board are comfortable operating at such a high leverage? And what is our thought process to have such a high leverage?

Sorry, Viraj. Can you repeat your question?

Am I audible?

Yes, you're audible now.

Yes. What I'm saying is that if I look at our presentation, there was stated guidance to achieve 1% ROA and 13% to 14% ROE. Implied understanding -- implied working would be that this would have a leverage of 13 to 14x. And if I look at the 14-, 15-year history of our bank, we were never operated at such a high leverage. So in fact, we were to achieve -- operate at this kind of leverage, we will be among the highest in private sector banks. So if you can just help us understand, if we and the Board are comfortable operating at such a high leverage? And will the thought process to have such a high leverage?

We -- if you look at the net worth of INR 5,000-plus crores, okay? See, we work on RWA at 53%. So what you're seeing is a very efficient use of capital. So effectively -- and this has been consistently done from 2016 -- 2018 onwards, you will see that our RWAs are primarily in the less than 55% category. So there is considerably lower usage of capital, and that has resulted in the ROE being close to 12.5x the ROA.

Yes. So I mean this -- so we will be talking about increasing it further to -- from 12.5x to almost 14x to achieve the kind of ROE, do we want to achieve over next few years?

So, you would continue to see that the risk-weighted assets would be in the region of 54%. So you would -- the internal accrual of capital at a 17% to 18% growth will come from within. But as and when -- because our ambition is not to grow 17%, but we're looking at a 20% growth, then fresh infusion of capital would certainly happen.

What will be the proportion of fixed rate and floating rate loan book for us? And if rate cuts were to happen at the end of the year, how do you see the impact of rate cuts on our NIM?

I can answer the second part. So we have 3 types of loans. So one is a fixed rate loan, other is a hybrid loan and third is a floating rate loan. What -- in case a rate drop happens, one of the things, which we can do is to ensure that there is a simultaneous drop of a similar rate on a savings account book where the proportions would be similar. We've got INR 11,000 crore book on savings account, and if that particular portion of INR 42,000 crores of asset book were to have a benchmark related reduction, we would see a similar reduction in a similar time frame happening on the savings account book also. We see that because savings account is more or less retail in nature. It is reasonably pricing elastic. Maybe at the top end, we could have a bit of a customer movement happening but then the benchmark FX most plays in the industry as well.

And in the budget, there has been an announcement of credit guarantee scheme for MSMEs. So if you can just help us understand what the scheme is? And if in any way it is beneficial for our bank, to underwrite a higher number of loans or underwrite better quality loans?

So there is a program called Tarun, which has been extended to 20% -- to INR 20 lakhs. Our team is looking at the budget proposals and studying it. And then we'll come back with an action plan on whether that makes a long-term viable sense for us or otherwise.

Okay. Just 2 questions. One is on the fee income growth. I think, if you can just elaborate more, are we driving that to increase? I think historically, it used to be close to 1% but it's been trending lower for the last few quarters. So how are we looking at driving that better in coming quarters? And second is on the promoter preferential issuance, if you can give an update by when do we expect that to happen?

Sure. Sure. So, on the first question, which is the fee income. We had a 33% Y-o-Y growth on fee Q1 '24 versus Q1 '25. There was some bit of inorganic fee also there. But from a core income perspective, INR 114 crores of fee income has been enhanced primarily by some good performance from the third-party distribution processing fee, et cetera, which is a repeatable fee income revenue. So that's one part of it. The second part of it is that some amount of elevation is there. Because what would have otherwise come in, in NIM has come in fee on account of the penal charges being -- coming to play instead of penal interest. But on an ongoing basis, where will the fee come from, how would we go more towards 1%? The answer to that is that the whole engagement model, which I spoke about in the previous -- in the beginning, is to drive overdraft and CASA. And what is common between overdrafts and CASA on either side of the balance sheet, is that these are high engagement products and when engagement happens, there's an opportunity to cross-sell. And as a bank, we have multiple avenues to cross-sell both physically as well as through the net. So effectively, this shift to CASA, and you've seen some parts of it already with the savings account growth at 21%. Some part of that is still bearing fruit. There's lots more. One can see going forward. And movement from TReDS, which is a fairly anonymous system-based lending to overdraft based lending of SME, would result in a higher opportunities to come by both on the funding front as well as on the bank guarantees and other fee revenues, which we can get from them.

