DCB Bank Limited (DCBBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the DCB Bank Limited Q4 and FY '25 Earnings Conference Call. Today, we have with us from management, 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 Mr. Praveen Kutty, Managing Director and CEO. Thank you, and over to you, sir.

Thank you. Good evening, everybody. I'll give you a very quick brief on the Q4 financial performance of DCB Bank. In continuation of the trend of growth momentum, we have seen a balance sheet growth of 22% for the year, deposit growth was a healthy 22%, and the loans growth was 25%. This growth was achieved with our savings account growth being 19%, and our top 20 ratio declining over the quarter to 6.61%. But it's not all about growth alone. From a NIM perspective, the NIM is stabilizing at 3.28% from 3.29% in the previous quarter. The bank had a total fee income of INR 751 crores for the year. And the core fee income for the quarter was never before high of INR 161 crores coming in on a previous high in the previous quarter. The efforts the bank has put into technology and productivity enhancement started to show signs of results. Our cost to average assets for the quarter came in at 2.54%. For the first time in 4 years, the jaws -- the growth rate of operating income over operating costs, we saw that the jaws were widening. The growth rate of the operating income was higher than the operating expense. In an environment which is challenging, I'm happy to share with all of you that the provision cost has come lower for the year. We have seen that we come with a full quarter provision cost of 0.33% on average assets. And we've seen that the slippage ratios in Q4 have come down at the lowest in the last 5 quarters. The bank always has had a healthy recovery over fresh slippage. Q4 had 83% of this fresh slippage. You've seen that the recovery to slippage ratio is at 83% for Q4. We closed the year with a gross NPA under 3%, just under 3% at 2.99%, much lower than what we started the year with 3.28%. There has been no write-offs during this particular quarter. Net NPA comes at 1.12%, 1 basis point higher than what we started the year with despite inclement weather with regard to unsecured lending, which we don't do too much and microfinance loans, where we do in as much as we need to do agri PSL and small farmer-marginal farmer PSL categorization. The PCR is healthy at 74.48. All in all, we are reasonably happy with the growth momentum, the improvement in portfolio quality and also the path that we have set in terms of cost and operating leverage. It sets a platform for the next few quarters to come. That's my opening remarks. Happy to hear questions from you. Happy to hear thoughts from you. So operator, if you can open all the lines and in sequence, if we can have the queries and questions, we're happy to take them.

[Operator Instructions] The first question is from the line of [ Akshit Agarwal ] from [ SMIFS ] Institutional Research.

Congrats on a good set of numbers.

Hi, [ Akshit ] good to hear from you.

Sir, my first question is on NIMs. It's great that you have been able to achieve a stable NIM trajectory Q-o-Q with just 1 bps decline. Can you help us understand how are we thinking about the margins from 4Q exit NIM of 3.29% to a possible part towards business model NIM of 3.5% to 3.65% in next 2 years. And is the strategy of moving from retail loans to business loans still in place, which would offset the rate cuts impact at least to some extent? And was this a driver of 10 bps yield on advances expansion this quarter? That was my first question. So I will ask a few more after your response.

So on the NIM, what I want to tell you is that while there is NIM compression and to some degree of NIM stabilization, this is not exactly where we want to be. But to get to where we want to get to, I don't think we will be moving away from our strategy of secured assets, granular deposits and granular loans. So that's sacrosanct. So within the particular framework, there's been a -- there's some work that's already happened on immunizing the impact of a rate cut through reduction of savings account rates. So to some degree that we have kind of absorbed the hit on account of repo rate cuts. There is work happening on reducing the cost of deposits. The bulk rates have come down quite substantially since March 31st. On retail term deposit rate also, there is a reduction, not very high, but there's definitely a reduction which is being affected. So on the cost of funds, there is some bit of action that has happened, and you -- I don't have to tell you. The impact of that will happen over a period of time. So that's what's happening on the cost of funds mode. On the yield, we are tweaking -- not we are tweaking, we have been consistently tweaking our fresh sourcing within the framework that we have towards high-yielding products. We're pretty much happy with the LAP to home loan ratio in mortgage now as compared to what we were a year back and also as to where we were about a quarter back. So there is a momentum shift that is happening. I would tend to think that going forward, how we are going to address this is that -- so percentage growth of co-lending based products where the yield is slightly subdued will be actually on par with the balance sheet, whereas we could have the organic book growth contributing significantly more than what has been contributing until this time. So there's a product mix in terms of organic versus inorganic, so to speak. And also within organic higher-yield products is where we are focusing upon. There's a journey, which we've taken about at least 4, 5 quarters back, that is continuing and that momentum is there. Lastly, just to repeat, are we going to get into unsecured lending or higher-yield product outside the framework of what we have? Very, very unlikely. Does it answer your question, [ Akshit ]? Hello.

Mr. [ Akshit ], we are unable to hear you. Hello?

Can we go to next caller then?

As there is no response, we'll move to the next question, which is from the line of [ Aditya ] from Securities Investment Management.

Congratulations on a good set of results. Sir, my first question is on net interest income. Sir, you answered it partly in the previous question. But if I have to understand, our NII growth has been trailing advances growth for some quarters now. We saw 15% growth last quarter, but this has dropped to 10% this quarter. Sir, then you expect to see both of them converging -- considering the rate cuts also being undertaken by RBI?

