DCB Bank Limited (NSE: DCBBANK) Q2 2025 Earnings Call dated Oct. 24, 2024
Corporate Participants:
Praveen Kutty — Managing Director and Chief Executive Officer
Analysts:
Dixit Doshi — Analyst
Rohan Mandora — Analyst
M.B. Mahesh — Analyst
Aditya Khandelwal — Analyst
Jai Mundhra — Analyst
Gaurav Kochar — Analyst
Rakesh Kumar — Analyst
Kartik Solanki — Analyst
Rishikesh Oza — Analyst
Nitin Aggarwal — Analyst
Presentation:
Operator
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.
Praveen Kutty — Managing Director and Chief Executive Officer
Thank you very much, and good evening, everybody in this call. I want to tell you that we’ve had a steady quarter two. Our growth trajectory, both on assets and on liabilities remain in the same curve. We have grown the balance sheet by 19.49%, similar kind of percentage growth in advances and deposits. On the deposit front, the growth of 19.86% Y-o-Y has been — we got it 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 of which we have achieved in the last one year is — all goes 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 our 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 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 [Indecipherable] 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 INR114 crores last quarter, which was high in itself for quarter one to INR139 crores in quarter two. This, along with benign NPA numbers, our gross NPA coming down from 3.36% to 3.29% over the last one year, net NPA shedding 11 bps, 1.28% to 1.17%, has resulted in overall profit of the bank or in excess of INR155 crores.
I want to draw your attention to two things here. One is that is on our area of focus, which is NIM. Our NIM is down to 3.27%, and primarily because of three, four elements, some which are uncontrollable and some 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 we have 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 a lower cost also as compared to our organic business. So some of these activities give us time to build the kind of structure that we want on a steady-state go-forward basis, and I’m repeating what it told you earlier, to build a strong overdraft proposition, to build a higher ticket size mortgage proposition, marginally higher than what is 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 three 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 are put in the people, we have put in the technology, and I’ll talk about both. Over the next six 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 FinOne, the treasury management system from TCS, the SIEM system for cybersecurity, Compass system for AML, behavioral biometrics, we’ve put in 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, 11,901 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 asset 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% or to 64.3%.
Net-net, we have had 11 bps improvement in ROE in our journey towards — a 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 into 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 clarification from your side. Thank you.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Dixit Doshi from Whitestone Financial Advisors Private Limited. Please go ahead.
Dixit Doshi
Yeah, thanks for the opportunity. So my first question is, you mentioned in the opening remarks that there was some impact due to one-offs in the 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 people 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?
Praveen Kutty
Yes. On the first question, let me tell you this, the one-off we had to have was based on RBI circular, and that has been taken into effect fully between quarter one and quarter two. 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 penal interest is now coming in as penal 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, 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 login and better conversion to disbursal happening on the ground. We are also working to ensure that this — the average ticket size, which currently hovers around INR28 lakhs to INR30 lakhs is hitched up to — between INR40 lakhs to INR50 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 you’re seeing a higher business loan coming through the door. We want to increase that sort of 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.
Dixit Doshi
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 penal interest regulation, do you feel that structurally that range will come down?
Praveen Kutty
Yeah. I mean, if you can’t charge penal interest anymore, so it will come as penal charges. And as and when we collect it, we will get it. So you will have a single-digit bps change happening between NIM and fees.
Dixit Doshi
Okay, that’s it from my side. Thank you.
Praveen Kutty
Thank you.
Operator
Thank you. The next question is from the line of Rohan Mandora from Equirus Securities. Please go ahead.
Rohan Mandora
Good evening, thanks for the opportunity. Sir, just on the MFI fee, if you can just let us on what is your total exposure there?
Praveen Kutty
If you have the investor presentation, and for the benefit of you and all other people in this call, you could go to Page number 22. 16% of the AIB book is MFI plus BC, and that book is 25% of the overall book. You can do the math yourself, 16% and 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 is actually 18%, that 18% has come down to 16% now.
Rohan Mandora
Sure. And just if you can…
Praveen Kutty
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.
Rohan Mandora
Sure. And if you can share the asset quality trends in this book?
Praveen Kutty
Say it again please?
Rohan Mandora
On the asset quality change in this portfolio for us?
Praveen Kutty
If you want to look at asset quality, you could look at Page number 36 [Phonetic].
Rohan Mandora
Yeah, 32 is overall AIB, but within that…
Praveen Kutty
So publicly what we share is what you see in Page number 26. So you could possibly see that the momentum change on AIB. So far 3.22 to 3.33 [Phonetic] that’s not a big movement yet.