Okay. On the promoter fund...

On the promoter capital, there are a few more documents that have been sought for. We are in the process of submitting it and once that happens, we would get the clearance. And once the clearance comes in, the capital inflow should happen within a very few days, if not weeks.

So maybe by Q2, we expect the closure?

We expect it by Q2 definitely. So, usually, it's a iterative process. Some documents are asked for, I mean some more are asked. So assuming that, that particular process is complete, then the infusion should happen practically immediately.

Next question is from the line of Mona Khetan from Dolat Capital.

The first question is on margins again. So you mentioned of the impact on NIM partly being offset by higher fee lines where penal interest got converted to penal charges. So to that extent, shouldn't the NIM going forward settle at lower levels or simply because there'll be levers on yields from changing loan mix, you believe that the guidance will be maintained.

Mona, there are 2 things in this -- actually, 3 things in this. One, what you said of penal interest coming back as penal charges. Second is about a refund of interest for loan disburses from the time of the demand draft being made to the time the demand draft is handed over. These are onetime events. A bit of a spill-off may happen into July as well. But beyond that, I don't see that one-off coming into play as far as NIM is concerned. From a slightly longish perspective, the repricing of long-tenor term deposits would continue to middle of third quarter, after which you would see a stabilization of the rate of cost of deposits. I would draw your attention to the key ratio sheet, Page #30, if you have it with you. And if you were to look at the cost of deposit, you see -- it's on increasing curve but the rate of increase is decreasing in every quarter. So from a 16%, 18% -- sorry, 16 bps, 18 bps, 13 bps, it's now come to 2 bps and you probably will see it stabilizing before tapering. So then what would really -- in reality happens is that the percentage increase in the interest income would reflect the percentage increase in the top line growth.

And secondly, when I look at your -- again, coming to the yield space, so what would be the share of hybrid book and if I recollect last quarter, there was a big gain from some of the fixed rate loans being converted to floating, et cetera. So do these gains continue this quarter and in the ensuing quarters as well? Or the benefit has largely already played out?

Benefit has not gone fully. There is some more pending. It is -- like we spoke about term deposits, right? The old term deposits are coming off renewals right now. Similarly, there are hybrid rate loans, which are continuing as fixed, where the -- in the future, you would see them becoming floating and there will be upside as and when that -- the movement to floating happens. That story is not over yet.

Got it. But roughly how big would be that book on a steady-state basis?

That's not a publicly revealed information. One of the ways you can look at it is that we told you that in case we have to immunize ourselves against a rate cut, how would you -- we said that we will look at the savings account book as a buffer for making similar kind of changes, kind of gives you an indication as to how much will be floating.

[Operator Instructions] Next question is from the line of Jai Mundhra from ICICI Securities.

Sir, I wanted to check on the slippages, so even [Technical Difficulty]

Sorry to interrupt Mr. Jai, your voice is breaking.

Is this better now?

Yes, we can hear you.

Sure. Sir, I wanted to check on slippages, sir. Excluding gold loan, the slippages at 2% plus, still looks on a bit higher side. What is driving this? And how should one look at this number going ahead?

So if you were to look at Page number, let me see -- Page #25, okay? Please have a look at the bottom table on the right-hand side of Page #25. So you can see that there is an increase in the mortgage book, from INR 445 crores, there is -- the stock has increased to INR 486 crores. So within that, home loan is one area where there is an elevated slippage happening. But then we are -- it's not something, which keeps us awake in the night. It is -- I don't see that more as episodic rather than as a continuous problem to handle.

Okay. And sir, secondly, sir, I mean, you have partly indicated this, but if you can quantify the yield change in this quarter or how much of the yield decline was due to penal charges flowing from NII to fee income and maybe because of the higher slippages just to understand the yield movement correctly?

