DCB Bank Ltd

Ladies and gentlemen, good day, and welcome to the DCB Bank Q2 FY '26 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone.

We have with us from the management, Mr. Praveen Kutty, Managing Director and CEO; Mr.

Sridhar Seshadri, Whole Time Director; Mr. Ravi Kumar, Chief Financial Officer; Mr. Ajit Kumar Singh, Chief Investor Relations Officer.

I now hand the conference over to Mr. Praveen Kutty, Managing Director and CEO, for the opening remarks. Thank you, and over to you, sir.

I'm happy to announce the quarter 2 financial results. The key highlights include total deposits, which has grown by 18.79% y-o-y to INR 64,777 crores. The total advances have also grown by 19.14% y-o-y to INR 52,975 crores. This signifies a consecutive 5-quarter pattern of high growth in line with our stated strategy.

Post the repo cuts, one of the questions I've been constantly asked is how our NIM would stack up. And I'm happy to inform you that our total interest income y-o-y has increased by 16.22%.

While in comparison, our total interest expense has increased y-o-y by only 15.79%.

The management action implemented has ensured that our growth has come with a cost to deposit decrease from 7.12% to 6.96% between Q1, Q2. That's a 16 bps decrease in cost of deposit. It softened the impact of our rate cut to a much better degree than what was anticipated earlier.

For the similar period, the cost of fund also decreased by 17 bps. We have reduced our higher cost of borrowing and also our lower-cost investments further aiding to the better margins. And that is also the reason why our balance sheet growth is marginally lesser than the assets and deposits growth. All these actions, in addition to a strong showing in credit cost has ensured that our NIM has increased from 3.2% in June to 3.23% in September quarter.

Our fee momentum continues to be strong, despite the tailwind of treasury gains reducing A strong display in third-party distribution and trade is helping our core fee income growth. It gives me pleasure to inform you that the tightening that you see is not limited to the cost of deposit and/or the cost of borrowing alone, but it's percolating across the bank. There is a higher ask on productivity, a greater focus on technology, both of which resulting in better cost control.

One year back to the day when the Q2 results of last year was announced, I made an assurance that the number of employees that we have would come down not only for that financial year, but also for the year ahead. I also announced that the cost to average assets will come down.

We have grown our advances and deposits by about 19% y-o-y, despite having 1,118 employees less than what we had a year back. That's a 9% reduction of the employee base, while growing 19% on our advances and deposits. Suffice to say, the advances and deposits still continue to maintain a structure. Our top 20 has not altered, our greater than INR 3 crores loans have not altered.

The net output is that the cost to average assets is now at 2.43%, lower by 32 bps over the same quarter last year. This is the fifth consecutive quarter of lower cost to average assets. Another comment I made at that time -- this time, not a year back, but when the last quarter results were announced, was that I do not expect the overall credit cost for the year to cross the 45 bps mark.

I'm very proud to say that the team has delivered a credit cost of 31 bps for this quarter. And if you were to look at both the quarters combined, the credit cost for the half year is about 45 bps.

We continue to make optimal use of our capital. Our Tier 1 capital, including the profit for the period has increased, yes, increased for the second consecutive quarter despite the 18%, 19% growth to 14.85%.

Another query that we used to get on many of these calls, in many of our interactions is that of promoter stake increase. I'd like to inform you that as committed the promoter capital has been received post the RBI approval. But it happened post-September 30. And as of October 10, it's at 16.27%, including the profits for the year.

Finally, the bottom line is that our profit after tax for the quarter has grown to INR 184 crores, This is the highest ever quarterly profit in the history of our bank. We signed off the quarter with the highest ever EPS of 5.84 and a book value of INR 180.41 without including the promoter capital, which came post the results. Our ROE for the half year at 12.39% is the highest first half for our bank in this decade.

With this, I thank you for your patience in listening, and I'll open the floor for your comments, observations, queries and clarifications. Operator?

Yes, thank you very much. We will now begin with the question and answer session. Our first question comes from the line of Akshat Agrawal from SMIFS Institutional Research.

Congrats on delivering a very strong set of numbers. Sir, my first question is on asset quality.

We saw a very benign credit cost this quarter with at just 31 bps. Do we expect this to continue?

And secondly, sir, on fees, if you could provide more color on the increase in fee income and sustainability of key drivers?

Yes. So our credit cost for the year -- for the full year, I'm reasonably confident that we will not cross 45 bps. The model seems to suggest 45 to 55 generally, but we are very confident that we'll be below 45.

The second question on the fee income, Q1 had the benefit of treasury fee income. Exceptional treasury fee income, Q2 did not. Our core fee income at INR 158 crores is coming on with a

strong showing in third-party distribution, trade finance, cards. So these are contributing reasonably heavily.

And our belief, our management conviction on this is that we have enough repeatable core fee income, which offsets the one-off that we got on treasury in Q1. And that's demonstrated in Q2, and probably you'll see that in Q3 and Q4 as we go along.

My next question is on margins. Have NIMs turned around finally? And what kind of expansion do we expect going forward? How much repricing of deposits is already complete? And how much is like qualitatively left for next quarter? And what led to CASA ratio expansion this quarter? Is it finally, has it finally turned around?

Okay. So, we'll go one by one on this. One on the NIM, has it turned a corner? I think we have turned the corner unless there is more rate cuts coming up, okay? How much of expansion can it happen? I'll just give you 2 parameters to think about, and you can extrapolate from there on.