Rohan Mandora
Sure. Nothing much in the early delinquencies also? That would be a fair assumption?
Praveen Kutty
Look at it this way. We took the call on this pretty much early. That’s why you’re seeing a drop in the pie chart, right, it’s not a late movement happening. 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.
Rohan Mandora
Sure. And sir, on the same Slide 26, the mortgages GNPA have been rising in the last two quarters. So what is the reason for this uptick from a customer behavior point of view?
Praveen Kutty
Actually, our sourcing in ’23 was not the level that we — 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 months bracket, it was not the kind of quality that we wanted it to be.
Rohan Mandora
But sir, what were the kind of issues that we are trying to correct in that, just to get an understanding, [Speech Overlap] certain segments of portfolios like CV gold loans earlier, we had seen a spike up on NPAs and then normalizing?
Praveen Kutty
So in mortgages, we’ve had — we’ve made some changes on our LTV and income assessment norms for certain segments. So that change we made about four to five months back. But the errors that we made earlier will have an impact, and we’ll have to go through it. So there will be a delay, but I don’t think there’ll be a denial.
Rohan Mandora
Sure. And lastly, sir, on the CV commission exchange and brokerage revenue, the core fee income, [Speech Overlap] the contribution from the penal fees?
Praveen Kutty
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 penal interest earlier becoming penal charges now, which is an incremental change because of the norm, will be single-digit basis points.
Rohan Mandora
Sure, thanks.
Praveen Kutty
Yeah.
Operator
Thank you. The next question is from the line of M.B. Mahesh from Kotak Securities. Please go ahead.
M.B. Mahesh
Praveen, just a 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 penal interest charge changes?
Praveen Kutty
So Mahesh, there are four components to the difference between the NIM of today — of September and the NIM of say, March. So there is a penal interest to penal charges conversion, which is single-digit basis point. You have a reduction in the MFI sourcing, which is we’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 one and in quarter two. So these are four components which has resulted in the NIM reduction. The last item will not occur in the future going forward. The penal interest, penal 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.
M.B. Mahesh
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 — how does this move from here onwards?
Praveen Kutty
Mahesh, I wanted to look at a cost of deposit page, and the cost of funds page, or I can read it out to you. It’s on Page number 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 fund is kind of flattened out at 7.19% coming out of at 7.17%, and cost on deposit is 7.10% coming to 7.09%. I don’t see this falling off. I mean even now if you were to look at the way the liabilities, the deposit market is, reduction happening in the cost of deposit. [Speech Overlap] see a longer play of similar line.
The good news you want to look at it is that it is flattened finally. Reason to believe that it will go up also, because if you see the kind of growth that we got in the quarter, it is not — I mean it’s been 19% based on whatever I have seen, it’s at the higher end of growth. So that kind of growth trajectory, if you can — if you’re able to get at the kind of stabilized kind of cost which is here, you would possibly see — the cost of deposit 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.
M.B. Mahesh
Okay. Second question, sir, on the asset quality line, there are a couple of banks who — 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?
Praveen Kutty
Not really, and I’ll tell you why. Look at the collection efficiency chart for bucket zero and for all buckets put together. That’s a very revealing chart. Okay. That is Page number 28. I’ll tell you why it’s revealing. You look at bucket zero behavior. Bucket zero behavior across the three big products, I mean, I’ve not included CV, SME in it, but 54%, maybe 55% of the entire book is there in these three lines. And this is basically — this basically determines our overall performance, right? So bucket zero 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, we 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 as indicator of things.
M.B. Mahesh
Perfect, sir. And the 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?
Praveen Kutty
Are you talking about the opex?
M.B. Mahesh
Opex, yes.
Praveen Kutty
See, you’ve seen the cost to income decreasing. The 2.75% [Phonetic] 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 is it investment or cost, okay? A lot of work is happening in the bank, and bulk of our focus is going into ensuring that there’s 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 sail fast route.
M.B. Mahesh
Perfect, sir. Thank you.
Praveen Kutty
Thanks, Mahesh.
Operator
Thank you. The next question is from the line of Aditya Khandelwal from Securities Investment Management. Please go ahead.
Aditya Khandelwal
[Speech Overlap] Hi sir, thanks for the opportunity. Sir, I have 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 place of threads [Phonetic], and with the cost of deposits and find stabilizing for us, would it be fair to say that the NIMs have bottomed out in this quarter, should be in an improving trajectory going forward?