Yes. So it is not those 2 items alone. First of all, Jai, okay? What those 2 items are there but there is also a third item, which is that refund of interest from the day of disbursal to the day of handover of the demand draft. So there are 3 elements to it, which contribute to both -- if you were to compare with Q4, it is -- 11.71% was our yield, now it is 11.50%. We don't give the individual breakup. With -- what I can say with confidence is that the penal interest to penal charges is the onetime that is done and dusted. The refund of interest on booking is something which is there for the June 30 booking also, which would practically be for what -- maybe 2 weeks or 3 weeks. But on an incremental basis, we don't have that problem. So the day on which the disbursal happen is the day on which the handover happens in that sense. So those 2 one-offs will not happen. And the rest of the yield is a question of the mix, and I told you on a -- not told you, told the group on a go-forward basis 3 items where we are increasing the yield. One is movement from -- the thrust movement from a 50-50 home loan -- business loan to a higher business loan. Second is reduction in the TReDS outstanding more than compensated by genuine SME overdrafts, which happen. So these 2 elements would result in higher yields, and we don't expect any other "one-offs" to happen on a go-forward sense.

Next question is from the line of Prakhar Agarwal from Elara Capital.

Just wanted to get a sense on OpEx, so cost OpEx that you probably said that is 2.7% to 2.5%. What is the reason for this being elevated this time around? And what will lead to the changes that you probably said that in the near term, you'll probably see from 2.7% going to 2.5%?

So I personally think that it is the reduction on the NIM, which has resulted in the elevation. It's not necessarily the cost perspective -- from a cost-to-income perspective. On cost to average assets, we have increased the number of people and how well we squeeze the productivity from the team, and how we build the book will also determine how the cost to average assets will decrease. The third element to that is that a lot of investments have been made in technology, the impact of it is yet to come, is happening in the future, which involves reduction in multiple costs, including courier charges, stationery charges. So -- in fact, we have had a system called My Docs where more than -- sorry, more than 80-odd dispatches to customers have been replaced with electronic communication where customers can get information at will by going into the website, not necessarily through logging in to the app. So the 3 elements to this. The biggest element, of course, is productivity because we have invested in the people, and we need to get the returns from the people that we invested. The second element is the focus on higher ticket size, which also will -- because the same cost, we're getting a higher ticket size with similar kind of yield. And the third element like I told you is the operational cost reduction because of investments in technology.

Got it. Just one more qualitative comment on how has been the behavior of your co-lending book on FLDG side? And have you seen any deterioration in there or...

First of all, FLDG and co-lending cannot coexist. You cannot have FLDG with co-lending, that's against the law. So there is no FLDG. So good that you asked a question. So on March 4, one of our big partners -- co-lending partners has had an embargo on sourcing a particular product. And they were one of the biggest co-lending partners by a long chalk. We've had a near perfect recovery from that in March, April, May, June and July so forth. In addition to that, this also meant that no fresh sourcing for the originator, means no fresh co-lending for that originators partner. But that has not impacted our book because if you were to see the previous quarter end, our co-lending book was 7.5% of the total assets, now with a 7.2% or 7.1%. So there's hardly any difference. So the bank has very nimbly worked out on other co-lending partners to make up for the shortfall of co-lending. Otherwise, we would be sitting on a massive -- massively low asset growth both for the quarter and for the Y-o-Y basis. So net-net, short answer, quick compensatory action on other co-lending partners, impact on portfolio quality, negligible so far.

Next question is from the line of Rakesh Kumar from B&K Securities.

Congrats, sir. Good numbers, sir. Sir, just one thing I wanted to clarify with respect to notes to accounts detail. So we have acquired around INR 800-odd crores loans with a residual period of 4 years -- 4.6 years or something. And out of that, close to INR 600 crores number is on the secured side. So just wanted to get some detail. And also, what is the full year credit growth target that we have sir -- internal target that we have?

Yes. So last question first, credit growth target. We intend to double the book in about 3.5 years. So you can work backwards out on that. So we are comfortable with the 19% growth. So anywhere between 19%, 20% growth is a good number to target. More importantly, as far as the transfer of loan exposure is concerned -- from our side, the bank has always been playing a key role in alliance and partnerships. In May 2021 when the co-lending circular first came out, we started involving and we've got almost 10-odd co-lending partners right now. The reason for that was that -- and we built a co-lending book, which is about -- my guess is about 5% of the industry. Whereas from an overall perspective, we are about anywhere between 0.25% to 0.3% of the total lending book from an overall banking sense. So we are punching much about a way for co-lending. The reason I'm telling you this is, the bank has always been partnership focus. So we've had relationships with multiple financial institutions, both on the pass-through certificate front as well as on the direct assignment sense. So securitization and PTCs play an important role. The number of players that we deal with is vast, which has helped us migrate into co-lending also very, very quickly. But the ticket sizes are usually pretty much low bite-sized units, which we have. So this is important for us. We will continue on the journey. It gives us insight into new products. We are not predatory by nature, which helps us also have multiple relationships within the same product, same segment or same geography. So it is important for us, and we'll continue with it. But -- and that will be -- in a proportion sense, it will be the current proportion to the overall book the bank has.