So in a way, we are happy with the trend line. The aberration or the impact that you see of 15% coming down to 10%. Some part of it is definitely due to the rate cut, which you alluded to. While we have tried to address that through lower cost of fund, obviously, the impact on cost of fund will trail the repo cut action on an ongoing basis. So when would the net interest income match with the top line growth? The effort that -- like I told you in the previous question, the effort that we've taken on the cost of fund will be a slow burn fuse, whereas the yield improvement within the framework that we're currently doing, you're actually seeing the benefit of that happening. I just want to take you through a trend line, if you -- which will give you some indication of how the momentum is going. If you were to look at the growth in terms of -- balance sheet growth is at 22% and 15% is the increase in net interest income, right? This was 20% last quarter. But if you were to see the trend, and if you were to extend it to March '24, you are moving from single digits in March '24, June '24 and September '24 to 15% and 10% in the last 2 quarters. So -- and the 10% impact is primarily broadened by the repo cut. So from a trend perspective, underlying perspective, we are happy with the way the momentum growth is happening. And the yield and cost of funds activity that we are undertaking would help us get into a convergent mode more than where it is today.

Understood. So now, sir as per everyone's expectation, we are expecting 1 or 2 more rate cuts. So this convergence of loan growth and NII growth, this would have a lagging effect. So this will take a little bit more time to converge because of these rates cuts. Would that be a fair assessment?

That will be a fair assessment. But I would tell you if more rate cuts were to happen, our ability to pass on that by reducing the savings account, et cetera, will be limited. So as of now, it's okay, but any future rate cuts, the ability to reduce instantaneously the cost of fund by reducing the savings account rates would -- that option would be limited for us.

Understood. So consequently, a targeted ROE of 1%. So NIM was a big piece to help us get to that 1% ROE. So would it be fair to see that the ROE target would also get delayed, or do we have any other levers in the P&L to offset that?

Have a look at 2 levers or maybe 3 other levers which are there. We have a fee to average assets of 1.18% for the quarter and 1.09% for the full year, which is higher than the indications that we have given on what our fee income will be. Within the fee income also, the core fee income is a never before high, and consistently, that has been on a higher level. In our mind, that's a lever which had remained stable at a very low level for a very long period of time. But let me take you through the last 5 quarters of core fee income growth, starting from March '24: INR 118 crore, INR 114 crore, INR 139 crore, INR 141 crore, INR 161 crore. Last 3 quarters have been the highest ever and the next quarter has been kind of eclipsing the previous quarter. So -- and I'm not even talking about the total noninterest income. I'm talking about the core fee income only. Similarly, on noninterest income: INR 136 crore, INR 143 crore, INR 205 crore, INR 184 crore, INR 219 crore. To my mind, there is some level of consistency. So that lever is something which we believe we have -- we are lifted from the averages of the last 2 years or 3 years if you were to see. And there is enough belief in the system that the momentum will continue. The second point, which we need to consider is one off provisions. As a bank, we have always said that our model sustains 45 bps to 50 bps of provision cost. While I myself had said that that's the way it would be. We are closing this year with close to 31 bps of credit costs and the quarter with about 33 bps of credit cost. So even in an environment where MFI loans that the bank has is going through its set of problems, we can't deny that. But the fact is despite taking accelerated provisions, the overall provision number is healthy at 33 bps for the quarter. So that definitely is a moment and a second lever, which is working. The third lever is obviously, when NIM compression happens, what can you immediately do to curtail the impairment issues that we have and that evidently is cost. There's been a consistent reduction in our cost to income as well as our cost to average assets. Cost to average asset for the quarter has come at about 2.54%. The go to, which we have spoken about, albeit in a yearly sense, is about 2.5%. So these are the in distance of where we want to be. Fee to average is higher than what we had predicted. Provision cost to average assets, we are lower than what we had projected ourselves to be to reach a 1% ROE. Cost to average assets, we are at 2.54% for the quarter. 2.5% is where we want to be. So yes, in one area in the NIM, there is an impact. But on the other 3, the bank has been punching above its normal averages, which has been demonstrating for the last few years. Over the last 5 quarters, you can see there is a visible movement in a positive way in all the 3 lines for -- across the last 4 quarters.

Understood, sir. Sir, next question was on loan growth. So yes, our loan growth has been around 24%, 25% this year, while our ROE is around 12% to 13%. So sir, by when do you expect you will need to raise capital considering our current capital adequacy? And secondly, sir -- secondly, your share price now is currently below our book value. So if we raise capital at current valuations, it would be dilutive to existing shareholders. So how do you plan to address the same?

I just wanted to look at our CAR. In a year where the bank has grown by -- grown its advances by 24.7%, the capital utilization during the same time period, and I'm hunting for the page number...

[ 55 ].

Yes. The capital utilization in the same period -- sorry, our capital adequacy ratio has moved from -- tier 1 has moved from 14.53 to [ 14.30 ]. 23 bps utilization for a 25% advances growth, okay? And even now, obviously, if you were to look at 14.3%, it is well above what we believe is a go-to capital kind of mark. On a total capital basis, you are at 16.77%. So there is enough in the tank for the growth ambition and consistent growth of a similar nature, if we can continue to do it. We are very cautious about the capital consumption, which is why you RWA is well within 50% -- I mean, well below 50% also for the last few quarters. So yes, would you want to raise capital? Yes. At some point in time, you have to raise capital. Would you want to raise it at this particular level? Perhaps not. We had 3 considered good quarters under our belt. Maybe we'll have a few more consistent good quarters under our belt when we go to the market, and we probably will go to the market at a rate which is more reflective of the intrinsic strength of the bank than what it currently is today.

The next question is from the line of Apurv Parikh from Equirus Securities.

Sir, I think you already touched upon and if I heard you correctly, you said on co-lending. The percentage growth of co-lending products would be subdued as compared to the balance sheet growth. Today...

Right. As compared to the current -- like next year, the co-lending growth will not be at the same level as the previous year.