13 bps reduction in yield of the stock and 17 bps reduction in cost of deposits, right? That gives you an indication as to what can come. And also remember this, the pass-on is instantaneous, but the benefit on cost of deposit is complete only when the cycle -- the duration of the term deposit gets over, right?

And the third question -- and typically, 13 to 14 months is an average duration, maybe even 15.

So, you can use that as an assumption to kind of extrapolate until when you will get the cost of fund benefit going through.

Very well, sir. And just if I could squeeze in one more question. Can we understand drivers of loan growth going forward, while headline growth is very strong? It seems to be driven by co- lending with mortgage being very weak and SME is negative. MFI seems to have increased Q- o-Q? So that was my question, sir.

Yes. So going forward, at the end of this year, our co-lending book will be less than 15% of the overall growth. And as far as overall growth is concerned, we have -- there is reason to believe that over the next 3 years, 3.5 years, we'll be doubling our book. So, you've seen the growth happening over the last 5, 6 quarters.

I would tend to think that in a similar kind of fashion, the growth would continue. If you look at the mortgage pie chart, it is 54% of the book a year before, even a year before that, even now it is 54% of the book and we'll continue to be in that range going forward.

Our next question comes from the line of Mona Khetan from Dolat Capital.

Congratulations on a good quarter. So, my first question is on the opex bit. So you've been guiding for 2.5% to 2.6% kind of opex to assets, we are already below that. So from a quarterly perspective, of course, so could this kind of improvement sustain or further improve what's the broader thought for this year?

Probably we'll, we will settle around the 2.4, 2.42 mark. And the reason I'm saying that is that the number of employees that we have, have dropped down to 10,700 odd. We still are in line to open about 20 more branches. So, we'll have more people coming in on the deposit side.

We'll also be increasing our staffing to, on a few products like the INR 3 crores to INR 10 crores secured SME business, educational institution finance. These are critical elements where we are putting resources behind that. So, the number of people, which we'll have at the end of the year will be -- will be slightly higher than what we have today.

So, you will find a slight increase in the overall total, in the total cost, of course, offset by the balance sheet size also over the next two quarters. So, I would tend to think that we should be somewhere between -- somewhere around 2.42, 2.43, we should be stabilizing there.

Okay. So, the similar level of cost of assets could continue, what we have in this quarter? It should. It should.

Okay. Secondly, if I read it right from the previous comment, is it fair to say that margins have bottomed unless assuming that there are no further rate cut?

Yes. If further rate cuts are not happening, then you would see NIM expanding in.

Okay. Again, on the direct assignment book, just wanted to get a sense, how big is this portfolio out of the 53,000 kind of loan book in your case? How big is the direct assignment book?

Single-digit percentage. I don't think we'll reveal it, but it's a single-digit percentage.

Okay. And this includes the products across the board, including secured, unsecured and... Correct. Across products within that. Absolutely correct.

Okay. And just finally, on the ECL circular, if you could just give us some thought as to what will be the impact for DCB Bank. And also, in case you could share the SMA 1 and 2 book in your case, so that you get some better sense, how the ECL producing to play out?

So right now, we are evaluating it. We do a retro calculation of this to see how things are. And at an approximate basis, I think the bank is -- it will not cause a ripple in our bank. And as far as SMA 1, 2, we don't reveal it now. But yes, there is a possibility that we may even be putting it forward. If slippage ratios can be given and the NPA recovery upgrade is also given then yes, maybe we can look at that.

Prima facie, assuming the draft circular comes in the current form, draft circular is executed the way it is, you don't anticipate much impact on additional provision in your case?

Unlikely. Very rarely, unlikely. I mean, no, not worth -- nonmaterial.

Our next question comes from the line of M.B. Mahesh from Kotak Securities.

Congratulations. Just 2 questions from my side. On disbursement, there is some slowdown that we see in the mortgages side? Just some color on that, sir.

Yes. So, see, it's a culmination of what I've been speaking for the last year and a half or so. What we have done in mortgages, and thankfully, we did that in mortgages is that we increase the ticket size, we moved up the ladder on the ticket size, number one.

Number 2 is that we have not compromised on the yield, so we have tightened up the yield considerably and also the product mix when we spoke, when, like Q1 and Q2 of last year, we were running at a 50-50 HL BL kind of ratio. Now we move to 65-35 in terms of fresh sourcing of mortgages.

And obviously, LAP has a far higher yield than home loans. So that has resulted in the volume being lowering, but it has significantly helped us get higher profitability going in. Fourth element, it was in expenses, a large amount of our mortgage sourcing was coming from the DSA.

We are really, really ramped it up, tightened it, as if, we've tightened multiple things. One of the things that we have tightened up on cost is a payout to DSAs. And that has resulted in a lower volume.

In my opinion, that's a good thing to do because from a long-term perspective, it is important to have operational efficiency coming in and own sourcing capability coming in. So in a nutshell, higher LAP as compared to home loans more organic sourcing, higher demand on productivity and better yield.

These 4 things have contributed to slightly lower volumes, and I'm sure the volumes will pick up as we pick up the, as we increase our front-end FOS. And this is not a theme only for mortgage Mahesh. Across the bank, we have, we are leaving less on the table. We're leaving less in the table on cost of deposits. For every stakeholder, we are renegotiating things. There is a tightening across. Mahesh, sir, your line is again unmuted.

Sorry, I think I got briefly disconnected, sir. The second question was on the margins, which you kind of alluded to, if you start improving. From the cost to deposit side, how much more leverage you have in terms of it reducing? And how fast do you anticipate that you can get to now to, closer to 3.5% in terms of timeline?