Mr. Rakesh, does that answer your question?

Yes. Just one question, sir, in addition to that. So the total maturity of the book is around 6 years, correct, the books we have taken on our book?

Yes. Door-to-door.

Door-to-door. Correct. So basically, the...

About 4.74 years is the current weighted average residual maturity. And the holding period at the originator is about 1.14. But that frankly, you should look at 4.74 rather than 1.14.

Correct. And sir, the originator is holding just around 10% of that book, correct?

There is a minimum, see it depends upon what product it is. There is a minimum holding period and MMR, minimum retention, what you call MMR full form, don't recollect right now. Yes, there's a portion which is retained by the originator as well.

Correct. Sir, just wanted to understand that 6 years book like from door-to-door and unsecured. So what is the characteristics of this loan, sir, if you can like...

It's a combination. So you've combined, it's not entirely -- is not unsecured. There are multiple loans within that, where there are long-tenure loans and there are short-tenure loans and unsecured typically are short-tenure loans. And the average, which you see is the weighted average residual maturity.

And credit yield, sorry sir, how much credit yield you mentioned sir on this book? Credit yield, sir on this book?

Around yield, see, we don't give individual yields for the TLEND book.

Next question is from the line of Shreyas Pimple from JM Financial.

So I wanted to ask about the recoveries. Recoveries this quarter has been really good. What kind of pipeline that we are looking at? And how do we build the quantity of recovery for this full year? Can you give some sense on that?

So we have a fairly large book of NPA stock of INR 1,400-odd crores. And what you -- if you were to look at the Page #25, you'll find that a substantial portion of that has matured. So when an NPA happens, either you get a recovery fairly quickly or you get it after a period of, let's say, 2.5 to 3 years. Why I say that is because the judicial process in India usually takes that amount of time for the position order to come in, et cetera. And usually, people -- when position order comes in, that's when people rummage and find the -- arrange for the loan repayment to happen or sale of asset to happen. Usually, in our case, the borrower himself or herself ensures the sale of the property happens in which -- in cases where position orders come through. So we have a reasonably big, pickled pool, vintage pool from which we are expecting recovery to happen. So effectively, if you were to look at INR 486 crores is mortgages, INR 176 crores is SME and MSME, which, frankly, the collateral for both are practically the same. And then we have a small book of commercial vehicles, where probably the recovery factor is not very high. But if you were to look at mortgage in SME, close to about INR 700 crores of high recovery pool is there with us. With the passage of time, we are confident that we will be able to make a significant recovery. The trend line should continue.

Understood. And on -- secondly, on the unsecured business, we have seen in the industry credit costs normalizing. How do you see the unsecured lending part, the credit cost going up? Or how is the book seasoning? Can you give some sense on that also?

So on the unsecured book, what we are concerned about is our customers having an unsecured book and how does that impact our secured customer behavior. So we also do not have an organic book of unsecured lending unless you include MFI. We'll talk about MFI in some time. So on a normal SME mortgage book, what we are clearly looking out for is that our customers' -- our secured customers' behavior in the market from a -- if he has taken unsecured lending. So based on scrubs with the credit bureau, you understand how the -- which customers to proactively act upon. So far, we haven't had any issues on that particular account. The other unsecured book that we have is MFIs. We are -- our credit -- our repayments are as per plan -- we have -- as per our expectation rather. And we haven't seen any worsening of the MFI book in the quarter.

Understood, sir. And the last question, sir, on the business loan part. What is the delta in the yields that you are looking at as far as increasing proportion of business loans is concerned?

Luckily, if you were to look at it today, I can give you a general example, if you look at a customer and you're taking a business loan vis-a-vis your customer's taking a housing loan, there is anywhere between 1.5% to 2% difference at the time of sourcing itself.

Next question is from the line of Ravi Purohit from Securities Investments Management Pvt. Ltd.

Yes, can you hear me?

Very well, Ravi. Go ahead.