Okay. So can it be considered that -- does it have some bearing of the current RBI guidelines on the co-lending, where weighted average rate should be applied? And how -- and subsequent to the guidelines coming into place, how do we see the whole maybe product dynamics for us or the profitability getting impacted. Is it because of the guideline that we are going slow on to the core ending, or it is just that we want to grow organically with organic capabilities.

This is basically NIM, right? Look at this way. If you were to do a loan originated by somebody else, you necessarily have to give a sacrifice and that sacrifice usually is net interest margin. So -- and we make our budgets pretty much early. And there's not a reaction to what RBI has come up with. Where the strength of the bank is in its origination in this portfolio quality. While co-lending helps -- the way we look at co-lending honestly is that you get into a segment that you don't otherwise get into, you get into a geography that you don't otherwise get into or you get in the product that you don't otherwise get into. It's a very good petri dish, do your experimentation and to figure out what works, what doesn't work. And it also helps boost up some revenue in that sense, specifically if you're quality -- the credit underwriting template is good. So that's the reason why we do co-lending. It helps us understand things very well on a risk-sharing basis, and it also helps the overall growth. But to depend upon it for your balance sheet growth may not be a great idea because it -- while it is very cost accretive, it may not be great in terms of NIM. So philosophically, we had decided in our budget also that we would grow at the same rate as what we want to grow the balance sheet, not more. Seasonal variations may happen. There will be -- some quarters will be growing higher, some quarters will be growing lower. But over a period of the year, the inorganic growth should be ideally in line with the organic growth. As regards to the RBI guideline, let's -- I think we should wait for the final guideline to come in before commenting on it. Let's see how -- what it comes through. If you're asking my personal opinion, I think anything which benefits the customer is beneficial for the lending institutions. So it will expand the market. It's a good -- on the blended rate, it's a good thing to happen. I mean if you can -- if that will allow lots more of customers to come into the organized fold, and maybe I'm talking only from a gold loan or perspective, it will help much more customers to come in on board. And the customers also can take a -- take the benefit of a blended rate. Yes, that's the way I personally see it. But honestly, let's wait for the final guidelines come in before we comment on what really would happen on the implementation of the final guidelines.

Sure. Sure, sir. And the second question is on the NIM. So obviously, we are into a rate cut cycle as earlier gentlemen kind of suggested that we are -- market is expecting 1 or 2 rate cuts to happen. So we broadly -- I just want to understand that how the ROAs and obviously, you explained the levers to a certain extent. But if you look at that you're already taking a 25 basis cut on your savings account, but still -- obviously, you mentioned that retail term deposit rate cuts might be in place. But up till this date, I don't think that they have announced, while all the other banks, they've already taken a retail TD cuts on to the -- I mean all the larger banks. And considering the fact that TD is a integral part of our maybe liabilities-acquisition process, how do you see -- and as you already mentioned that there might be limited scope of kind of reducing savings if the repo cuts are consistent. So how much -- so what is the strategy maybe be going for the year in the TD and SA acquisition if this rates were to absorb into the NIM and NIM protection will be the priority?

Yes. So first of all, out of the [ INR 50,000 crore ] book, there is only a certain segment of the book, which is EBLR linked and floating, right? So the impact is there. Of course, it is there. But it is limited to a sliver of the portfolio or not to the entire portfolio, that's point number one. Point number two, we have already made rate cuts on our savings account. Otherwise, why would the NIM fall only by 1 basis point in quarter 4. There are some immunization actions that we've already taken. Will we continue to drop the savings account rate just to accommodate the -- of any future repo rate cuts, very unlikely. But what has happened is that we have reduced our noncallable retail rates. The bulk retail -- bulk term deposit rates have already been reduced, which has got immediate impact. Retail is a slow burning fuse. So any cuts that we do today, you will have a benefit of that coming through over a 15 -- 12- to 15-month period. So there is an action plan. There is a gain line on that, which has already been implemented from the time the previous rate cut happened when 6.50% went down to 6.25%. Will the playbook remain the same for future rate cuts? Obviously not, because there is a limit to which it can bear. There is -- the rest will come in -- when the TD maturities happen, you will see the -- we hope to see the reduction happening structurally. And we are confident that similar growth to what we have seen will happen. So I don't think growth will be -- will have a problem because there is a conscious southward movements for the deposit rates going forward. But the key is this, at which point in time, will the next set of rate cuts happen. The later it happens, the more beneficial it will be to the bank. The earlier it has happened, the less beneficial it will be for the bank.

Sure, sir. And if you can quantify -- understood, sir. Maybe just can you help quantify your, maybe floating rate book mix if that is possible?

I'm not too sure that we -- I'm not too sure that's public information. So it's not just floating rate book alone. It's -- you have MCLR, EBLR, even old base rate. So there is multiplicity, albeit in small quantities. And you also have within that floating and fixed. So there's a whole variety of benchmarks, which are still continuing in the system. But to say it is something which the bank monitors, is very conscious about and we -- but it's not publicly announced.

The next question is from the line of Suraj Das from Sundaram Mutual Fund.

I joined a bit late. Just to reckon from the first question. Did I hear it correctly that you were saying that your margins have more or less peaked in this cycle and hence, probably -- I mean, with the rate cut, next year margins and year after that the margins could moderate from the current levels?