Praveen Kutty
Yes, you succinctly put it, yes. I would like to say what you said. So the one-offs being gone and some of our execution starting to show results, there is — I mean — 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.
Aditya Khandelwal
Understood. And sir, second question was on the fee income. So year-on-year, I understand there has been a big jump because of classification from penal charge and penal interest, but even on a Q-o-Q basis, the fee income has increased by more than 20%, so if you could just understand what has led to this big [Technical Issues]?
Praveen Kutty
See, I wanted to look at the last five continuous quarters of core fee income growth. It is somewhere in this book, it is Page number 34. Core fee income was INR107 crores, going up to INR124 crores, to INR136 crores, to INR143 crores, to INR205 crores. Such quarter-on-quarter for five 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 INR97 crores going to INR98 crores, going to INR118 crores in Q1, which is traditionally a very difficult low-performing quarter, INR114 crores going to INR139 crores. So effectively what has happened is, since March, and I can’t 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 in — for want of a better phrase, fill it, shut it, and forget it kind of mode with 55% of our book being mortgages, LAP and home loan, where opportunity to interact to customers also is limited, and also retail term deposits on the other hand, retail and bulk also for the matter, where interaction with the customer is fairly on the lower side.
But when you’re seeing a savings account Y-o-Y, saving growth of 27%, we are seeing the beginnings of the overdraft strategy coming to light. There is far more engagement the bank has with its 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 we, 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 management — wealth distribution, not management — wealth distribution vertical, still early days. These things have helped the bank get a better — get a grip on the fee income. And this is traditionally — is still is an area of improvement for us, honestly, if I were to ask myself, and we’re making some progress on it.
Operator
Thank you. The next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.
Jai Mundhra
Hi, good evening. 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?
Praveen Kutty
The way to think about it is, look at the core fee income growth. That is — 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 in. There are some costs — 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, your processing fee goes up, but there’s a sourcing cost that you had to pay for it. But having said that, I mean, even after [Indecipherable], 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 — we have — we are looking at — which brings in slightly higher ticket size by itself. The one we are looking at is slightly higher, because it — but look, INR30 lakhs going to INR50 lakhs is frankly a 66% improvement on productivity, where it is 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.
Jai Mundhra
And sir, the SAR [Phonetic] growth that we have seen at very impressive defining the industry growth and even the previous trajectory at our bank, where to say that this is — part of this is driven by your differentiated SAR rates, or this is something else that you would like to [Speech Overlap]?
Praveen Kutty
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 customer puts in — a proprietary puts in a 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 a 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 benefit — 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%. That’s usually they don’t. They use it normally for their transaction purpose rather than for “investment purpose”. It’s money on the flow, okay, there’s not money which has kept there to earn something. 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.
Jai Mundhra
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 a notional profit also, I mean, just because the amount is so huge, I thought of asking?
Praveen Kutty
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 INR205 crores as much as I would look at INR139 crores, because you’re looking at repeatable, sustainable kind of growth. And for us, INR114 crore to INR139 crore 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, I’m sure our investor relationship unit can get back to you with relevant information. So you can drop in the mail, and they can give you further information provided it’s publicly available.
Jai Mundhra
And lastly sir, is there any update on the promoter institution of $10 million?
Praveen Kutty
Yes. Okay. Yes, fine. It’s good that you asked the question. So we are kind of dotting the I and crossing the T on that. So there is some documentation, which has been asked for where we’re providing all that. So getting that look — we are almost at the tail end effect. 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.
Jai Mundhra
Thank you, and all the very best.
Praveen Kutty
Thank you very much, Jai.
Operator
Thank you. [Operator Instructions] The next question is from the line of Gaurav Kochar from Mirae Assets. Please go ahead.
Gaurav Kochar
Yeah, hi, good evening team. Thank you for taking my questions.
Praveen Kutty
Hi, how are you doing?
Gaurav Kochar
I’m good, I’m good. Congrats on the quarter. Just a couple of questions to focus on the NIM fee [Phonetic] because a 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 — some shift from the NII line to the fee income line. So let’s say now better structure, and the 83 basis points, what is the, let’s say, potential maybe not immediately, and given the second half is typically better for fee income, and in the first half we’ve done 83 basis points, is there scope to increase this in the second half? And let’s say, for FY ’26, given that all the structures have increased, can we expect something like 1% in core fee income to assets going forward?
Praveen Kutty
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 is — one was a fee. I think on a steady-state basis, a 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 four quarterly average basis 1% I think is very much possible with the franchise that we have.
