DCB Bank Ltd
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DCB Bank Ltd
NSE:DCBBANK
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Ladies and gentlemen, good day, and welcome to DCB Bank Limited Q2 FY '25 Earnings Conference Call.
Joining us on the call today are Mr. Praveen Kutty, Managing Director and CEO; Mr. Sridhar Seshadri, Whole-Time Director; Mr. Ravi Kumar, Chief Financial Officer; Mr. Ajit Kumar Singh, Chief Investor Relations Officer.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to the management. Thank you, and over to you.
Thank you very much, and good evening, everybody on this call. I want to tell you that we've had a steady quarter 2. Our growth trajectory, both on assets and on liabilities, remains in the same curve. We have grown the balance sheet by 19.49%, similar kind of percentage growth in advances and deposits.
On the deposits front, the growth of 19.86% Y-o-Y has been recorded in reasonably tough times of liquidity, I should say. And what is heartening is this growth is in a scenario where our top 20 depositors remain at a very comfortable 6.89%, very similar to the 6.88% we had last year. So the structure of the deposit franchise remains the same. We continue to look at small ticket, build it the hard way, small brick by brick and then to get the kind of growth which we have achieved in the last 1 year augurs well for the future as well.
Similarly on the advances side also, the ticket size is consistent. In fact, we'll be happy to even increase the ticket size going forward. But it's a very steady growth on advances, deposits and balance sheet.
One of the things I want to tell you is that CASA ratio has marginally improved from 25.04% to about 25.61% in the year. But that may be unremarkable as it is. But what is remarkable is our savings growth. Our savings has grown by 27% year-on-year, clearly showing the effort leading to the desired result.
Another area where I want to highlight is our core fee. I've spoken about engagement as a big idea even in the last quarter. We want to have engagement as a key differentiator from where we were to where we want to be. And that translates to doing products, which are less of fill it, shut it, forget it and more of customer interaction, electronic as well as normal traditional face-to-face. And a big element of that is CASA, specifically savings account and on the asset side, overdraft accounts.
We made a good beginning, and this good beginning has also seen the core fee increasing from INR 114 crores last quarter, which was high in itself for quarter 1 to INR 139 crores in quarter 2. This, along with benign NPA numbers, our gross NPA coming down from 3.36% to 3.29% over the last 1 year. Net NPA shedding 11 bps, 1.28% to 1.17%, has resulted in overall profit of the bank in excess of INR 155 crores.
I want to draw your attention to 2 things here. One is that is on the -- on our area of focus, which is NIM. Our NIM is down to 3.27%, primarily because of 3, 4 elements, some of which are uncontrollable and some of which are controllable. We've had an extension of some of the one-offs, which I said would happen in our Q1 call also where we had to do some reversals. That continued into July. So those one-offs were taken on the NIM. Going forward, those types of one-offs will not happen.
Second is that we kind of foresaw the weakening microfinance environment, and we have gone slow on it. And going slow on microfinance also means that the earnings that you would have got from that book also dropped. It's a high-yield book. So there has been a bit of drop on that count as well.
Thirdly, on the NIM front, we have done some opportunistic co-lending activity during the quarter, which comes at a lower yield, albeit at a lower cost also as compared to our organic business. So some of these activities give us the time to build the kind of structure that we want on a steady-state go-forward basis. And I'm repeating what I told you earlier, to build a strong overdraft proposition, to build a higher ticket size mortgage proposition, marginally higher than what it's currently today within the risk framework that we have. And the third point is, improve the LAP to home loan ratio. We made some strides on it, but there's more way to go. So these are 3 key areas that we are working on. All this gives us the time to build it as we go along.
Our cost to average asset is at 2.75%. So we have put in the people, we have put in the technology, and I'll talk about both. And over the next 6 quarters, we should see the increased sweating of both the people and the technology that we've invested in.
The bank has upgraded Finacle system, the transaction banking system; the lending system, FinnOne; the treasury management system from TCS; the SIEM system for cybersecurity; Compass system for AML; behavioral diametrics. We're putting the hard yards on technology over the last 12 to 18 months, and we'll see the benefit of that on a go-forward basis.
Likewise, we have about 12,000 odd people in the bank currently, 11,910 to be precise as of September 30. And we will see the benefit of that increased manpower resulting in a higher organic business. So I believe that the cost to average assets is more of investment in nature, the benefit of which we will see over the next few quarters. Having said that, it is important to know that the cost income ratio quarter-on-quarter has reduced by almost 3% from 67.8-odd percent to 64.3%.
Net-net, we have had 11 bps improvement in ROA in our journey where the next stop is a yearly ROA of 1%. Our ROE has moved from 10.93% in Q1 to 12.65%. So you're seeing some of the effort converting itself into the result, and we will be able to see more of it in the not-too-distant future.