Suraj, good to hear from you. Let me just tell you what we articulated earlier. The NIM for this quarter comes in at 3.29% as compared to 3.3% for the previous quarter. And during Q4, repo rate cut of 25 bps happened. From 6.50%, we lowered it down to 6.25%. Despite that, we have had the impact -- it's not a full impact, but the impact on the book has been about 1 basis point so far. Why is it only 1 basis point? It's only 1 basis point because it has impacted part of the portfolio and not the portfolio. And the second bit is that there are some affirmative actions the bank has taken to ensure that margins are protected. What were the actions taken? We have proactively reduced some of the savings account rate around the time the rate cut happened so that simultaneously, there's a save on the margin. In the future when there are rate cuts, can you continue to do this? Perhaps not or perhaps not to the same degree as what we did earlier. So the stabilization, what we talked about is that if you were to see the trend line of NIM, it was on a downward trend. Now what you're seeing is that it is kind of -- let me tell what the NIMs were looking like for the last 5 quarters: 3.62%, 3.39%, 3.27%, all down; then 3.30% and 3.29%. So that's why I said there's stabilization happening. As far as the future is concerned, the bank is doing 2 things. We have already spoken to you about what's happened with savings account rates, which has got an instant benefit on the cost of funds. And secondly, on bulk rates, bulk deposits mostly are 12 months in nature. So there has been a fairly cut to the bone on the bulk deposit rates. And on retail rates specific -- specific retail rates have seen a downward movement. But the last part, which is our largest book is a retail book, and we're happy to have retail book, which is that large. But the impact of those any interest rate that we have done and we are going to continue doing in the future, we'll have a slow earning use, right? You will not get the immediate margin benefit of that right away. You will get it as the book matures and reaping happens. So that's on the liability side. On the asset side, there is focus on 2 things. There's a product mix change. If you were to see last year, we've gone -- we've got almost INR 7,000 crores co-lending book. We built up a INR 7,000 crore co-lending book. Roughly about 100% growth in co-lending for the matter. That's not going to happen in the future. We'll have more in line with the balance sheet growth happening in co-lending also. That's about, I mean, in line with the doubling of the balance sheet in about 3.5 years' time. So that will be the kind of growth rate that we'll be seeing on the balance sheet as well as on the co-lending book. Where will the incremental growth come from? If there is -- if a similar kind of co-lending growth is not going to come, it is going to come from organic products. Organic products by definition have a higher yield than the co-lending book. And we believe it will not come with higher incremental costs because we -- those results, those incremental organic loans will come from the existing set of people that we have and that will come from enhanced technology deployment that we have done and also improved productivity. So it will have a marginal cost impact, but not major cost impact. So that's one product mix change. The second product mix change is that there is a middle movement from home loan to LAP. Mortgage is the largest book. Incremental sourcing of home loans is less and of business loans is higher. Business loans will give you anywhere between 150 to 250 basis points higher yield. So that's a journey we started about 5 quarters back. We're seeing the results of it now. We're happy with the way things have moved, not only over the last one year, but also over the last one quarter. So these are the various fixes that we are doing, which will help us improve our NIM, not just maintain, but improve our NIM. And how well we execute, you'll get to know over the next 2, 3 quarters.

On that mortgage home loan to LAP, that journey is still on, right? There is still room. I mean in the sense that probably on the outstanding book, your home loan share would be higher versus the incremental disbursement your home loan share is lower, right? So that journey will still give us some benefit in terms of margin. Is that a fair estimate?

There is enough ceiling room available to do more of LAP and less of home loan with the same number of people. There is enough more to do. And while incremental disbursals are skewed in favor of business loan, over a period of time, we'll see the portfolio also going into that particular level. It has a capital impact, but then you see our risk weight is very conservative at less than 50%. So there is enough -- the benefit you get of higher yield really offsets the incremental capital requirement you will have for LAP, which is higher than that's required for home loans.

Sure. And sir, on the core fee, I mean, as you were speaking that core fee, obviously, we have seen sequential improvement for last 4, 5 quarters continuously. Right now, in fourth quarter, it is something like 95 basis points as a percentage of your assets. So the question is how far you can improve it. And then if there is still room to increase, I mean what are the levers? I mean, which products are from which area you will think that the core fee can further improve?

For whatever it's worth, quarter 4 is always a good quarter for third-party distribution, and it's been a good quarter for us from a third-party distribution perspective. Having said that, will we be able to replicate Q4 in Q1 on third-party distribution, may not be. But will it be better than the previous quarter 1? One tend to think so, because there's robust momentum that is being built up. So third-party distribution is a very key element. Then we have met also, we have spoken about engagement being key, overdraft transaction accounts being key, wholesome banking of -- meeting all banking needs of a customer rather than just a product per customer is the key. So what we are seeing the beginnings of is that the greater engagement is resulting in greater transaction, is resulting in a higher opportunity for fee income. We haven't even scratched the surface on this, Suraj, okay. I really think there is more to come. But you're seeing the beginnings of that coming through trade fee income. You are seeing incremental processing fees coming through. And also there is a structural advantage we've got, where NIM suffered and fee increased on account of penal interest being replaced by penal charges. But end of the day, you still have to collect, yes. So you're seeing that momentum happening. On the noncore fee income, yes, we've had a good treasury year. So the flip side of this -- of the NIM compression, possibly is a potentially higher treasury gain in the -- if it were to happen. But then honestly, our energies are going into ensuring that core fee income consistency and growth continues like it has for the last 4, 5 quarters, keep that going. That is renewable, that is predictable. That is -- that consistency is what we are aiming for.

Sure. Understood. And sir, last question, I mean, in terms of this capital raise, I think, due to some unfortunate events, the plan got delayed. I think now you're doing the paperworks again. So I mean, do you think this can happen this year or it might take longer?

I'm so happy that your window has moved to a year and not a quarter, right. Yes, so that activity, that paperwork activity has happened. Possibly -- I mean, we are looking at quarter 2 for that incremental money to come in. But what is more heartening is that, look, any business which can grow by 25% with a 23 bps usage of capital, I think that is a fairly efficient -- capital-efficient model, right? And this includes a proposed dividend also, right? It includes a proposed dividend also. So that's it. Including the proposed dividend, you're talking about 23 bps when you're growing by 24.7% year-on-year.