Okay. So this refers to our PPT and this one and the earlier guidance also that we've been mentioning lately about hitting 1% ROA and 14% ROE. So just wanted to understand the mathematics as to if you hit 1% ROA, how does that translate into a 14% ROE? Because as, I think, at one of the conferences, as you were referring to the DuPont formula and you said that if you look at the constituents of that, and when I work on that, I kind of struggle with the math, right, 1% ROA translating to 14% ROE. If you could just kind of help us give insight into what's our path to this 14% ROE? Is it higher leverage to net worth in terms of more loans? Is there NIMs? What is the path towards hitting this 14% ROE? Because there's something over the last 15 years we've never done, right? We've probably achieved within like a hairline distance maybe about 8 years back or 7 years back, but apart from that, we've never hit like even 13% ROE or 12%. So in that sense, like where does this confidence for 14% ROE? Is it an aspiration? Or is it something that is -- that can happen over the next year, 1.5 years?

Yes. Good question. So it's an aspiration. Of course, it's an aspiration. Will it happen? We are very confident. Why will it happen? There are 2, 3 components to it. We believe that the investments have been made. Okay? And there is a product mix change that is required in some areas. So I spoke about this earlier, BL, more business loan-oriented growth, which may have a higher capital impact but not a higher credit impact. The segment remains the same. So that's one element to it. Second, I told you, TReDS currently, you can guess what kind of returns you make on that vis-a-vis a regular overdraft on the SME platform. So without changing the growth numbers, we are talking about our higher yields coming from in there. There are 2 areas management is working upon, which will ensure that the aspirational number of 14% will be realized. One is on the fee front. We have a talk ahead of us from a late 80 bps, 86 bps to 90 bps, we have to move towards the 1% of fee. Where will it come from? Will it see -- what is working for us currently? Is the third-party distribution? Is the processing fee? is the ATM charges? Some amount of tailwind will come from the penal charges, which is to just come into play. But be it as it may, we want to put our emphasis and thrust on the engagement model that we spoke about, which would result in NFB, nonfund-based income coming through -- fee income coming through. That's a key area of change for us from the way we used to operate. And nothing wrong with mortgage, and we are very comfortable with that. But the opportunity to serve customers is fairly limited because the interaction is perhaps 2 to 3x during the entire lifetime -- life term of the particular loan. The second area where work has to happen is what I told you from the beginning. The investment has been made. That is the people costs have been incurred. And now how well we squeeze the productivity out of that investment that has been made would help us bring down the cost to average down. Over the last 15 months, we brought it down from a high of 2.87 to current levels of 2.71. A similar kind of work would result in us getting to closer to 2.5, which is the aspirational figure from a cost to average perspective. Lastly, on the credit costs. On a steady state, one would expect it to be around 35 bps, which is considerably higher than the 18 bps that we currently have. But the model would assume that we would be at some 35 bps on a steady-state basis.

Right. So this probably, all of these initiatives will help us get to a higher ROA, right? And ROA would probably hit one or maybe cross a little above one. So the other element of that is how much leverage we can do on our net worth, right, which will effectively be made up of deposits and borrowings, right? And how much that come to be -- or how much does the balance sheet actually allow us to go because if you multiply 1 for -- 1 ROA, to get a 14% ROE, you need a leverage of 14x. Where would that -- because, again, if I go back in history, we've not seen that number, right, ever. The max that we hit is like 12%, maybe once or twice. So again -- so ROA piece is, I think, very well communicated. I think you had indicated earlier as well. This ROA translating into 14% ROE, if you could explain or just help us understand that...

I will you construct on this. So the construct is this. The model that we are working upon is that when you utilize the capital fully, we would be operating closer to 15%. And when fresh supply of capital comes in, we will be operating close towards 13%. So that's the aspirational model that we have built in, where the range of ROE will be in 13% and 15%, depending upon how well the utilization of capital happens. But from a risk-weighted asset modeling perspective, we will continue -- in the future also, continue to be in the 53%, 54% range unless some dramatic regulatory change happens on the risk weightages that we currently operate, which we cannot foresee.

Next question is from the line of Nitin Aggarwal from Motilal Oswal.

Sorry if this question had been answered earlier. Like one is on fee growth, like, which has been very strong. So how structural is this because there's a very sharp improvement that you're looking at? If you can like provide more color on this number that you have reported this quarter.