That's my brief summary, and I look forward to questions and clarifications from my side. Thank you.
[Operator Instructions] The first question is from the line of Dixit Doshi from Whitestone Financial Advisors Private Limited.
So my first question is, you mentioned in the opening remarks that there was some impact due to one-offs in NIM. So if you can broadly touch upon how much impact would that be? And going forward, do you feel that this is almost a bottom of the NIM, and we can see the improvement from here on?
And my second question is regarding the OpEx. So obviously, we are doing investments on the peoples side and as well as technology side, but it has grown almost 26% year-on-year, whereas our top line is growing at 20%. So when do you see that our top line will grow faster than the cost? Or when do you see the cost going up slowly?
Yes. On the first question, let me tell you this, the one-off we had to have was based on a particular RBI circular, and that has been taken into effect fully between quarter 1 and quarter 2. So that is done and dusted. So that impact is not going to happen in the future.
There has also been some structural change which has happened where some part of the P&L interest is now coming in as P&L charges, okay? That's the second component which also has resulted in a slightly higher core fee and a slightly lower NIM. So the second part will continue the way it is. The first part is done and dusted and that's over.
When would you see the OpEx coming down. You've seen some benefit of it coming through on the cost-to-income ratio decrease. What we are working on is to ensure that the incremental manpower that is put in is -- we're sweating it out to ensure that there is better log-in and better conversion to disbursal happening on the ground. We are also working to ensure that the average ticket size, which currently hovers around INR 28 lakhs to INR 30 lakhs is hitched up to between INR 40 lakhs to INR 50 lakhs. So there's work happening on that ground.
And the third item is, if you see the stock of mortgage book that we have, it's almost divided half and half between home loans, which is low yield and LAP, which is higher yield. So that engine is turned, and we're seeing a higher business loan coming through the door. We want to increase that so that the percentage of throughput would see a higher LAP as compared to home loans. So having put all these people in, we will see the benefit, and we're very confident that we'll see the benefit of it coming through in Q3 and Q4.
Okay. And just a follow-up. So historically, we have always maintained that our business model is around 3.65% to 3.75% kind of NIM in the longer run. So due to this change in the P&L interest regulation, do you feel that structurally that range will come down?
Yes. I mean, like I told you, see, you can't charge P&L interest anymore, so it will come as P&L charges. And as and when you collect it, you will get it. So you will have a single-digit bps change happening between NIM and fees.
The next question is from the line of Rohan Mandora from Equirus Securities.
Sir, just on the MFI piece, if you can just let us on, what is your total exposure there?
If you have the investor presentation, then for the benefit of you and all other people in this call, you could go to Page #22. Okay, 16% of the AIB book is MFI plus BC. And that book is 25% of the overall book. So you can do the math here, 16% of 25%. And I'll tell you how to read this. You look at the previous investor presentation, and see what the MFI and BC percentage was, and I'll tell you what it was. It was actually 18%. That 18% has come down to 16% now.
Sure. And just if you can...
So that gives you an idea of what the book was a quarter back and how we have reduced it over a period of time.
Sure. And if you can share the asset quality trends in this book?
Say it again please?
The asset quality trends in this portfolio for us?
If you want to look at the asset quality, you could look at Page #36, no sorry, #26 is it. Sorry, I'm also going to...
Yes, that gives overall AIB, but within that...
So publicly, what we share is what you see in Page #26. So you could possibly see that the momentum change on AIB. So not -- so far INR 322 crores to INR 333 crores, that's not a big movement yet.
Sure. Nothing much in the early delinquencies also. That would be a fair assumption?
See, we are -- look at it this way. We took a call on this pretty much early, right? That's why you're seeing a drop in the pie chart, right? It's not a late movement happening. It also -- and the environment is what it is. So we are also hopeful -- the book size also you've seen how it is. So how material and significant it can be.
Sure. And sir, on this same Slide 26, the mortgages GNPAs have been rising in the last 2 quarters. So what is the reason for this uptick, like, from a customer behavior point?
No. Actually, our sourcing in '23 was not the quality that we aspire for. We have made some changes. And the new vintages are behaving better. But specifically within home loans, the mortgage sourcing in the 12- to 24-month bracket was not the kind of quality that we wanted it to be.
But sir, what are the kind of issues that we are trying to correct in that, just for better understanding. [indiscernible] certain segments of portfolios like CV, gold loans earlier, where we had seen a spike up on NPAs and then normalizing?
So in mortgages, we've made some changes on our LTV and income assessment norms for certain segments. So that change we made about 4 to 5 months back. But the errors that we made earlier will have an impact, and we have to go through it. So there will be a delay, but I don't think there'll be a denial.
Sure. And lastly, sir, on the CEB; commission, exchange and brokerage revenue; the core fee income. What was the contribution from the P&L fees?