The next question is from the line of [ Varun Bang ] from Bandhan Life Insurance.

Congrats for a good set of numbers.

Thank you. As always, good to hear from you.

So firstly, as you start focusing on higher ticket LAP, I think we'll have more competition from larger banks and we can't compete with larger banks on yield. So how do you find niche areas for ourselves? And secondly, when you -- when we talk about better yield on advances, would that mean the risk profile of business will also change?

The risk profile will not change. We are conservative. We are proud to be conservative. We really believe that the hallmark of a bank is the ability to manage its portfolio health. So that's a very clear answer, right? So we don't expect us to dilute credit quality for anything, including NIM. That's not going to happen. So that's one. Second part is where is the competitive advantage? More than 50% of our loans that we get and the loans that we lose out in terms of balance transfer happens to NBFCs and small finance banks, okay? It doesn't happen to normal private sector banks. It doesn't happen to big banks, like you said. It doesn't happen, at least in a material way, to public sector banks. So 50% of where we get the customers from or where we are customers -- we lose our customers to on the asset side or on the installment lending side, is to NBFCs, right, [Foreign Language]. If that is the way it is, what is the moat that we have. And the moat that we have is clearly how do we move from a fill it, shut it, forget it kind of product to a customer engagement product. What is it that DCB Bank has, which this 50% of the customers -- 50% of the competition does not have? And the answer to that is neither innovative nor mind blowing. It is something which has been there in the Indian industry for ages, overdraft accounts. We are going hard on overdraft accounts as a solution for deficit needs of our small and medium business owners. Why? Why overdraft? Because our customers intrinsically, instinctively understand interest paid versus interest rate. Because you have the moat of OD facility, you can charge a higher rate of interest because the customer can park surplus funds in those particular accounts and enjoy a lower interest cost to himself or herself. This, customers understand very well. We're really going big time on business loans, which are of an overdraft nature. Customers are liking it. They're benefiting from it more importantly, and if we continue on this journey at a similar kind of growth rates over the next few quarters, maybe even years, you will find that as matters stand, the relative white space that we have would continue. You can compete with largest of the largest NBFCs because you have the moat of an overdraft product. So clearly, where is the contested area? What can you do to make it easier for your frontline and for your customers? What is the specialization that you've been building? I tend to think it is overdraft. The other benefits, since you already asked about it, the other benefits of going in the strategy is that our customer attrition levels get lower. Overdraft create engagement which creates transaction, which creates cross-sell benefits, which improve our core fee income -- renewable core fee income. It also shows that the lifetime of the loan -- the currency -- the life currency of the loan with us improved significantly. There are multiple benefits that we get out of this. So I'm glad that you asked this question and we are very clear about it in our strategy of what we are doing with whom so that the competitive advantages come to the fore.

Got it. Got it. And one question on OpEx. If I see last 4, 5 years, the OpEx per branch has increased from INR 2.5 crores to INR 3.5 crores. So just want to understand what all investments have you incurred and what is the right way to look at it? Because while the advances and deposits per branch have seen material improvement, the profitability has not improved because of higher OpEx per branch. So if you can just help me understand what is the right way to look at it, yes.

You're talking about overall operating expense?

Yes. So simple math, total operating expenses divided by a number of branches.

That's not necessarily a metric that we look at. So the way we look at it is, there are 2 big items there. There's an employee expense, and there is other expense. Mainly within the other expense are technology-related expenses that we incur, which have long-term benefits. And I want to spend some time on the employee expenses. If you just spend some time on employee expenses of Q2, Q3 and Q4. If we don't have the figures right there, let me tell you, it's INR 235 crores in Q2, INR 231 crores in Q3 and INR 232 crores in Q4. During this time period, the bank has been growing roughly Q-o-Q 5%, actually, more than that, okay? So what we've done, and I don't know if you remember this, in -- when the Q1 results came out -- Q2 results came out in a similar kind of discussion -- meeting, I had said that the number of people we will have in the bank will not exceed the current levels for the rest of the year as well as for next year, and we are very clear about that. When we ended the year, we had 11,057 or 11,051 customers -- 11,057?

57 customers.

11,057 customers, which is lesser than then the...

Employees.

I'm sorry?

Employees.

Oh, sorry. Why am I saying very customer-centric, it's the employee-centric. So 11,057 employees, right, which is lower than the number of people that -- number of employees that we had during the course of the year. There will be some increase for the -- in the current year, but it will still be less than the number of employees that had -- the maximum number of employees that we had in the last year. So where -- so there's a reduction of number of employees, not reduction in growth of employees. Reduction, absolute reduction in the employees. Why is it happening? 2 legs to it. One is productivity increases happening. 2 is where we have tried and worked out improvement, and we're seeing that not happening. We fail faster. We move on from them quicker. And the third is there is so much of tech improvement happening, both from a offering perspective and much more importantly, from an adoption from the customers' perspective, which is resulting in a lowering of cost. Just one single example. Statementing -- or any kind of paper stationery going out in the market is getting -- not only is getting -- has gotten replaced by electronic communication links, my docs where the information is being stored, all is helping us improve our OpEx. But there is technology spend, there is cybersecurity spend. We're spending quite a lot on improved customer-facing technology, better back-end technology and also in terms of enhancing the cybersecurity. And this will continue in the future as well.

The next question is from the line of M.B. Mahesh from Kotak Securities.

In FY '25, what is the full impact of the penal interest fees that you have recorded?

Mahesh, your voice is kind of coming in -- if you can repeat your question or come closer to the speaker, to the mic? Mahesh, can you please speak?

Yes, I can hear you. Can you hear us?

Yes. Now, we can hear.

Sir, FY '25, what is the full year penal interest fees that was collected?