So, Mahesh, you'll have to do the extrapolation, I'll give you the ingredients, average duration of our term deposit in a bank is about 14 to 15 months, okay? And you can start from April onwards. We have, our cost of deposit has gone down by 16, 17 bps. Cost of funds have gone down by 17 and cost of deposit by 16 bps, right? And that's 1 quarter.

And you have maturities you know what a CASA ratio is 23%-odd. The rest is term deposit. So it comes up from a maturity. And then on renewal, you do get the benefit coming through. So the bank is betting reasonably well on the renewals for the next 3, maybe 4 quarters more. So, you can guestimate how much can come from NIM on that front.

But one question, sir, is the pricing pressure on the asset side more than what you're anticipating, or it doesn't seem to be -- how are you seeing on the asset side?

As an, are you asking whether there's going to be more yield pressure coming in the asset side? Is that the question, sorry?

I think you talked from a stress perspective or from a downward pricing perspective.

So I tell you how the math works. On the new sourcing, there is very little impact. The new sourcing continues at a similar level. The rate cut impact is hardly any there. But on stock portfolio, which used to be a hybrid every month, some portion of the hybrid, which is partly fixed, becoming floating at the end of two years or three years.

Every month, some portion of that for what we source two years back, three years back, will come into the floating point. And at that time of the floating, you will have a reduction of rates.

So, to that degree, there will be every month, some sort of reduction in the yield. But on fresh sourcing, no, very low impact. Perfect. Okay. All right.

Our next question comes from the line of Rohan Jitendra Mandora from Equirus Securities.

You see the quarter 2 of our bank. I haven't seen the quarter 2 of other banks. You compare our reduction with other banks reduction and extrapolate.

I don't see other back quarter.

Wait for Q3 to come in and see what our performance is and then you compare with other banks.

Because, sir, this quarter for them, the transmission was there of the repo, explain to that?

Every bank. For ourselves, it is there. So there are 2 ways of doing it. You look at the Q2 results of us versus others, look at our Q3 results compared with our Q2 or compare our Q3 results with their Q3 results, you'll get the answer.

Okay. But sir, possible for you to give a broad indication of how much is it hybrid portfolio?

We're extremely confident. I can't talk about others, but we know exactly what is going to happen next quarter and the quarter after that.

Sure, sir. Sure. Any contribution that can be done on the hybrid portfolio? Broad range or ballpark range?

See, you have to compute what the monthly volume of loans a year back. So we have been giving disbursal volume by product in our investor presentation. You go back to two-year-old investor presentation, you will get a sense of how much was there. And then assuming that those customers stay with us and some don't, they close and go. It will give you an indication of how much it will come every year, every year or every month.

Got it.

You understood, there is a disbursement by product that we give in investor presentation, right?

So some will be two years, some will be three years, but it'll give an indication. But what you need to know is that our, the play that you have on the renewal of term deposit is much higher than whatever asset which will come from fixed to floating in any given month.

Got it.

For no other reason, I mean look at the liability base, the liability basis is at some 64,777, whereas the asset base is 52,000-odd, right? So even assume that all with 1 by 12s have all come in, the save that you have on one is higher than the save you have on the other. The spend on the other.

Got it. And sir, second one is on this draft norms on the risk weights, which has come out. Since we have a high mortgage book, we would have, I think, a reasonably good benefits on the release of capital. So, any estimates there?

Yes, we should have. But that's not what we're looking at. I mean, look, let's look at what has happened over the last 1 year. Between Q2 of last year and Q2 of this year, the bank has grown its advances by 19%-odd, right, 19.14% and our Tier 1 capital, including profits, without including new capital that is come in, promoter capital come in has increased.

And that's the kind of control you're keeping on capital. So yes, so whatever comes through risk- weighted asset benefit is a benefit. That's okay. But the model is so tight, right? We run a very tight ship on this.

Got it. And sir, during this call, you indicated that you were adding resources in INR 3 crores to INR 10 crores secured SME business. So is this a segment where we are going to incrementally focus aggressively? Or how should one look at your presence in this space?

See, just like education institution finance, now you built it up over a period of time. This also we'll build it up. It's a part of our strategy to go slightly higher ticket size, keeping in mind the

secured nature of it. As a bank, what you're looking forward is for go away from single product sales to all product, all financial solutions providing institution. That's a challenge.

So, one of them that we are, one of the activity we are doing on the 3 to 10 is to capture the cash flow of the customer entirely. We are doing similar kind of things on our existing mortgage book. We're trying to get their CASA accounts, their insurance, their trade finance needs, etc.

So, it will take time before you see the results of it happening.

It's just like, bit like a cost to average assets, which I spoke to 1 year back. You haven't seen the benefit of it. But maybe a year, year and a half down the line, you'll see the benefit of that happening where we want to be the full banking provider for the customers that we currently have. And 3 to 10, we think, fits in very well with that strategy, right?

Trade finance, surplus in our CASA accounts, getting the customer to transact with us. That's the way we want the entire set of customer base to be in an ideal world. Today, most of our mortgage customers do not transact with us. Their operating accounts are with somebody else.

They take insurance from somebody else. They do the trade finance from somebody else.

So, what we are doing right now, which is not visible in the outside world, we are really working hard to ensure that we are a single source, all financial solution provider for our existing customers. So, this fits in very well with that concept.

Our next question comes from the line of Nitin Aggarwal from Motilal Oswal.

Congrats on a very good quarter. Congrats on a very good quarter. Thank you very much. Very generous.