Like I said, the person who called earlier, the net structural change between NIM and fee would be single-digit bps. So what used to be P&L interest earlier becoming P&L charges now, which is the incremental change because of the norm. It will be single digit basis points.
The next question is from the line of M.B. Mahesh from Kotak Securities.
Just the first question on the margin side or the NII line side. If you could tell us on a like-to-like basis, how much is the NII kind of growing at adjusting for these P&L interest charges changes?
So Mahesh, there are 4 components to the difference between the NIM of today, of September, and the NIM of, say, March. So there is a P&L interest to P&L charges conversion, which is a single-digit basis point. If you have a reduction in the MFI sourcing, you're getting a much higher yield, which has been compensated for by other products.
The third is, there is an increase in co-lending disbursals, which comes at a lower yield, albeit a lower cost. And the fourth element of the lower NIM was one-offs, which we have taken in quarter 1 and in quarter 2. So these are 4 components which has resulted in the NIM reduction. The last item will not occur in the future going forward. The P&L interest and P&L charges will continue on an ongoing basis that will be on a continuous basis. We don't expect the organic book to pick up at a faster pace than co-lending as we go forward.
Okay. Just to continue on this point. If I look at the interest expense line, that is still kind of growing at a pace much faster than the loan growth, suggesting that the cost of funds is still kind of inching up. Just trying to understand how does this move from here onwards?
Mahesh, I want you to look at cost of deposit page and the cost of funds page. [indiscernible] I can read it out to you. It's on Page #31. This is pretty much in line with the predictions that we made in the previous quarter and also in March that by September, we should be able to see a stabilization. So cost of funds has kind of flattened out at 7.19% coming down to 7.17%, and cost of deposits is 7.10% coming to 7.09%. I don't feel it's falling off. I mean, even now if we were to look at the way the liabilities -- the deposit market is, reduction happening in the cost of deposits. So probably we'll see a longer play of similar lines.
The good news you want to look at it is that it has flattened finally, right? No reason to believe that it will go up also because if you see the kind of growth that we've got in the quarter, it is not -- I mean, it's been 19% based on whatever -- since I have seen, it's at the higher end of growth. So that kind of growth trajectory if you're able to get at a kind of stabilized kind of cost, which is here, you would possibly see the cost of deposits is pretty much at it's peak. Now it's a question of improving the yield to get the NIM back to where it belongs.
Okay. Second question, sir, on the asset quality line. There are a couple of banks and NBFCs who are kind of starting to highlight saying that there is stress now starting to emerge in the SME portfolio as well. Do you kind of concur with this view based on the data that you're seeing? Or you say that, look, it's still too early to say that?
Not really. And I'll tell you why. Look at the collection efficiency chart for bucket 0 and for all buckets put together. That's a very revealing chart. Okay. That is Page #28. [indiscernible] so revealing. You look at bucket 0 behavior. Bucket 0 behavior across the 3 big products -- I mean, I've not included CV, SME in it. But 54% -- maybe 55% of the entire book is there in these 3 lines. And this basically determines our overall performance, right? So bucket 0 performance has been fairly steady. So between 98.9% to 98.5%, you had a deterioration of 4 bps. And in home loans, you have a deterioration of 3 bps. I would tend to take that as business as usual and not as a harbinger of a problem. So we haven't seen that really coming through.
Having said that, if you look at the overall efficiency, you'are seeing that some of the restructured, particularly restructured book has kind of had a problem in September. But I would tend to think of it as a one-off rather than as indicator of things.
Perfect, sir. And this final question on the OpEx line, which is currently running at about slightly higher than 20%. It continues at these levels? Or you think you can extract a little bit here as well?
Are you talking about the OpEx?
OpEx, yes.
OpEx, See, you've seen the cost to income decreasing. The 2.75% is frankly unsustainable. And if you see all our -- most of our efforts are in -- we're thinking it's investment. Time will tell us if it is investment of cost, okay? A lot of work is happening in the bank, and bulk of our focus is going into ensuring that this money that has been put in is giving us outcomes.
The easy thing to do will be to cut the cost. It's really simple to do. It's not very difficult. But that's not the whole idea. I mean, we want to continue growing at this kind of pace for the foreseeable future, but we see a good enough market for it. And the question is, how do you make these guys successful rather than how do we go by the fail fast route.
The next question is from the line of Aditya Khandelwal from Securities Investment Management.
Sir, question on our NIMs. So this quarter, we had an impact of that one-off reversal. But going forward, with increasing share of LAP in our mortgage book and increasing the proportion of OD in case of spreads and the cost of deposits and funds stabilizing for us, would it be fair to say that the NIMs have bottomed out in this quarter and it should be in an improving trajectory going forward?