Let me put it this way, Mahesh. There is 5 bps reduction of NIM and a similar 5 bps improvement in the fee to average assets, which has happened. The absolute amount is actually in line with the balance sheet growth, which you usually see. There's no real difference between 2024 and 2025 as far as the fee collection is concerned. It's in the same proportion. But slightly less, I'll you why? Because earlier, penal interest was accrued, you didn't have to collect, but now penal charges, unless you collect, you cannot account for it. So it is slightly on the lower side. But if you want -- I don't know where it's publicly available...

No, no, that's fine. That is -- no, that is fine. I just wanted to understand the materiality of this number.

There is hardly anything, hardly anything.

Sir second one is that -- if I heard you correctly, your commitment is that -- your observation is that over the next couple of quarters despite yields moving down, margins will improve, led by cost of deposits. Is that how you are saying this?

No, it will not. Any further repo rate cuts will hurt the bank. What we have, we are -- we have managed, but the later the repo rate cut happens, the better it will be for the bank. If it were to happen immediately, the impact of what we are doing on the portfolio, what we have done on the portfolio will realize over a longer period of time. So the later the rate cut, the better it will be for the bank from a margin perspective.

Okay. So just to confirm, we have done 50 so far. But your expectation is that on the -- in a base case, we should be able to hold on to that margin?

The current level of margins, yes. Sure.

Okay. That's fine. The final question, you said co-lending is a bit margin dilutive. Is it also ROA dilutive?

Do we -- I don't know we give individual coverages...

No, no. So just trying to understand, if you're reducing co-lending, does it improve ROAs, or does it reduce ROAs? That's it.

Theoretically, I'm not talking about the DCB Bank at all. Let's talk purely theoretically. If you're talking about co-lending, and you're talking about a fairly secure co-lending where provision will not come and hit you, then it will be ROA-accretive. And with a product which requires less capital or low capital, it is hugely ROE accretive.

The next question is from the line of Jai Mundhra from ICICI Securities.

Most of the questions have been answered. I just wanted to check on your -- I mean, we have a small proportion of MFI loans, either through BP or direct. Was there any slippages in contribution to this quarter? And hence -- yes, so the question is, sir, with situation improving, do you see some delta coming from MFI slippage as we move into FY '26?

Honestly, I don't see any improvement. At least our portfolio, there's no improvement. It's a small portfolio, so we are okay with it. We have taken accelerated provisions on it, but I don't see any improvement.

Okay. And sir, on gold loans, is there any change in the way you are doing business after this RBI circular and possibly tighter scrutiny and -- or there is no change as such.

Absolutely, no change. We are -- whatever was mentioned in some form or the other or even -- perhaps even higher, we are -- for an organic book, okay, I'm not talking about co-lending at all. I hope you're not referring to co-lending guidelines. On the gold loan proposals, we are -- on our organic own book, it's pretty much the same.

Okay. And is there any change on the co-lending side, sir? I mean, because the guidelines are very comprehensive. They also talk about...

There is a draft guideline, which is coming about 15, 18 month points. Jai, I would suggest let's wait for the final guidelines to come in to see what changes have to be made or what the impact, positive or negative it will be. Currently, it's draft guidelines. At some point in time, I'm sure, the draft guidelines will become proper guidelines and then probably we'll have a conversation on that front.

Sure. And sir, treasury income, right? So this year, of course, the treasury department seems to be having a very good job. Was there any one-off? Do you include -- I mean, is this only a trading gain or you include some ForEx-related activity here? And is it likely -- I mean, is there any offset available within this treasury income? Or do you think that it can sustain a -- if I look at as a percentage of assets around 20 basis points, is there any more details there?

See, usually -- and I'm giving you a general answer, yes. Usually, when the -- when you are in a rate cut environment, NIM suffers and you make gains on your investments, usually. So I'm sure Treasury has done a reasonably good job. But the environment has also been favorable. So while we take a stick for, on the NIM compression, there is some benefit you get on the investment piece as well. Will it continue in the future? Well, if rate cut continues, if yield -- if bond yield drops, yes, I mean, we can't predict it. But frankly, our focus is more on the core fee income. We're happy with the treasury gains, we welcome it. But even within treasury, the yield on investment is a very, very important factor more than the -- not more than, as much as the gains that we make on the fee line basis. The second part of that is that, yes, fine, treasury has contributed. I'm not grudgingly accepting it, and wholeheartedly, generously accepting it. But you just see the core fee income growth, and that's over a period of -- and don't look at it over last quarter or the quarter before last, look at it over the last 5 quarters. See the consistency of the core fee income growth, which is coming in. So -- and these are trends, right? So the onus is on us to keep improving the trends. And we welcome windfall gains as it comes in. But the key is, of course, the core fee income.

And sir, this -- I think last quarter, we were still awaiting this PMAY 2.0. I think during the quarter, the final guidelines have come in. Would you have any comment on the implementation of those guidelines. I mean how those guidelines benefit the core mortgage business, or they're still in the...

So we're very happy with it for multiple reasons. One is that the max interest rate on that is 11.5%, which, if you were to look at it, it's almost on par with the yield on advances that we're currently getting at 11.54%. Secondly, the book stays with you -- the customer stays with you for at least 5 years, is guaranteed. Thirdly, the incentive for the customer to remain current, nondelinquent, is very high because the subsidies spread over -- equally over a 5-year period. So from a priority perspective, he or she will default this as the last loan and not otherwise because the subsidy that you get is substantive. Fourth, this is a loan which has got a max size of INR 25 lakh. And that is like the sweet spot for us, middle of the bat kind of area for us. So it's something which we understand. And we are very comfortable with new-to-credit customers, right? We don't -- I mean we do rely on bureaus, et cetera. But the bank is very, very comfortable with accessing new to credit customers, first-time homebuyers. We have done -- we've gone through 2, maybe 3 credit cycles, good times, bad times, ugly times, and they've all rebounded mostly. So it's an area of skill for us. It's an area of expertise for us, and we will -- we are continuing to focus on it. And you'll see that -- we're promoting it big time. So you'll see PMAY being a very integral part of our growth plan for the next foreseeable number of years.