So we've had INR 114 crores of core fee growth, which kind of resonates with the INR 117 crore of core fee growth, which we had in quarter 4. So from a Q1 perspective, we are reasonably happy with the fee income growth that has come through. There has been a couple of one-offs. One is of investment sales that's happened. And also opportunistic income coming in from IPO financing has also helped the cost. But on a clear-cut go-forward basis, I expect the core fee to continue on its momentum towards getting to the 1% mark, which is an important landmark for us to get to the ROA and ROE, which we have spoken about in the multiple questions earlier, Nitin.

Right. Okay. And the other question is on the network expansion. While we have been adding employees at a very aggressive rate. So if I look at last 1 year, our employee count has gone up by more than 20%. But the branch increase is like very measured, like 9 branches in last 1 year, 3 branches this quarter. So how do you correlate the 2? And how will this fit in, in your medium-term cost income, cost to asset guidance?

So effectively, one of the ways I look at it is that where is the growth of 20% of liabilities coming in from or a 19% asset coming in from? Partly it is fueled by the increase in manpower. Most of the deployment of people has been on the front line. And that -- one of the reasons why it is -- our cost to aggregate has climbed up is because of the increased expansion of people. Now there are 2 things in this. One is that our strategy of hiring has given -- is a lever to us to sort out the goods from the bad in the environment that we currently work. So it is a process of ensuring that the productive people stay, and we fail faster on people who are not cutting it. So to some degree, that is happening because there's a constant churn. So some bit of attrition in that sense is welcome because you don't want to carry, for want of a better word, freeloaders on the book. So this -- it's not the most effective way of hiring that we are getting increased emphasis on getting people onboard, and then there is this productivity-focused movement of people who are not making the cut. And it will continue to happen, Nitin, in the future also. So I'm not seeing the growth but this process because getting the right sort of people on the front line is a bit of a cumbersome process.

Right. And lastly, on the CD ratio, like while the bank has condition in control, we have reported a recent deposit growth. So -- but what is the optimal number that you're looking at in terms of CD ratio? And what is the SLR ratio for the bank?

So look -- see, we are -- my belief is our CD ratio is one of the better ones in the market today and getting into a sub 80% level may not be a bad idea. We have 81.6% currently, declining from the previous quarter also. So there is sufficient cushion that we have but under 80% would be a good number for the shorter term.

Under 80%. But why so conservative, like under 80%, because most private banks are above 80% only?

Yes. I mean, see, essentially, it's good to have the liquidity. It gives you the raw materials to go ahead and get the right -- I mean, today's market, having a strong liquidity backup is pretty much useful. We saw that in quarter 4. We saw that in Q1 also. We don't want to be scrambling for deposits within point in time. Being solvent, being liquid is absolutely critical. It's good to be a bit more -- a bit conservative. Having said that, we're also very conscious about the LCR. We keep an internal LCR benchmark higher than what the regulatory mandatory minimum is. One more thing. One more quick one on that is that we are also looking at improving our liability profile by focusing more on the individuals than on entities and institutions.

Okay. And so this like under 80% CD ratio guidance, are we breaking it in when we look at like 19-odd-percent sort of advances growth -- 19%, 20% advances growth and like overall deposit attrition that we will need to deliver on that value improving CD ratio? So, are we like looking at that sort of deposit inflow?

We should be able to. There is no reason to believe otherwise. We should be able to do that.

Next question is from the line of Rishikesh from RoboCapital.

So my first question is with respect to the NII growth. If I got it correct, you are indicating a loan that our NII growth really similar to loan book growth Y-on-Y around Q3 or Q4. Is that a fair understanding?

We expect the one-offs to get completely eliminated in the next quarter and then the term deposit rates to stabilize thereafter. So effectively, what we mean is that beyond -- from middle of quarter 3, you'll probably see the volume growth reflecting in the NII growth.

Okay. So by Q4, we should really see the reflect -- numbers reflecting in our P&L. Is that correct understanding?

Yes. Yes. Currently, what's happening is that we're growing 20% on the -- 19% on the assets. We're growing 20% on the yield. And however, the NII is growing only by 6%, right -- by 5%.

My second question is with respect to the LAP book. What is your LAP book currently as a percent of mortgages?

I'm so sorry, I'm not sure I understood the question.

Our business loan book -- or I was asking about the LAP book, what is that as a percentage of our mortgages -- mortgage book?