Absolutely, very strong performance. And I have a few questions. Like one is on the operating leverage that you talked about that bank has been exerting a very tight control and utilizing the existing infrastructure. But any sense as to how long we can continue to pursue growth before we start increasing headcount, branches and where should the cost ratios be in a year from now?

Ideally, we would want to, we would have to increase that. See, 10,700 is a good enough base.

We don't want to go anyway lower than this. We want to increase it. But this increase will come with increased volume.

I mean, just look at this, about INR 1,600 crores of IBPC is still there. It's not accounted for in that sense of the word, right? You can see that Page Number 21 maybe, right? That is there. So there is an asset opportunity. There's a liability opportunity coming in there. It's already there.

So -- but if you were to look at it, we still are a people-dependent business. Much as I don't want to add the people. The reality is it is still an FOS driven company. So we will need it. We are building it up. So cost, overall cost will increase, but the bet that we're taking is that the denominator will grow at a faster pace than the top line or at least in a stable base. So we're very comfortable being under 2.5 and definitely comfortable at below 2.45 as the year goes by.

Okay. And second is on the ROA. Now we are in the striking distance of 1% ROA with upcoming like margin expansion and these cost efficiencies further improving. So will you like to talk about as to what kind of medium-term ROA that the bank can deliver in FY '27 and beyond? What is the aspiration that you have?

I think we should close the financial year '26 - '27 with an ROE of 13.5% and close the financial year '27- '28 with an ROE of 14.5%. And there is capital coming in between that will be adjusted for the capital.

Right. And ROA, as in, the, what kind of number you're looking at over these 2 years?

Even we can reverse calculate like that. So why I'm talking about ROE is that's what we would like to go in for. And I'll tell you where it's coming from, more importantly. We've done so much of work over the last year and a half, two years. And now we have the confidence that the effort that we are putting is really translating into results.

So I know there are external issues can happen. Things we don't know can come from behind the corner. But from what we know, I think there is a reasonably good chance that we will be 13.5% ROE for the coming year, coming full financial year and 14.5% the year after.

Okay, sure. And lastly, just a small clarification. On the Tier 1 number, how much did you say after this promoter infusion, what the new Tier 1 number is ratio?

You go to Page Number 40, and it's in very small font, but you can -- I'll just read it for you, Page Number 40. It is post-issuance, promoter shareholding as on October 10, 2025, stands at 16.27%. So that's the promoter contribution. And on Tier 1, , we are at 14.85% without the capital. And with the capital, add another 21 bps, so 15.06%.

Okay. So very, very comfortable position.

Right. I mean you've seen that happen time over time. Our RWA is now under 49%, maybe even 48% -- under 48% also possibly. So there is enough gain. But that will increase because we will bring the core lending book, which is primarily gold below 15% or at 15%. So there will be more usage of capital in Q4.

Our next question comes from the line of Jai Mundhra from ICICI Securities.

Sir, on SME book, right? So it looks like this book has been degrowing or at least has degrown this quarter on a both y-o-y, q-o-q basis. And we, of course, had this aspiration of providing the check-in account of CC facilities to gain market share here. What is happening, sir? Is this a bit of a worry on the tariff-related thing, or what is leading to subdued outcomes here?

It's a very simple answer. So we didn't have a good experience in Q1 and the previous Q4 on our unsecured experiments, okay, in Q4 and Q1, right? And because of that, we cut down on TReDS.

So primarily DA was a problem, the unsecured co-lending was a problem. But since we saw that happening, we have cut down on TReDS significantly. What you see here in the SME book is

the OD/CC book as well as the TReDS book. So the TReDS book has come down as a part of our action only.

The, see, let me put it other way around. The bank has declared war on high cost borrowing and low-cost assets, okay? I'm taking this conversation slightly away from the question you asked, but I'll come back to it. Have a look at our cash, have a look at our interbank balances, have a look at other assets, have a look at borrowing, the significant reduction happening. So we are tightening.

There is no, for every stakeholder, we are tightening the bet because the depositor is going to be less easy, increasing the yield, lowering the cost of deposit, renegotiating with all types of AMCs and various vendors, running a tight ship both on credit and capital.

So, on SME book, we decided we're not going to be waning on top line. It is okay. For us, the asset has to sweat. So, it's okay to give up on TReDS, lower it. And on the second question, I'm coming back to your direct question, how are we progressing on the multiple product strategy?

So, we have something called a no to singles.

So we don't want a single customer in our bank who has got only a single product. So that campaign has started. Are we happy with the progress that we have made? Not really, but it's going in the right direction. And these things take time. You got to nurture it and let it happen, let it grow.

Over a , you'll see the result of it, I think, only in about two to three years' time. But that doesn't mean that we will not focus on it. It's a very, very important initiative for us. We'll drive that.

And it's not just about SME loans and OD, OD and CC. It is about making mortgage customers transact with us, getting their current account with us. And then the whole world opens up of using them for trade, using them for the deficit need, using it for the surplus needs. So that's the story very much is centre plate for us.

Right. Sure. And sir, on this ECL, right, so while I agree that you may be, you're very comfortably placed. But I wanted to check, sir, we have a specific PCR, which is less than -- which is around 60%, while the LGD for our bank has been much lower given the secured nature of NPA. But do you sense a need to increase the PCR from current levels by the time we transition to ECL, or you believe the 60% PCR is reasonably good even if we were to move to ECL?