So the only flip side is, does this tilt the favor -- I mean does this tilt the balance in favor of mortgage -- I mean the home loan versus LAP or this is just an enabler and you will -- you are confident that even the LAP growth will be higher than this home loan growth?

Yes, just think about this. If you were to replace a chunk of the current home loans with the PMAY loans, right? You will have a yield enhancement coming through, you will have lesser collection cost, you will have lower provisions, you will have lower capital cost, and you will have a customer longer with the bank -- for a longer period of time with the bank, right? And most likely, this is our belief, we just started this exercise. Our belief is because subsidy comes in, and just imagine for an Indian -- normal Indian middle class person, owning a house is the ultimate destination. It is the height of purpose for most people. I mean that's like a revelation for most people, right? And here is a bank which is helping you get -- you're funding a house and you're getting a subsidy for that, it's a big leg up. And that's perhaps the only asset he or she will get -- will make during his lifetime. And it's definitely the single most prized possession the person will have. So -- and if you're a banker who is giving that particular loan, for life he or she will be your first port of call for any of the financial needs, surplus-deficit needs, insurance needs, trade needs. Don't forget all -- most of our customers are SME customers, right, and trade, insurance protection, these are things that they definitely will want to have. And combined it with what I spoke to you -- not to you, in general, earlier, engagement is key to the bank. Why this overdraft is a less contested area? Why it's a moat area? Is because we will do the engagement. And for this PMAY customers also, it's not -- this whole engagement concept is not limited to overdraft or to CASA. It's the way we do things. It will be the DCB way of approaching, engaging a customer. So that's the way we see this. It's not that LAP will suddenly go down and most of it will get replaced with PMAY, no.

Right. Sure, sir. And lastly, sir, if I may ask, while you mentioned that in this quarter, we have made some affirmative action on -- and we saw that the savings rate was also cut in the month of Feb. But still, the cost of deposit has gone up at a pace which is slightly higher than the earlier quarters. I would have thought that because you have cut SA rates. I mean, what explains this rise in still cost of deposits? Is it only TD or the repricing is still higher? How should one look at it?

Maybe you should look at it as an opportunistic move rather than a strategic one. You had a 24.7% increase in advances. These advances were coming in with -- they're accretive to ROA, even if it meant that it is being funded by higher cost deposits. Is that the way we will go? Perhaps not. I'm not particularly happy with 2 consecutive quarters where the advances growth has been higher than the liabilities growth. That's not the way we want to run this bank. Not that the CD ratio is alarming, it's at 85%, but the fact of the matter is that it's important even at a higher cost to get these liabilities going because the assets that we're getting were truly accretive in a cost sense, in a credit sense and in a customer sense. So is that the way the trend line? No. That's not the way the trend is going to be. So it's an opportunity which we had in the last 2 quarters, and I don't think that's the way we will be growing the bank.

Sure. Sir, I actually wanted to highlight one thing. I mean you have the lowest -- you had the lowest SA rate across all banks. Up to INR 1 lakh, you were offering INR 1.75 lakh, and now you have got it down to INR 1.50 lakh. Of course, you would have seen the behavioral thing, et cetera. But it looks like that you may be achieved only a few basis points, but you run the risk of having the lowest SA offering by any bank possibly in the last few decades, I don't know. I mean does it -- I mean is this substantial, or you think the people have become very inelastic -- absolutely inelastic to offer such lower rate of SA in the initial bucket?

There are 2 sets of people that we cater to in a savings account. There are people who use savings account for their basic transactional purpose, right? If you were to take a statement of a savings around customer, your statement or my statement 3, 4 years back, you would find there are a few transactions. Now it will run into 4, 5 pages because there is a huge amount of UPI transactions happening. So customers need a savings account for transactions. That's one set of customers. Then there are other set of customers who have huge chunk of surplus money, which they want to park for an uncertain number of days, waiting for an opportunity, waiting for an investment, waiting for something to happen. So that is actually a term deposit masquerading as SA. It is not even -- I mean it looks like SA, it talks like SA, it walks like SA, but it's not SA at all. It's a term deposit artificially sitting in this and boosting our CASA ratios, et cetera. It happens in most banks, it happens in our bank also. As long as customers are using it for transactional purpose, and that's why, again, I'm coming back to this, engagement and transaction. Use a bank account for the purpose for which the bank account is being made, right, for making your payments, for getting your receipts, et cetera. Those set of customers, they are price inelastic. But if you're -- the same breadth, you have customers who are using -- who want to utilize their investment, and we are happy with that. I mean, there's nothing wrong. I mean, I don't -- I'm not passing a value judgment here. But you're catering to both sets of customers, and how are you doing that? By having a spectrum of rates, which is as low as 1.5% currently and perhaps even as high as 7.9%, 8%, right? So -- basically, what does customer want? We're catering to that customers' need, right? And are you the lowest rate at the lowest end? Why no only? You look at our savings account. The lower end of the savings account rate over the last 2 years, we've been at -- we've been there. And why would you even lower it further unless we had some experience.

Right. No, no, fair point, sir. And I think this -- no, I acknowledge your point of people using savings account not for saving, but for transactional and hence, this is okay.