Okay. If your question is what is the business loan as a percentage of total mortgage book, it's about 50-50 currently.

It is 50-50. And what is the target going ahead?

We want to increase it. I mean not that we have a problem with the home loans but we will keep that -- we will -- we want to -- see, what you're currently seeing is a reorientation of the team. And we are doing some verticalizations within the organization to ensure that there is greater focus on the INR 50 lakh to INR 1 crore segment. And also on business loans segment. And so there's a bit of a rejigging of the asset structure as we speak. And we should see the benefit of that coming in from maybe quarter 2 or definitely from quarter 3 onwards.

Okay. Okay. And one last question with respect to the OpEx. Our OpEx has been high for this quarter. So is there any one-off or any particular exposure that we have taken? And we have a cost to income target of 55%. So by how -- by when are we going to achieve it and how would that take place?

So the single largest component of our cost is the people cost. And like I explained earlier, we have invested heavily in the people. And not all of them will be productive but we're really working hard on making them productive. Those who are productive is, so be it. Would not -- we would ensure that the cost does not continue in the future. We -- getting the productivity up is the #1 challenge in getting the cost to income ratios down. In addition to that, you have some changes, which are technology driven. So effectively, some components of OpEx, including couriering, stationery costs, storage costs, all these are coming down dramatically because of the digitalization that we have done on both the liability systems as well as the asset system. So that will continue. Those benefits, we will get. Plus, we are working on rejigging the sourcing model by giving more emphasis and more weightages to organic sourcing as compared to DSA-based sourcing. So these are elements which will ensure that the OpEx is in control. But the single largest element, what will really move the needle is about the productivity. The number of people who are being paid salary and what is the disbursal output from them. It can also include liabilities, which is the CASA and term deposits come from them.

Next question is from the line of Shrinjana from RatnaTraya Capital.

I have 2 broad questions. Am I audible?

You're very much audible.

So one is on the OpEx side. Currently, like the OpEx in this quarter is a little bit on the higher side. So can you just throw some light on what items and what headers have led to that? And the second is that is it more of a run rate OpEx for the full year? Should we think of it like that?

So what you did look at is that in Q1 is where the salary increases happen. We also have the full impact of the source -- the incremental frontline workforce that we have hired. So the number of people that we have is now closer to 12,000. So I would like to think of it like an investment, which would result in both better quality loan book growth and better retail small ticket deposit growth to come in. So effectively, this OpEx that you correctly see is elevated on account of incremental people and also in Q1, where the increases of emoluments are being given.

Sorry, I didn't get the second part. The increases?

The increments that typically happens in quarter 1.

Right. And on the other expenses side, I understand employee costs. There is other expenses side?

Other expenses side is fairly static in nature except for costs, which are being replaced by technology. So there is -- most of the costs are frontline costs. You see that the improved use of digitization has helped us in reduction of multiple costs like stationery costs, postage costs, courier costs, storage costs. So there is a clear-cut improvement coming in there. The third element we are looking at is in terms of sourcing where there is greater emphasis on organic sourcing, self-sourcing, than by relying on connectors and DSAs.

Right, understood. And this expense is also more of a run rate number. We'll continue to do such technology investments and...

We would tend to think that this 2.71% cost to average assets would steadily drop as we move forward, both from the numerator sense as well as denominator sense.

Understood. Just one more question. So you mentioned that like some portion of the fixed rate loan book, which will come out, that will also help in the yield expansion because those loans would get repriced. So what proportion -- can you just give some sense of like what proportion would that be? Or how much impact would that have on the yield and the NIMs?

So look, even in this quarter 1, where the NIMs are subdued, that -- what you said happened, okay, because every month, there are loans, which we booked 3 years back, 2.5 years back, 2 years back, which is hybrid in nature, coming up for movement from fixed to floating. So that is a monthly accrual sort of change in rate that happens on a steady-state basis. What I can tell you is that, that is not done and dusted yet, in the future also. There are loans -- hybrid loans, which are currently fixed, which will, in the future, turn to floating unless closed earlier.

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

Thank you so very much for your patience and for your questions. If you have any further questions at any given point in time, you can reach our Investor Relations team. Thank you very much and look forward to hearing from you in any of your conferences or in the next quarterly update meeting. Thank you so very much.

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