Yes. I mean, you succinctly put it. Yes, I would have loved to say what you said, right? So the one-offs being gone and some of our execution starting to show results, I strongly believe that we are at the bottom end of the NIM. And cost of deposits is continuing to hold at the current levels, and we don't have any indication to believe whether it is going to go up or go down in the future. It's remaining where it is.
Understood. And sir, second question was on our fee income. So year-on-year, I understand there has been a big jump because of classification from P&L charges and P&L interest. But even on a Q-o-Q basis, the fee income has increased by more than 20%. So if you could just help us understand what has led to this big [Technical Difficulty]?
See, I want you to look at the last 5 continuous quarters of core fee income growth. It is somewhere in this book. It is Page #34, okay. Page #34. Core fee income was INR 107 crores, going to INR 124 crores, to INR 136 crores, to INR 143 crores, to INR 205 crores. Such quarter-on-quarter, for 5 continuous quarters, that kind of rise does not happen by coincidence, okay? It is because of specific actions that we have implemented on the ground, why you're seeing the growth happening on the overall fee line.
On the core fee line also, you see INR 97 crores going to INR 98 crores, going to INR 118 crores. In Q1, which is traditionally a very difficult low-performing quarter, INR 114 crores going to INR 139 crores. So effectively, what has happened is since March, and I can say even since Q4 of last year, we really worked on getting engagement going big time in both assets and liabilities. There was a tendency for the bank to be more -- for want of a better phrase, fill it, shut it, forget it kind of mode with 55% of our book being mortgages, LAP and home loan, where opportunity to interact with customers also is limited and also retail term deposits on the other hand, retail and bulk also for that matter, where interaction with the customer is fairly on the lower side.
But when you're seeing a savings account Y-o-Y with savings growth of 27%, we are seeing the beginnings of the overdraft strategy coming to light. There is far more engagement the bank has with this customer. And one area where it's really seeing the light of the day is in the core fee income. Our ability to cross-sell has improved. Is it where we want it to be? No.
I think there is a further strong long play involved. But we, as in me and the management team, strongly believe that this focus on engagement resulting in products which demand engagement will result not only in the core fee income increasing, but also in terms of better retention and a stronger bond with the bank.
TPD has got a big play in it. We have launched our wealth distribution vertical, still early days. These things have helped the bank get a grip on the fee income. And this is traditional our weak -- it still is an area of improvement for us, honestly, if I were to ask myself and we're making some progress on it.
The next question is from the line of Jai Mundhra from ICICI Securities.
Sir, first on this fee income only. So I mean, the Y-o-Y growth looks very impressive on the core fee side, and it is clearly higher than the loan growth and asset growth. Is there any -- there's no one-off here, right? I mean, there is no one-off and ideally one would expect that fee growth to be higher than asset growth. Is that the way to think about this?
The way to think about it is look at the core fee income growth. That's where you need to focus upon. And that's where we are really, really focusing upon. That is much more repeatable, sustainable linked. There is some core fee income here, which also has some leg on the cost side. And the classic example is something like a processing fee. The volume goes up, the processing fee goes up, but there's a sourcing cost that you have to pay for it. But having said that, I mean, even after taking that into consideration, there has been improvement in the margin between the fee that we get and the cost that we may have to incur on those lines.
But much more importantly, the third-party distribution system is kicking in. I'm repeating, but the wealth distribution setup that we have put up has started to work. The overdraft product that we are looking at -- which brings in slightly higher ticket size by itself. Now one we're looking at slightly higher ticket size, but the INR 30 lakhs going to INR 50 lakhs is frankly a 66% improvement on productivity, where it's very well within the risk framework that we have. So there are multiple things that's happening, which is helping us improve our core fee income. And honestly, yes, you're seeing the result of it, but there is much more to come.
And sir, the SAR growth that we have seen at very impressive, defying the industry growth and even the previous trajectory at our bank. Fair to say that part of this is driven by your differentiated SAR rates or this is something else that you would like to call out?
No, no. Don't be fooled by it. See, our customers are self-employed customers. They are your normal people, the normal retailer, merchants. Those are the kind of customers that we have. We have some unique products whereby the money the proprietor puts in his current account is swept into a savings account. So while the customer is a self-employed customer, he's got a current account, he gets the benefit of moving money into savings account and gaining whatever the savings account rate applicable for his account. So even though we open current accounts, the customer gets some benefit out of it.
For us, yes, it's not a 0% current account, but it's definitely not a high interest TD account as well. So a large proportion of our savings account is coming from these kind of customers. And proprietors don't keep the kind of money that you need to keep in a savings account to get 8%, usually they don't. They use it normally for their transaction purpose rather than for "investment purpose. " It's money on the flow, okay? It is not money which is kept there to earn something. It is -- by the way, while I'm keeping it there, we are earning something. That's the kind of product, and that's the kind of customer base that we have on the savings book.
