DCB Bank

DCB Bank reported a steady Q2 FY25, with the balance sheet growing by 19.49% and deposits increasing by 19.86% YoY. Advances growth was similar to the balance sheet. The bank's CASA ratio marginally improved from 25.04% to 25.61%, driven by a strong 27% YoY growth in savings accounts, indicating a strengthening deposit franchise. The top 20 depositors remained stable at 6.89%, similar to 6.88% last year.

Core fee income showed significant quarter-on-quarter growth, rising from Rs. 114 crores in Q1 FY25 to Rs. 139 crores in Q2 FY25. This growth is attributed to increased customer engagement, cross-selling, the beginning of an overdraft strategy, and the activation of a third-party distribution system. Management highlighted that this core fee income growth is repeatable and sustainable, with a target of 1% fee income to average assets in the steady state.

Asset quality continued to improve, with Gross NPA declining from 3.36% to 3.29% and Net NPA shedding 11 bps from 1.28% to 1.17% over the last year. The bank reported a profit in excess of Rs. 155 crores for the quarter. Profitability metrics also saw healthy improvement, with the cost-to-income ratio reducing by almost 3% from 67.8% in Q1 to 64.3% in Q2, and Return on Equity (ROE) increasing from 10.93% in Q1 to 12.65% in Q2.

Net Interest Margin (NIM) declined to 3.27% due to several factors, including one-off^📎 regulatory adjustments in Q1 and Q2, a strategic slowdown in the higher-yield microfinance segment, and opportunistic co-lending activities at lower yields. Management stated that the one-off^📎 impacts are now 'done and dusted' and believes NIM is at its lowest end, with expectations for improvement going forward^⏳, partly from improved yield on advances.

The bank has made substantial investments in technology, upgrading its core banking systems (Finacle, transaction banking, lending, treasury management), SIEM for cyber security, and AML/behavioral biometrics systems over the past 12-18 months. With a current headcount of 11,901 as of September 30th, management expects these investments in people and technology to yield higher organic business and improved efficiency over the next six quarters.

DCB Bank is targeting a full-year Return on Assets (ROA) of 1% for FY26, viewing it as a 'milestone' for future growth. Key to achieving this is improving cost efficiency, with a target to reduce cost to average assets by 10-15 bps in the next 2-3 quarters and ultimately aiming for OPEX as a percentage of average assets to close to 2.6%. The bank also provided a credit cost target of 30-35 bps for its model.

Management acknowledged that mortgage sourcing in 2023 was not of the desired quality, leading to rising GNPAs, and has since implemented changes in LTV and income assessment norms for certain segments. The bank has also proactively slowed down its exposure to the microfinance segment, reducing its contribution from 18% to 16% of the AIB book, prioritizing asset quality over high yield in a challenging environment.