We would — we have some work to do on the opex, and I’ve talked about it in the earlier calls as well. At 2.75% cost to average assets, it’s on the higher side. That definitely is a 10 to 15 bps improvement, which we can see in the next two, three 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 a 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 have — will not have any 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 an end of journey by itself. I think that’s a way to go, and which will take us to our next phase of growth. So that’s the way the management team is thinking about the revenue cost provision dynamics.
Gaurav Kochar
Sure, thanks for the answer. And just specifically on the liquidity, the overall balance sheet growth was much higher than loans and deposit growth, which essentially we have borrowed and kept higher liquidity on the balance sheet. So just wanted to understand, is it because of the revised [Indecipherable] loans? Or is it more of an opportunistically some treasury actions that you would have done in this quarter [Speech Overlap]?
Praveen Kutty
I wanted to look at the cost of funds, okay. Your cost of funds went up from 7.14% to 7.19% not in the current period. I want 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 number 31. Can you see that?
Gaurav Kochar
Yes. Yes.
Praveen Kutty
So that’s a 5 bps increase. What is the cost of deposit increase during the same period? 2 bps, 7.08% going to 7.10%. Do you see that?
Gaurav Kochar
Yeah.
Praveen Kutty
So what does it indicate? It indicates that, while the cost of deposit was increasing at a lower rate, the cost of fund was increasing at a higher rate. What is there — 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 deposit happening in this quarter, 7.19% coming to 7.17%, and 7.10% coming to 7.09%.
So that is — so we’ve worked on the borrowings, we’ve worked on the refinance, we’re 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 CDs — short-term CDs to match with the short-term assets that we have. So we’re looking to an integrated perspective to bring the overall cost down, and more of it will be coming in the future anyways.
Gaurav Kochar
Sure. Perfect. And just last question, if I can squeeze in. The 7% [Phonetic] while you indicated that — these are probably the bottom margins [Indecipherable]. And you mentioned in the presentation that the business model is designed for a [Indecipherable] steady-state margin. I know the situation is a little more challenged on the [Indecipherable] to slow down on NFI, etc., which is leading to some compression. But — by when do you expect to see the normalized NIM fraction? Is it an — expectation not a guidance for sure, expectation [Technical Issues] start to see that margin to move towards that 3.65% to 3.75% band?
Praveen Kutty
See, there are two things which is very important for you to know. One is that, for the foreseeable future, the structural movement from NIM to fee of penal charges, is given, and it’s not going to come back. It’s very unlikely it will come. 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 an educated — rather an uneducated guess. So there are two 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 sub-segmental PSL numbers.
So there will be an impact on yield because of these two particular reasons, but it’s better take a yield hit than take a NPA hit, obviously, goes largely. 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 you me, we are working as hard as possible as quickly as possible to make those changes happen. That’s a very integral part of our action plan to make the next full financial year average 1% ROA year.
Gaurav Kochar
Sure. Perfect. Congrats on the quarter again to the team and all the best.
Praveen Kutty
Thank you.
Operator
Thank you. [Operator Instructions] We’ll move to the next question, which is from the line of Rakesh Kumar from B&K Securities. Please go ahead. Rakesh Kumar please go ahead with your question, your line is unmuted.
Rakesh Kumar
Yeah. Can you hear me?
Praveen Kutty
Yeah, of course. How are you doing?
Rakesh Kumar
I’m fine sir, thanks. How are you?
Praveen Kutty
Not bad.
Rakesh Kumar
Results are showing that. Good results. So sir, one question was pertaining to the Slide number 11, the margin guidance that we have is around 40 bps higher. And if you look at — like if you look at — the ROA number like 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 like 25 bps approximately. So if you can just — briefly if you can take us through like this margin movement to this ROA movement. So…
Praveen Kutty
Okay. So you’re talking about the journey towards a 1% ROA?
Rakesh Kumar
Yes. So basically, the increase in margin is that we are looking at is around 40 bps from the current quarter, and the ROA movement is that we are looking at around 70 bps. So in between like what is changing so much?
Praveen Kutty
So there are two ways of looking at that. Okay. I’ll explain to you in two 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?
Rakesh Kumar
Correct, sir.
Praveen Kutty
As a management unit, we have to find somewhere close to 10 bps across four different lines, right? I still want to say that the 27 bps of credit cost, we would go to 30 bps, because that’s what the model is about, between 30 bps and 25 bps is where the model is about.