And sir, on treasury gains, right? So of course, this quarter is very, very strong. Is there any component which is not realized also because now RBI allows you to book notional profit also. I mean, just because the amount is so huge, I just thought of asking.
I do not know whether that is publicly available news or not -- publicly substantiated information or not. But the fact is I wouldn't even look at that INR 205 crores as much as I would look at INR 139 crores because we're looking at repeatable, sustainable kind of growth. And for us, INR 114 crores to INR 139 crores is a good enough indicator of what the potentialities are, and I believe that we could crack it.
On a separate note, I don't know if it's not a UPSI information -- it's not a UPSI information, I'm sure our Investor Relations unit can get back to you with relevant information. So you can drop in a mail, and they can give you further information provided it's publicly available.
Sure, sir. And lastly, sir, is there any update on the promoter institution of $10 million? Any ...
Yes. Okay. Yes, fine. Good that you asked the question. So we are kind of dotting the i's and crossing the t's on that. So there is some documentation which is being asked for. So we're providing all that. So getting that -- we are almost at the tail end of it. While it's not substantial in itself, it is symbolic. So it will be good to see that happening. If you ask me, it will happen in Q3.
[Operator Instructions] The next question is from the line of Gaurav Kochar from Mirae Asset.
Congrats on the quarter. Just a couple of questions to persist on the NIM and the fee because [indiscernible] very strong traction in this quarter. Just to understand a little more, the core fee income to assets is currently at 83 basis points. And you mentioned, I think, some bit of it is also [indiscernible] some shift from the NII line to fee income line. So let's say, now that is structural. And this 83 basis points, what is the, let's say, potential maybe not immediately. And given that second half is typically better for fee income and in the first half, we've done 83. Is there scope to increase this in the second half? And let's say, for FY '26, given that all the structures are in place, can we expect something like 1% core fee income to assets going forward?
Yes. So on the fee front, what I'd like to tell you is that the core fee income which we are seeing is primarily coming from repeatable sources. The only negative to that is that some of them are attached to the costs that we have. So I would tend to think that this is -- on a sustainability scale, this kind of trajectory is possible. We are looking at a full year ROA of 1% in the year '25, '26, okay? That's what we are gunning for.
We have to fix a few things. One was the fee. I think on a steady-state basis, 1% fee is very much possible. And the discounting was 1.23%, which we got now, not for any other reason. But on an overall basis, on a 4 quarterly average basis, 1% I think is very much possible with the franchise that we have.
We have some work to do on the OpEx, and I've talked about it with the earlier callers as well. At 2.75% cost to average assets, it's on the higher side. There definitely is a 10 to 15 bps improvement, which we can see in the next 2, 3 quarters, which we can affect.
The current provision is at 27 bps, may not be the right indicator. We're still getting the benefit of the restructured assets having a higher provision either going away or staying with us, and there's a provision write-back as per the guidelines or becoming NPA and need not having to take the incremental provision or need to have take only the lesser incremental provision as a case maybe. So there is a bit of a tailwind on that. The 30 bps, 35 bps seems like the right thing for the particular model to come through.
NIM at 3.29% is possibly at the lowest end. We probably will not have too many one-offs coming in there. So I think from the 0.93% which we have today of ROA, there is a distinct possibility that we could steadily build up to a 1% ROA. And that's not a milestone in itself. I mean, that's not end of journey by itself. I think that's a way to go, which will take us to our next phase of growth. So that's the way the management team is thinking about the revenue cost and provision dynamics.
And just specifically on the liquidity front. If I look at, the overall balance sheet growth was much higher than loans and deposits growth, which essentially means you have borrowed and kept higher liquidity on the balance sheet. So just wanted to understand, is it because of the revised LCR loans? Or is it more of an opportunistically some treasury action that you would have done in this quarter? [indiscernible].
I want you to look at the cost of funds, okay? Cost of funds went up from 7.14% to 7.19% not in the current period. I want you to look at the previous period. Between Q4 '24 and Q1 '25, the cost of funds went up from 7.14% to 7.19%, Page #31. Can you see that?
Yes. Yes.
So that's a 5 bps increase. What is the cost of deposit increase by during the same period? 2 bps, 7.08% going to 7.10%. Do you see that?
Yes.
So what does it indicate? It indicates that while the cost of deposits was increasing at a lower rate, the cost of funds was increasing at a higher rate. What is the difference between cost of funds and cost of deposits? It primarily is borrowing. So what we did is we went back and reworked our borrowing strategy and ensured that the cost of funds are more or less in line with the direction the cost of deposit takes, which is why you're seeing a correlated movement of cost of funds and cost of deposits happening in this quarter, 7.19% coming to 7.17% and 7.10% coming to 7.09%.