I mean, that's what you want. I mean you have UPI transactions. You need the facility of instant transfer. You need a safety factor, that comfort that your money is safe, your -- the fact that there is instant transmission happening. In case there is an issue that you're able to solve it quickly, you're not caught in a web of phone banking labyrinth, where you can come in, you can't get out, right? That kind of [Foreign Language] situation, you can't have. You need people who can speak to. There's a whole element of service element to the whole thing. When things go right, it's great. But when things go wrong, how fast you respond. These are very important factors in customers' life. And most people are intimated by finance. So that's the customer base that we are catering to. And for that customer, a lot of things are important, and interest rate may not be the highest amongst that.

The next question is from the line of Prashant Kumar from Sunidhi Securities & Finance.

Prashant, can't hear your voice, if you can hear mine.

Hello, am I audible?

Prashant, you're audible now.

Yes. So my question is on technology front. Although the bank has shown some details on digital initiative. And can you give just some more color on technology upgradation, and what is the percentage cost incurred on technology development to total operating expenses?

I'm not sure that we can answer the second question. We have the numbers, but we probably can't answer that, Prashant. But let me give you a flavor of what we're doing on the technology front. Let's talk about some less, less -- what's the right word? Less sexy stuff. We'll talk about core banking system, okay? It's functional. It has to be robust. It has to be -- have the capacity. We have upgraded our core banking system, Finacle a year before last. Last year, we upgraded our installment lending program, FinnOne. It's the state-of-the-art, one which we have implemented now. Third item is our treasury management system, TCS. We upgraded it in June of last year. We have totally 4 core banking systems, 3 of them are up and running. There's not like a flashy advertising kind of stuff. This is like back end, which has to work, which ensures that what we all take for granted happens. So the core-banking system happened across the bank, big-scale movement has happened on this. That's the part on the storage computation infrastructure piece, which you have up and running. The second piece I want to talk to you about is on customer-facing technology. Both on the loans -- okay, there are 3 areas which we'll focus upon, maybe 4. But the 3 key areas are: deposits, loans and payments. You may want to subdivide payments into domestic payments and international payments, but broadly payments. On the deposit side, the account opening is -- for individuals is paperless. There is virtually no paper happening. It's cut down the fraud cost. It has cut down our courier cost. It has cut down the supervision cost significantly. Most of the customer acquisition is straight through. A large proportion of the amendments to the account is straight through. Second part is on the loans piece. MFI lending, which we do is entirely digital. This -- right from the customer information coming into the bank to disbursal going into the customer's own account, the entire journey is electronic. And why are we are choosing to give an MFI example? Because you're talking about volume, large volume, entirely goes as electronic. Third piece, on secured lending, a lot of progress is being made in terms of digitization, perhaps with the only exception of title search and physical valuation, which continues to happen on an offline mode, not technology reliant. But as and when titles become digitized in India, you will see a scenario where secured lending also goes through an STP process. And remember, 54% of our book is mortgages, and that's a key element in terms of digitizing which happened to us. The usage of RPA within the bank has significantly reduced the manpower or -- now the rate of growth of manpower is not what we're talking about, the actual number of people the bank has reduced consistently over the last 3 quarters, right, partly from the advent of usage of technology. Let's talk about technology of a different kind right now. It is about probabilistic modeling. It is about using GenAI to ensure that higher accuracy and lower operating cost comes into play. On phone banking, we have -- instead of writing an SQL query, which only a few people possibly have the ability to, you can write -- in English, you can write what you want, and then you will be able to extract information. Suddenly, information has not become the preserve of a few. You're able to identify cuts by writing general English. And that's improving every time there's an error. So there's a built-in ML building. I'm giving you one small example of what's happening on GenAI implementation within the bank. We are using high-quality analytics to determine pursuing of which particular customer for what makes more sense than others. Simple example, there are customers -- in collections, for example, there are some customers who anyway will pay. There are some customers who anyway will not pay. No amount of effort into those 2 is going to result in incremental gains for the bank because the people who can't pay, can't pay anyways. And the people who will pay will pay anyways. Wasting phone calls and activation on them is not going to make any sense at all. So the entire firepower resources of focus goes into the middle bucket. These are customers who can reprioritize. So our ability to predict has improved and more importantly, is improving as we go along. So I'm giving you 3 very different scenarios on the usage of technology. One, the traditional ensuring the core part of technology works, right, where what we take for granted happens time after time, day after day. There is enough DRDC movement happening. There is enough redundancy being built in. There is enough cybersecurity. I got to tell about it. Our SIEM, again, we upgraded last year. So you have invested extremely heavily on the back end to ensure things work normally. There is -- the computational powers have gone up, the storage powers have increased significantly is one part of it. Cybersecurity is the second part of it. Third part of it is customer-facing technology where paper is banned, right, where significant reduction in paper is happening. Fourth is usage of technology to make better decisions. So these are 4 elements of technology, which is coming into play, which is helping the bank. Have we leveraged it enough? No way. Is the best yet to come? Of course. Do you have the people -- do you have the people skills to leverage it? Without doubt.

Yes. So going ahead, sir, on improvement in productivity due to, I mean, technology, especially on mortgage and all processing side. So do you think the cost to average asset ratio as kind of 2.4% or 2.45% is achievable in near to medium term on a sustainable basis?

See, we're working very hard. It's a part of the agenda. You see how the last -- look at the cost to average assets for the last 4 quarters...

Because already you have mentioned that...

And wait a minute, wait a minute -- and look at it next quarter also. Usually, Q1 is when the cost to income is at the nadir, right? That gives an indication. I mean the trends usually forecast the future.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Praveen Kutty for closing comments.

Thank you very much. You were extremely patient with all your questions, and we hope to ensure that we continue to be consistent, predictable and boring. Look forward to meeting you next quarter with hopefully an even better set of results. Thank you for all your questions, and look forward to meeting you maybe next quarter.

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