Jai. I'll tell you what is my single biggest priority as far as portfolio quality is concerned. It is neither gross NPA nor PCR. It is slippage ratio, okay? I want to fix the slippage ratio. It is unnecessary waste of time. You don't collect one EMI when you have, when you can collect 1, and then you go ahead and collect four EMIs when the customer becomes NPA. It is a complete waste of time. It is just an increased opex cost. It shows wrong lead indicators, while it doesn't impact the credit cost. I want to fix that slippage ratio. That's my number 1 priority.

Otherwise, we are very comfortable at 45 bps of credit cost, right? That's really not the issue.

Why slippages and recoveries are a problem is that it just increases the opex, right? You're going and collecting, you saw, I don't know if you saw this, but 81% is your recovery as a percentage of slippage, right?

Why wouldn't we do that upfront? It begs the question. So that is the real priority. Fix that in the front. And as far as the sourcing metric is concerned, template is concerned, underwriting is concerned, frankly, no issues. This is a decent business with good LGDs.

Sir, on slippages part, well this quarter slippages, let us say, is around 3% annualized. Is this number is good 3.17%. Is that number a decent number or I mean, how, considering the business model, how should be the gross slippages in rough range? We want to make it somewhere below 2%. Okay.

Okay. 2.5% it is without the gold, right? We would like that 2.5% to come down to 2%. Right. Yes.

Okay. And this 60% PCR, sorry, just because we would have to make a transition, right? Because this PCR on existing Stage 2, Stage 3 loans would have a bearing on the net worth adjustment and maybe the ROAs that you make over the next seven, eight quarters. Would this 60% number suffice, or you need to increase it to 70%, 75% as per the system level? System is around 75%.

So I was checking on that number as well?

See, essentially, if your business model is built on unsecured loans, which has a higher loss given default, you will have to. Just look at where our NPAs have stacked up, right? You've got the product-wise NPAs are, you see where the growth is coming in from. INR 23 crores growth in AIB is the highest. And that is partly driven or rather significantly driven by the MFI book, which they have, the BC MFI book that they have, right, in AIB. That is where the issue is coming in.

Other all secured assets where there is marginal growth coming through. So we're very, very comfortable with the kind of loss given default we have in our system. I don't expect it to be anything more than that. If anything, the new model will suggest slightly lower than the current provision that we take. But obviously, it will be the higher of the two.

So one doesn't see too much a change happening there. The real story, the real need to address is to ensure that the focus that we have on the later buckets is brought right upfront so that opex comes down. It is not about credit cost, at least in my opinion, for the products that we have.

Okay. Sure. And sir, last quarter, we had some higher, let us say, higher slippages in unsecured DA and small ticket LAP. This quarter, of course, the gross slippages have improved sharply.

But is there any seasonality element also, or do you believe that the issue, whatever issue we had in unsecured DA and small ticket LAP is clearly, clearly behind in terms of gross slippages also?

See, in retail banking, nothing gets over in a quarter. So there is always a long tail. So, this quarter is better than the previous quarter, but the next quarter will be better than this quarter.

So, it goes on like that. It just doesn't stop, right? So, we have that. There is, though that's not, it's not a great book; it's not a book that we are very proud of. But the impact of that book is decreasing as we go along. So is with the MFI, right? The MFI fresh NPAs are progressively getting smaller and smaller.

And the same is the case with unsecured DA and small ticket LAP? That book is improving... Yes.

And lastly, sir, the co-lending share as a percentage of overall is still around 16%. How should one look at, let's say, as you end the FY '26 and maybe beyond?

The way to look at this is it's currently 16.22%. You add INR 1,575 crores of IBPC to the bottom line, 16.22% will automatically look like 15.75%. And that 50 bps, 75 bps reduction will happen in quarter 4 because of the following reasons. One, new technology will come into play. There will be a blended rate on co-lending, which will happen.

And there will be a handshake time frame where things may not flow at the same seamlessness as current. And I'm just imagining this. And if that is the way it is, then you will find a lower volume coming through automatically.

Otherwise, what we'll do is we will ensure that the incremental book remains at the 15% level of what we think the March 31 advances book is going to be. But in Q4, you'll find changes happening. Blended rate is one, CLM 1 technology interface is the other. So these, all these things will come in. And usually, when these kind of new rules come in, you'll find some bit of hiccups coming in.

So in that sense, you could say that we have upfronted it, kept some fat and then we will be releasing it as we go into Q4. If it doesn't happen, great. If it's seamless and continues to happen the way it is great. We'll stop instead of stopping it in March, we'll stop it in February and keep it to that particular level.

Our next question comes from the line of Aditya from Securities Investment Management.

Sir, firstly just a clarification -- Sir, just one clarification, sir, was there any one-offs in NII, like IT refunds or interest reversals, or anything of that sort? Sorry, run off in non-interest income.

One-off.

One-off, nothing which is worth material we were speaking about. No.

Okay. Sir, secondly, one metric which we used to track was the deposit rate of DCB as compared to other banks. So that gap used to be pretty high. Now with the recent cut in term deposit rates, has that gap been maintained or we have tried to lower that gap?

We have a number in mind in terms of cost of deposit and cost of borrowing. And we have tasked the team to the growth rate that we want based on that, on the targeted cost of deposit, and the team is reacting very, very well, as you can see with the results, right?

So partly, it has been achieved through reduction in the savings account rates, which has got an instantaneous benefit coming in. But that petted out in Q1 because you, I mean, there's only a limit to which you can cut it. In Q2, most of what you see has come from reduction in term deposit on the renewal of deposits and also on the new deposit, it is coming at a lower rate.