That is -- so we've worked on the borrowings. We have worked on the refinance. We've tried to ensure that the overall cost of funds of the bank decreases. So we've done multiple things on this front. We've also done some short-term CDs to match with the short-term assets that we have. So we're looking at from an integrated perspective to bring the overall cost down. And more of it will be coming in the future anyways.
Sure, sir. Perfect. And just last question, if I can squeeze in. The current quarter, while you indicated that these are probably bottom margins at 3.27%, and you mentioned in the presentation that the business model is designed for a [ 365, 375 ] basis point kind of steady-state margin. I know the situation is a little more challenging on the macro front. You have to slow down on MFI, et cetera, which is leading to some compression. But by when do you expect to see the normalized NIM fraction? Is it -- I mean expectation, not a guidance for sure. Expectation, is it like 4Q when you start to see that margin to move towards that 3.65%, 3.75% band?
See, there are 2 things which is very important for you to know. One is that for the foreseeable future, the structural movement from NIM to fee of P&L charges is a given, and it's not going to come back. It's very unlikely it will come back. That's one.
Number two, the MFI environment, I would tend to presume, will take a year at least to get back to normal. I could be wrong, okay? But that's just rather an uneducated guess. So there are 2 elements. That being the way it is, I don't see ourselves rushing headlong into high-yield MFI assets, which we would have otherwise done. So that would be a no-go area. And whatever microfinance or similar kind of loans that we'll be doing will be to meet our small pharma, marginal pharma target or the agri PSL target if we so desire. At the current moment, we have met all these subsegmental PSL numbers, right?
So there will be an impact on yield because of these 2 particular reasons, but it's better to take a yield hit than take an NPA hit, obviously, goes without saying, right? So -- but on the other side, what you're really asking us is, how quickly can you ramp up the LAP as compared to home loan? How quickly can we get the overdraft over threads engine working. Believe me, we are working as hard as possible, as quickly as possible to make those changes happen. That's very integral part of our action plan to make the next full financial year average 1% ROA year.
[Operator Instructions] We'll move to the next question, which is from the line of Rakesh Kumar from B&K Securities.
So sir, one question was pertaining to the Slide #11. The margin guidance that we have is around 40 bps higher. And if you look at this -- the ROA number is increasing by around 7 bps as we are guiding. So what is happening in between. So are we expecting that like -- because cost to asset number also, if you look at, like it is kind of falling by around 25 bps approximately. So if you can just -- briefly if you can take us through this margin movement to this ROA movement. So...
Okay. So you're talking about the journey towards a 1% ROA.
Yes. So basically, the increase in margin that we are looking at is around 40 bps from the current quarter. And the ROA movement is that we are looking at around 7 bps. So in between like what is changing so much?
So there are 2 ways of looking at it, okay? I'll explain to you in 2 ways. So one is, the ROA for this quarter is 93 bps, correct? So that is 7 bps short of 1% ROA. That if you convert it into a PBT is 9.46 bps before tax. Right, so far?
Correct, sir.
So as a management unit, we have to find somewhere close to 10 bps across 4 different lines, right? I still want to say that the 27 bps of credit cost [indiscernible] would go to 30, because that's what the model is about, between 30 and 25 is where the model is about.
On the cost side, 2.75%, it's only a matter of time before you see it coming down, okay? There is a bit of slack there. It's an investment for the future. If it doesn't happen, we have the liberty to cut the cost. It's not like a sunk cost, which kind of hangs around on the neck. So there is an ability for us to move it. That will be a last ever option. I mean, I really wish we wouldn't come to the cost at all.
Our idea is the investments that we have made in people succeed and we make it happen. And that's the way to build the business, and we are reasonably confident about that.
These kind of one-off windfalls plus the momentum that we had in this quarter, that gives us the time to rebuild the proposition, like I told others also before, of our OD proposition, of our LAP to HL proportion, of a higher ticket size proposition within the framework, right? This gives you time to build that up. That's a cost that we are incurring. So once we get that moving, you will see the 10 bps can come practically entirely from the cost to average assets reduction. But the other way of looking at it is that if we go with a -- is so far okay, before I go into the [Technical Difficulty].
The second way of looking at it is we look at a 3.4% NIM to total assets, not average assets, consistent fee income of 1.1%. You would reach possibly somewhere around 4.5%. Cost to average assets of about 2.60%. You would land up with something like 1.9%. Take a slightly exaggerated provision of 45 bps. You come to 1.45%. And if you reduce the tax, you'll be somewhere between [ 105 to 108 ], somewhere around there, okay? And these are, in my mind, achievable. The NIM movement just by passage of time and some of the actions that come into execution mode will help us reach there.