On the cost side, 2.75%, it’s only a matter of time before we 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 hands 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 past at all.
Our idea is the investments that we have made in people, succeed, and we make it — 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 the higher ticket size proposition, within the framework. This is your 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-income — cost-to-average assets in production. But the other way of looking at it is that, if we go with a — so far okay, before I go into the [Speech Overlap].
The second way of looking at it is, if you look at our 3.4% NIM to total assets, not average assets, consistent fee income of 1.1%, you would reach possibly somewhere around 4%, 4.5%, cost to average assets of about 2.60%, it would land up at something like 1.9%, take a slightly exaggerated provision of 45 bps, you come to 1.45%. And if you reduce your tax, you’ll be somewhere between 1.05% to 1.08%, somewhere around there. These are, in my mind, achievable. The NIM movement, some — 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 year — in the time leading up to the next year.
Rakesh Kumar
Okay. So sir, just one last question. The first pertaining to [Indecipherable], 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?
Praveen Kutty
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 has come down slightly, but leave it as it may — as it is. The yield in advance reduction is primarily on account of one-off, primarily on account of the movement from penal interest to penal charge, primarily on account of being conservative on the NFI 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 in advances.
Rakesh Kumar
Understood. [Technical Issues] contributing how much to that fall?
Praveen Kutty
Individual case, reason why I split — I don’t think we’ll be able to give. But these are four items. We are aware of it and we are working on it. So that’s where, I guess, what we are working on is to ensure that the yellow bar next time around is at a higher level.
Rakesh Kumar
Understood, sir. Thank you and all the best sir.
Operator
Thank you. The next question is from the line of Kartik Solanki from Elara Capital. Please go ahead.
Praveen Kutty
Hi Kartik, how are you?
Kartik Solanki
All good, sir. Thank you for the opportunity. Sir, [Technical Issues] lines of net interest margin. You had earlier stated to one of the questions that it is due to a one-off in quarter one and quarter two. Can you just throw some light on the same?
Praveen Kutty
So Reserve Bank of India had sent communication to banks, I think banks and NBFCs, I could be wrong, but definitely to banks, where interest charge to customers, okay, to the customers who have taken loans should start from the time the demand draft was handed over to customers. So there are many cases where customers — the demand draft was made and customer for whatever reason, the home loan agreement not coming into play, the seller traveling, variety of avoidable and unavoidable reasons, did not take handover of the demand drafts. And I understand completely where the Central Bank is coming from, because 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. So that’s the right thing to do. But the fact is that it did take a penal line [Phonetic].
Kartik Solanki
[Speech Overlap].
Praveen Kutty
[Speech Overlap] impacting NBFCs also, but banks definitely I can tell you.
Kartik Solanki
And sir, if possible, can you please like quantify the bps impact if you have that number handy?
Praveen Kutty
We did not communicate that. So it is not publicly available. But what is publicly available is that, that issue is a non-starter now. It doesn’t exist now.
Kartik Solanki
Okay. And sir, the ROA target of 1% which you gave a clear ROI tree as well…
Praveen Kutty
Milestone rather than a target, Kartik. Yes, it’s a pick stop before we start up our next journey.
Kartik Solanki
Okay. So this 1% ROA is like with factoring any rate cuts or without factoring?
Praveen Kutty
No, I’m seeing it the way it is because if you were to factor with multiple things, then what’s the point in committing. Effectively, we have to manage it. There will be — 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.
Kartik Solanki
Okay, sir. That’s it from my side. Thank you so much.
Praveen Kutty
Not at all. Thanks, Kartik.
Operator
Thank you. The next question is from the line of Rishikesh from RoboCapital. Please go ahead.
Rishikesh Oza
Hi sir, thank you for the opportunity. My first question is the Q-o-Q INR60 crore growth in the fee income, can you provide a broad breakup, where is that coming from?
Praveen Kutty
It’s coming from two separate items. One is the core fee income and others. So if you look at commission exchange and brokerage, in Page number 34, you see it’s a steady kind of growth, have a look at the commission exchange and brokage. Are you there? Page number 37. INR97 crores going to INR98 crores going to INR118 crores going to INR114 crores going to INR139 crores. Do you see that?
Rishikesh Oza
Yes.
Praveen Kutty
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 INR52 crore benefit that we got, which is in the second line, and there are some exchange transactions and others.
So the big mover here is the commission exchange and brokerage of INR139 crores, and that’s what we are looking at from a repeatability and sustainability perspective. Profit and sale of investment happens when opportunities arise, so does exchange transactions.