CDs, which mature and are getting new CDs which are coming in are coming at a lower rate.

Borrowing, we've reduced a lot of borrowing and incremental borrowing, which has been taken has come at a lower rate. So it's a combination of multiple factors, which you're seeing in both cost of deposit play as well as cost of fund play.

But what I can tell you is cost of deposit play will continue into the coming quarters because we are, as a bank, we, our sweet spot on deposits is more than one year. So for every month of renewal which comes in for , at least for the next nine to twelve months, we should be able to see some benefit of cost of deposit coming through if you're able to retain the customer.

Understood. Sir, just to go further from a strategic focus standpoint, now most banks have taken rate cuts of 80 to 100 bps in the term deposits. Would you say that we try to match that sort of rate cuts or is it an opportunity for us to increase the rate cuts like 110 or 120 bps? Do you think there is an opportunity for us or it is only possible because it would affect our deposit growth going forward?

I think what we are attempting to do in the bank, and I'm seeing the success of it coming, is to bring in a culture of growth with the constraint of cost, okay? I genuinely believe with the hindsight of Q1 and Q2 that we were giving more than what we need to give for the kind of growth that we need to get. That is true for cost of deposit. That is also true for other operating cost.

So from a cultural perspective, the bank is tightening its belt. You're beginning to see the results of that happening in cost of deposits. You're seeing that in cost of funds. And we've been seeing it in cost of operating the bank, cost to average assets. You see that 5 continuous quarters of one way, one direction movement. So it's a cultural thing that we are attempted.

And as a bank, I think if a bank has to be reckon with, we have to find the ability to find low- cost liabilities. It is time to demonstrate that. And that will have, over a period of time, salutary effect on not only the asset growth, but also on the asset quality.

So cost of deposit is something which we are focused upon. And it doesn't mean that it's mutually exclusive. Lower cost of deposit does not necessarily mean lower growth. And that's a challenge, and our team is bearing the challenge very, very well.

Sir, next one on co-lending, so in our earlier commentary, co-lending book used to be majorly gold loan dominated. Would it be fair to say that it would still be the case now as well? And if you could just give a rough indication of the share of gold loans in our co-lending book? Very high. Upwards of 90%.

Understood. Got it. And sir, lastly, now if I look at the core fee income growth, which earlier used to be equal to a higher than our advances growth, but now it has been trending below advances growth for the last 2 quarters with Q2 we've seen a 14% growth as against advance rate of 19%. So how should we look at this core fee income growth going forward? So should it meet our advances growth, or it should, it would be below our advances growth?

The better way of looking at it would be look at core fee growth histogram, okay? Just see the way the bars are stacking up on core fee income. The INR 158 crores, which we achieved in September 30 is the second best in the last 5 quarters. That's Page Number 33, right? Do you see that? Yes, sir.

Yes. So as, if you look at quarter-by-quarter, if I can see that kind of improvement happening, we're very comfortable with it. I'll just read out to INR 139 crores, INR 141 crores, INR 161 crores, INR 134 crores, INR 158 crores and INR 158 crores is not too far from INR 161 crores anyways. And March is traditionally a very, very good quarter for most banks. And in September, if you can touch INR 158 crores then and it's , that's the way you have to look at it.

I wouldn't correlate non-interest income with asset growth because a substantial chunk of our core fee income comes from third-party distribution, trade fee income, credit, sorry, card fees and of course, processing fee for loans also. So just to pick up one part of the balance sheet and check it may not give you -- may not be the right indicator. What would be the right indicator is look at the core fee income by itself and see how that is progressing.

Understood. But sir. One of the things which you had earlier mentioned was that fee income growth should be higher than our advances growth going forward. It was one area where the bank was lower index as compared to other banks. So ideally, if we have to improve the fee income as a percentage of assets, the fee income growth should be higher than our loan growth.

So that was the whole point of asking the question?

Yes. But what I want to clarify is a significant portion of our fee is coming not from assets. It is coming from branch banking, okay? It is coming from third-party distribution. So it is coming from branch banking, forex. It is coming from our cards, which is DCB Bank Niyo Card, which is being used in multiple countries abroad that nothing to do with assets.

So that is where the core fee income is coming in. And what we're looking at is how do we -- I mean if we keep increasing the core fee income the way we are increasing it currently, it will help us meet the guidance that we set for ourselves for the years -- for the next year and the year after.

Our next question comes from the line of Sanjay from Bastion Research.

Sir, just wanted to know, our cost to average asset has been going down, while in terms of, when we look at cost-to-income ratio, that is not the case. How should one look at that metric? Because in the past, we have guided that it would be also slowing down as well. So how should...

So, let's take it forward, let's take the cost question forward. I would request you to look at the cost-to-income ratio in Q1. It is not there in this investor presentation, but in a laptop, it should be there. It is about 67.8%, okay, in Q1 of last year. That 67.8% has come down to 59.97% in Q1, okay? Right. Right.

So, let's look at the September quarter. It was in 64.23%, it has come down to 61%. So, if you're shaving off 700 basis points in 1 quarter, shaving off another 300 basis points in the next quarter, you're very happy with that kind of shaving off.

Okay. Understood, sir. Sir, my next question would be, we are saying in the last quarter only that we will be targeting INR 3 crores to INR 10 crores SME segment. Just wanted to understand how are we progressing there? What are our strategy on that side? And if you can guide on medium term, what is the percentage of loan book we are targeting on that side? If you can share some things on that side from a longer-term perspective, I'm not asking from a quarter-on-quarter perspective?