The key to achieving all this is, in my mind, getting the OpEx as a percentage of average assets to close to 2.6%, and that's what the management team is focused upon, really, really working upon it to improve the efficiency and output with the same number of people. And if that works, then we would probably require very, very little investments of manpower in the time leading up to the next year.
Okay. So sir, just one last question. This was pertaining to credit yield thing. So credit yield number that has come down to 11.4%. So I don't know if I have missed it, had you given the reason? What was the reason for the fall in the same?
So the NIM reduction is primarily because of the yield advance reduction. It's entirely that. So you see the cost of funds has stabilized. It's actually not just flattened, it's come down slightly, but leave it as it is. The yield and advance reduction is primarily on account of the one-offs, primarily on account of the movement from P&L interest to P&L charge, primarily on account of being conservative on the MFI portfolio much before the smoke started turning out into fire in certain areas, at least, if not all. So that's the impact on the yield on advances.
So the way forward, and I was telling some other caller also, is that the improvement in NIM will come from improvement in the yield on advances.
Understood. And that one-off [indiscernible] is contributing how much to that fall?
Individual case, region-wise split, I don't think we'll be able to give. But these are 4 items. We are aware of it and we are working on it. So that's where it is. But what we are working on is to ensure that the yellow bar next time around is at a higher level.
The next question is from the line of Kartik Solanki from Elara Capital.
Sir, my question is on the lines of net interest margin. You had earlier stated to one of the questions that it is due to a one-off in quarter 1 and quarter 2. So can you just throw some light on the same?
So Reserve Bank of India had sent a communication to banks, I think banks and NBFCs, I could be wrong, but definitely to banks, where interest charged to customers, okay, to customers who have taken loans should start from the time the demand draft was handed over to customers. So there are many cases where the demand drafts were made and customer, for whatever reason, the home loan agreement not coming into play, the seller traveling, a variety of avoidable and unavoidable leases, did not take handover of the demand drafts. And I understand completely where the Central Bank is coming from because the draft is with the bank, the funds are with the bank, even though the capital is allocated to it. The funds are with the bank. And therefore, the directive was, you can start charging the customer only from the time the demand draft is handed over.
So that we fixed it in middle of Q2. So from April 29 to middle of Q2, the bank took a hit. And rightfully so, because it's more customer-friendly in that perspective, and I understand that, and I also advocate the same, right? So that's the right thing to do. But the fact is that it did take a P&L line.
Sir, if possible, could you please...
I think NBFCs also, but banks definitely, I can tell you.
And sir, if possible, can you please like quantify the bps impact if you have that number handy?
First of all, we did not communicate that. So it is not publicly available. But what is publicly available is that, that issue is a nonstarter now. It doesn't exist now.
Okay. And sir, this -- the ROA target of 1%, which you gave a clear ROA tree as well...
[indiscernible] rather than a target, Kartik. Yes, it's a pit stop before we start our next journey.
Okay. So this 1% ROA is like factoring any rate cuts or without factoring?
No, I'm seeing it the way it is because if you were to factor in with multiple things, then what's the point in committing, right? So effectively, we have to manage it. Environmentally, there will be some tailwinds, headwinds coming in. So some are unavoidable, some are avoidable. But I think we'll have to overmanage that.
The next question is from the line of Rishikesh from RoboCapital.
Sir, my first question is the Q-o-Q INR 60 crore growth in the fee income. Can you provide a broad breakup, where is that coming from?
It's coming from 2 separate items. One is the core fee income and others. So if you look at commission exchange and brokerage in Page #34. You see -- it's a steady kind of growth. Have a look at the commission, exchange and brokage. Are you there? Sorry, Page #37. INR 97 crores going to INR 98 crores going to INR 118 crores going to INR 114 crores going to INR 139 crores. Do you see that?
Yes.
So that's the kind of quarter-on-quarter growth that we have managed. This is the core fee income that you see there. The profitable sale of investment was INR 52 crore benefit that we got, which is in the second line, and there were some exchange transactions and others.
So the big mover here is the commission, exchange and brokerage of INR 139 crores. And that's what we are looking at from a repeatability and sustainability perspective. Profitable sale of investment happens when opportunities arise, so does exchange transactions.
So most of the incremental is coming from sale of investment, right?
You can see that. We used to get somewhere in the teens, 14%, 11%, 17%, that's gone up to 52% last quarter.
Got it.
But what we are happy with is the sustainable first line, not that we are happy with the second. But definitely, the kind of growth that we achieved on the earlier line is what we are trying to sustain going forward.
Got it. Also on the cost-to-income part, could you guide for coming quarters, Q3, Q4, what cost to income do we foresee?