Rishikesh Oza
So most of the incremental is coming from sale of investment, right?
Praveen Kutty
You can see that also. We used to get somewhere in the teens, INR14 crores, INR11 crores, INR17 crores, that’s gone up to INR52 crores last quarter.
Rishikesh Oza
Got it.
Praveen Kutty
What we are happy with is the sustainable first line, now 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.
Rishikesh Oza
Got it. Also on the cost-to-income part, could you guide for coming quarters, Q3, Q4, what cost-to-income do we foresee?
Praveen Kutty
Actually, not the quarter three and quarter four. But for the next full year, what we want to be is between is around 2.6%. I think it’s achievable. 15 bps reduction from today on cost to average assets, I think it is well within our grasp. I was not going to dodge Q3, Q4. The reason I was talking about the four quarters of next year, 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 three out of the four core banking systems, we’ve upgraded our AML system, we’ve upgraded our behavioral biometric fraud detection system, we’ve upgraded our SCM system, right, leading all the 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.
Rishikesh Oza
Okay. Also, if you could share what is the home loan and LAP mix currently?
Praveen Kutty
On the stock, 50/50. On the incremental, we are trying to ensure that the BL is more than HL, and that has turned around.
Rishikesh Oza
Okay. Could you share any targets that we have for the target mix?
Praveen Kutty
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 higher-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 micro finance business pretty much early in quarter two, pretty much early. And you can see that from a 18% contribution that has come down to 16%. So we’re not averse to take a hit on growth if we believe that’s not the right way to grow the top line.
Rishikesh Oza
Thank you very much.
Operator
Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Praveen Kutty
Hi Nitin, so good to hear from you.
Nitin Aggarwal
My please, absolutely, and congrats on 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 wherein we were not growing as much, in fact, they were on a decline earlier.
Praveen Kutty
Sorry, say the last sentence again?
Nitin Aggarwal
Certain segments, which were 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 now sequentially been a strong pickup on disbursement. So how are we looking at this continues to overall loan mix going into the next year?
Praveen Kutty
First of all, I want to tell you, Nitin, that our corporate book has declined and has not grown. So it is not as if — let me see the same graph that you’re seeing. [Speech Overlap] If I remember right, INR100 crores less than what we started the year with.
Nitin Aggarwal
The disbursement number was like INR475 crores in the previous quarter, which is now INR634 crores this quarter, like 30% plus jump on a sequential basis?
Praveen Kutty
You’re right. What I would suggest is, look at the overall pie chart on Page number 21, and compare it with the pie chart of last quarter, you would see that the corporate banking book in Q1 is less — Q2 is definitely less than March, if I’m not mistaken. In absolute terms, I know the number, it’s about INR100 crores less than what we started off the year with. So yes, maybe more disbursement happen — must be short-term loans, must be short-term loans that has been given, but otherwise, no change in strategy, we are very much — it will hover around thereabouts of this. In fact, less than March.
Nitin Aggarwal
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?
Praveen Kutty
These are more of opportunistic lending given to certain existing CV customers. Because one of the things that we found out, which have bee apparent earlier, is that, the performance of the book improve significantly if you were to keep it going. So it’s a small book, which keep improving. 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. The SME book which you see there, frankly, we are trying to convert it to full overdraft product, a full engagement product, which will — similar to what we spoke about earlier also, converting that the complete branch-led digital-led engagement process.
Nitin Aggarwal
Okay. Sure. And secondly, on margins now, as the rate cycle turns in the coming quarters, how do you see trajectory moving into 1H, what sort of pricing power are you looking at in the sort of a risk environment? How much downside risk do you see further?
Praveen Kutty
I don’t see a downward risk happening, because cost of funds is — the deposit market continues to be challenging, like it has been for the last six months. When it is 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 because, for obvious reasons. 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 loan will more than compensate for the rate drop in specific portfolios, which we will not be really going after hard. So [Indecipherable] I think NIM is at one of the lowest, which we can foresee.
Nitin Aggarwal
Okay. Okay. That’s interesting. Thanks so much Praveen, and wish you all the best.
Praveen Kutty
Thank you so much.
Operator
Thank you. 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.
Praveen Kutty
Thank you for your patience. It’s been late in the evening. Good, top provoking questions. I hope you’ve got answers for that. If you haven’t, please send an e-mail to our Investor Relations team, we’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. Thank you very much. You can close this call, Operator.
Operator
[Operator Closing Remarks]