I don't know. Maybe first year, we'll lose some INR 200 crores, INR 300 crores. We just test it, see how good it is and then build it up from there on. So for us, we don't want to enter in a big bang, rush in there and then repent in -- at leisure, build it slowly. Like we build the educational institution finance, it's a INR 1,000 crores book, they're doing extremely well. Like we did the gold loan book, right? It's now a INR 3,000 crores book, organic book.

So likewise, we build slowly build the capabilities, get the right kind of people, align the ducks and then results, output will happen. So, get it right, don't get into a , we want to ensure that we get the ingredients right. As a bank, we suffered badly by delving into things like CV, doing hobbies and then getting our hands burned.

So we're not doing it for immediate balance sheet growth purpose. It is to build a franchise, a proposition, which will last for the next decade and more. So maybe INR200 crores, INR300 crores, maybe INR400 crores we'll do in the first year, build upon it, pick and choose. And then maybe in over a 5, 10-year time frame, it will be a very good proposition to have. But over the next one and half years, we will see -- the pie chart will look more or less the same, only in the pie increase.

Okay. Understood, sir. Sir, my another question would be on, as you already highlighted your guidance on slippage side from 2.5% to 2%. And currently, we are hovering around 3%.

Sorry, that's not a guidance. That is an ambition, okay? It's not a guidance. The only guidance I said is that in the year -- in the financial year next year, we want to get to an ROE of 13.5% and then move it to 14.5% the year after. All the rest are ambition, I mean, we'd like to get there.

Yes, incrementally things if we have to look at from that perspective, so incrementally, I'm assuming that the slippages cost would go down. And I'm not saying for a year, within a year, you are saying that for 2.5% or so that number. But incrementally, we are looking reducing quarter-on-quarter basis. That's the point to look at. Is that the right thing to work on?

See, in the overall scheme of things, it's not such a high priority. But within the credit cost environment where we're doing reasonably well on the credit cost, that is one of the priorities.

So from a focus sense, just by getting the slippage down, our credit cost is not going to go down. Okay.

Credit cost will be around the same level only, but opex will go down. But look at opex, I'll tell you where the bigger opex is. The bigger opex is on the people productivity, okay? It is on the new branches that we're putting in. Those are the products we will be focusing our torchlight on.

If the slippage continues to be at 2.5% non-gold, it is an irritant, but it's not a showstopper. As long as the credit costs are low, we are okay with that.

But in terms of, at some point in time, yes, we need to bring it down. But right now, getting the productivity up, the incremental employees that we're going to put up, how well do we get the bang for the buck for those investments that we make of people, that will take over the management's focus and attention in a priority sense more than getting the slippage ratio down because that has, frankly, very little impact on the credit cost.

Our next question comes from Saumil Shah from Paras Investments.

Sir, my question is basically on our capital requirement. So do we require any more Tier 1 or Tier 2 capital in next, say, maybe 1 or 2 years because... No. We don't have to require.

Okay. So we, I mean for the next couple of years, we are not going to raise any capital?

For the rest of this year and the next year, I don't see a reason why we need to raise capital. Okay.

And the raising capital will be dependent on the price movement than on real requirement for capital in that sense. Yes, correct. Because.

When that opportunity arrives at the right kind of price, maybe we'll look at it. But honestly, look, 19% growth in advances and the Tier 1 has increased, right? And then RBI has been kind enough for reducing the risk weights in some of the products that we are , which is significant and big for us. That will also have a positive impact. So why would you dilute it at this point in time?

Yes. Yes. That's why the question was because just management, I mean, we wanted to know the management thought process because to dilute below book value may not be the right time to dilute.

I think dilute at a significant portion above the book value would make sense. Why would you do it at book value also?

Correct, sir. Okay. And sir, for the first half of this year, if I were to look at our advance's growth, so I think it's around 3% to 4% if you compare with March '25 numbers. So how confident are we to cover this in the remaining half of this year? I mean to grow at a 20% yearly run rate, now we really need to gear up for the remaining half of this year. So is it fair to.

So look at IBPC, you look at IBPC number? Okay.

IBPC will come in at some point in time. So, INR 1,585 crores of IBPC is going to come back.

Hopefully, it will come back. If it doesn't come back, we have a different problem, but right? So that is going to come back. And conventional wisdom is that second half of the year is much better for assets as compared to the first half. That's conventional wisdom. I'm not talking from a DCB Bank perspective, but industry -- I mean, all of us are in the industry for long enough, right?

So, second quarter, second half is a better half. There will be a, let me add to the complication that you put in. There will be a reduction possibly or a standstill on the co-lending book because we said they will not go above 15%. So that is also there. So we are comfortable with that. I think there is enough ability in the system to generate anywhere between 18% to 22% on, - for growth going forward.

Okay. So, is it fair to assume that next couple of quarters, we can have 8% to 10% Q-o-Q growth for next two quarters?

See usually, what we do is we comment on three to three and half years of doubling, which translates to about roughly 18% to 22%, okay. That's a band in which we'll move.

Our next question comes from Rakesh Kumar from Valentis Advisors.

Just some questions on co-lending. So I was looking at that incremental credit composition of your co-lending book is around 98% for the first half? Yes.

So like most of the lending on a net basis, net addition to the loan book basis, it is entirely from the co-lending. And you said that it is like 90% or close to that number is the co-lending book is a gold book. Correct.