Actually, not for quarter 3 and quarter 4, but for the next full year what we want to be is around 2.6%, right? And I think it's achievable, 15 bps reduction from today on cost to average assets, I think it is well within our grasp. And I was not going to dodge Q3, Q4. The reason I was talking about the 4 quarters of next financial year is because whether there is a cost of investment, all of us will get to know soon. We are very confident that this is an investment -- that this investment in mainly in people and also in technology, not to forget the fact that we have upgraded 3 out of the 4 core banking systems. We've upgraded our AML system. We have upgraded our behavioral biometric fraud detection system. We have upgraded our SCM system, right? Leaving all this side, I think on the people front, the investment that we've made, we're beginning to see the benefit of that.
Hopefully, Q3 and Q4 will enhance that, and that will result in us getting to the 2.6% average on a full year basis, April to March next year.
Okay. Also, if you could share what is the home loan and LAP mix currently?
On the stock, 50-50. On the incremental, we are trying to ensure that the BL is more than the HL, and that has turned around.
Okay. Could you share any targets that we have for the target mix?
We don't have a target mix as such. Like I told you, the NIM is where it is currently. In our view, it can only go up, and we're working hard on that by multiplicity of ways, one of which is by focusing on high-yielding product. Having said that, in the same breath, let me tell you, the management team here took a collective call not to do high-yield microfinance business pretty much early in quarter 2, pretty much early. And you can see that from an 18% contribution, that has come down to 16%. So we're not averse to taking a hit on growth if we believe that that's not the right way to grow the top line.
The next question is from the line of Nitin Aggarwal from Motilal Oswal.
And congrats on a good result. One question on the loan growth. We have been now consistently delivering healthy loan growth, 20% is what we are looking at sustainably. But this quarter, there is a pickup in certain product lines where we were not growing as much [indiscernible]. In fact, they were on a decline earlier.
Sorry, say the last sentence again?
So certain segments, which we are declining earlier, there has been a sharp pickup in the disbursement growth in those products, like especially if you look at the CV, the corporate, there is a -- sequentially, there's a strong pickup on disbursement. And so how are we looking at this [indiscernible] to overall loan mix going into the next year?
First of all, I want to tell you, Nitin, that our corporate book has declined and has not grown, okay? So it is not as if, one second, let me see the same graph that you're seeing.
No. I'm just talking about the [indiscernible]...
If I remember right, INR 100 crores less than what we started the year with.
So I'll just quote, the disbursement number was like INR 475 crores in the previous quarter, which is now INR 634 crores this quarter, like 30% plus jump on a sequential basis.
What I would suggest is look at the overall pie chart on Page #21 and compare it with the pie chart of last quarter. You would see that the profit banking book in Q1 is less -- I mean, Q2 is definitely less than March, if I'm not mistaken. Yes, right. In absolute terms, I know the number, it's about INR 100 crores less than what we started off the year with. So yes, maybe more disbursement happened, must be short-term loans, right? Must be short-term loans that have been given. But otherwise, no change in strategy. We are very much -- it will hover around there and thereabouts around this [indiscernible]. Yes. In fact, less than March.
Okay. And likewise, in CV also, that was more of a defocused product. And this quarter, that has shown some pickup. So how are we looking at this segment now?
So there are -- these are more of the opportunistic lending given to certain existing CV customers because one of the things that we found out, which should have been apparent earlier, is that the performance of the book improved significantly if we were to keep it going. So it's a small book. We will keep it going. I don't see that rapidly increasing. It's not like a target segment in itself. But the real movement is getting your mortgage and OD. That SME book, which you see there, frankly, we are trying to convert it into a full overdraft product, a full engagement product, which will -- similar to what we spoke about earlier also, converting that to the complete branch-led digital-led engagement process.
Okay. Okay. Sure. And secondly, on margins now, as the rate cycle turns in the coming quarters, how do you see the trajectory moving into the 1H? What sort of pricing power are you looking at in the sort of a risk-averse environment? And how much downside risk do you see further to the NIM?
See, on the -- I don't see a downward risk happening because cost of funds is -- see, the deposit market continues to be challenging like it has been for the last 6 months. So when it's challenging that way, it is very unlikely that you will have a yield drop happening on any of these products, very, very unlikely. But like MFI, for example, we have budgeted for something much more. That's not going to happen for obvious reasons, right? So that will get compensated by some other secured products, which will not give you a similar kind of yield. So that kind of dampening will happen.
But much more importantly, the productivity that we will have of secured lending products like SME and LAP and even home loans will more than compensate for the rate drop in specific portfolios, which we will not be really going after hard. So some interruptions, I think NIM is at one of the lowest, which we can foresee.
Okay. Okay. That's interesting.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you for your patience. It's been late in the evening. Good thought-provoking questions. I hope you've got answers for that. If you haven't, please send an e-mail to our Investor Relations team. They'll be more than happy to respond to your queries. And I look forward to meeting you again or speaking to you again in Q3, yes? Thank you very much. We can close this call operator.
Thank you. On behalf of DCB Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.