So, the question, what came to my mind is that if I look at your yield on advances number, like it fell from 11.54% to 11.11%. So, like such falls would not have happened, right? Because there is improvement in the asset quality number, gross slippage number and gold book has, would have supported with a higher yield, our blended yield number. So, 40 bps fall, what does that , like which number would explain that apart from EBLR? Repo rate cut.

Yes. So EBLR is the one reason. So, other than that, should have, like it's fallen so much with total addition of gold book from September to, from March to September?

It would have. See, you've taken a hit of 100 basis points in this six, seven months. That's a lot to take, right? I know it's been compensated by some treasury income, thankfully. But that's a real hard hit to take on the yield front. So that is a real, that is the number one reason.

Number two reason is we still have an MCLR book, okay? Now because our liability team has done a fabulous job of reducing the cost of deposit, straight impact happens on the MCLR book also. So not only does the EBLR come down, MCLR also comes down. And that's good in a way because these are good customers.

We want to keep them at a, even if it's a lower rate, you will be able to hold them for longer. So, on both front, you have taken a hit from a yield perspective, right? So, it's not just EBLR alone.

Our fixed rate book is not too very high. I don't think it's revealed, but it's not very high.

And like I told Mahesh earlier in this call, which I'm sure you are listening to, that every month, there is some bit of previously fixed loan, which becomes floating. While each month volume is very low, over a period of time, that also accumulates. So these are the reasons why you have a , you're taking a yield hit.

And second thing, like in the Slide 22, I was looking at the disbursement trends. So in the gold in the Q1 or maybe in Q2, the way the addition on the net basis has happened because 100% has virtually come from the co-lending and the 90% of it is gold. So why it is not reflecting that kind of disbursement number in the gold in the stack like that you have given for Q1 and Q2?

I'm so sorry, I'm not sure whether I understood you.

No. So, 100 virtually 100% of net addition to loan book has happened from the co-lending, and 90% of it is gold.

So, there is, there are multiple things that have contributed to our asset growth. You're talking about disbursement or are you talking about growth?

Disbursement. I'm talking about disbursement. You're talking about disbursement. Okay.

So, disbursement number, which is given in the slide 22.

Okay. Look, the disbursement is only organic disbursement. That's the reason. Okay. Okay. I understood the question now, sorry.

The only request is that now co-lending book is 16%, and it is now like in the first half, the entire contribution is from the gold co-lending. So just if we can add maybe 1, 2 slides on the co- lending itself, that would give us some more clarity and comfort that what could happen maybe 1 year down the line. So that, some visibility, some understanding.

Maybe if you want to look at Page Number 21 and Row Number 2, it gives you what the co- lending book is and what has grown over the year and over the quarter, right? That shows you where you are. And I don't know whether we have enough time for it, but I'll be very quick on this.

Our co-lending book dramatically dropped in the first half year of last year. That is because one of our partners had an embargo on fresh sourcing. And our book from somewhere around INR 3,000 crores became somewhere around INR 1,200 crores. I'd be slightly wrong in these numbers, but it dramatically dropped.

I'm talking about a 60%, 70%, 80% drop happening because co-lending did not happen at all. It is in Q3 and Q4, it picked up. So, what you're seeing essentially is a base effect. And that base effect is going to go away when you look at the Q3 and Q4 number of this year.

Got it. Okay. And the co-lending book, particularly for gold loan, what would be the yield differential from the blended yield on advances and this book yield on advances?

That's something we don't reveal because we have multiple partners with whom we have different kind of arrangements. So, it may not be a good idea to make that public.

Our next question comes from the line of Gopinadh from PNR Investments.

Sir, we are planning to increase the book by double in three and half years and you are looking at the same time to serve the customers like one-stop shop wherein you can give all the services to the customers, which I assume that it costs a lot to build all those new services that we want to give. Are you giving this guidance of 13.5% ROE and 14.5% by the next year, including those expenses as well, considering them as well as a part of expenditure or...

So, we have a very divergent view from you as far as this is concerned. Our belief is it will dramatically cut down our acquisition cost. It will dramatically reduce our credit cost because these are customers of the bank. We know them. We have a history with them, but we only have one product history of them.

So, our idea is, I'll give you a strawman, okay? This is a person who is a self-employed customer, has a store of his own in one of the streets of Bombay, let's say. And he has a LAP with us a business loan against the collateral of his house. But his operating account is not with us, his , whatever he imports or exports is not done through us.

His fire insurance, burglary insurance, his motor vehicle insurance is not done through us. His wholesalers and the people who supplies to not done through us. The QR code that he uses for swiping the customer's card or for his GPay, PhonePe, etc., are not done through us. His current account is not with us.

We are assuming that we have the capability to provide all these services to that customer because his single biggest asset he owns is mortgaged to us. And we are very, very competitive in all the other things that we just now mentioned. If you get that banking with us from one customer, you will be able to not only get a higher revenue, which is good, but also will be lock in the customer with us for a very, very long period of time.

So, in my opinion, Gopinadh, sir, I think it will reduce the cost and also the operational cost and the credit cost significantly. And the early success that we have proves my point and not yours.

Thank you. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to Mr. Praveen Kutty, Managing Director and CEO, for closing comments.

Thank you for your patience for the questions. I hope you have clarified everything. If you have any questions, feel free to reach out to us or the Investor Relations team. We plan to do an Investor Day on the 14th of November, where if you have any questions based on what we just now spoke about or any other thing which comes in mind, happy to address. And then we're very excited to wait for the next conference call maybe in another 3 months' time. Thank you very much.

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