Great performance, this quarter. There has been around 22 per cent profit growth while loan growth has been nearly 30 per cent. Are these number sustainable?
It is not just about the quarter. As you know from October 15, we have been rapidly expanding our branch network. When we announced 150 branches to be added in two years, there was a lot of excitement. We were confident that we will be able to execute the plans well. So, we have expanded to 318 branches by end of the fourth quarter. We have not changed any of our strategy with respect to business.
If you look at our product distribution, 40 per cent of our book is in mortgages, 12 per cent is in SME and MSME, 18 per cent is in agri inclusive banking, 6 per cent is in commercial vehicle and in corporate banking it's just 17 per cent. We are purely focussed on SME and MSME segment. So if I look at each of the businesses, the performance has been pretty good as compared to the previous year.
We have kept our NPAs in control. In fact, we had some improvement in our gross and net NPA in the fourth quarter based on the strong recoveries and upgrades that we had in the fourth quarter. We have maintained our NIMs at a stable level even though there has been huge amount of competition and our cost income ratios are in the similar range to what it was when we started the journey of this big branch expansion so those are the factors I would like to credit for the improvement in performance.
If we look at the full year performance as well profits have gone 23 per cent versus 3 per cent in FY17, can we see profits growth at 20-23 per cent for this year as well?
I won't comment on profit growth, what I can comment on is that if you look at our balance sheet, if you look at our loan book three years ago we were half the size of what we are today. It means we doubled our book in about almost double rather in about three years time.
The way we are building our franchise and if we continue to do a good job, we should be able to double the book in three to three and a half years time without changing the mix of the product. In fact, the mix would probably skew more towards smaller ticket than corporate banking. If we continue to improve our efficiency, productivity, and do not damage the NPA I do expect better performance in all metrics.
What about the loan growth then because that has improved to a good 29 per cent as oppose to 22 per cent the last year can we say that now the DNA of DCB is set to achieve 20 per cent to 25 per cent growth over the next two to three years?
Based on all the investment that we have done so far, our intention is to try and achieve double the loan book in three to three and a half years. Our intention is also not to change the mix. In fact I would say that the mix might change more towards doing smaller tickets in the self employed segment. Our target market is self employed, we have very limited salaried segment in our book both on deposit and loan side so I would say that we are unlikely to change the product mix. We will maintain similar product mix and we will aim to achieve double the book in three to three and a half years.
Although margins have been holding well at about 4.16 per cent for FY18 versus about 4.04 in FY17 do you see them sustaining over this 4 per cent level, given the kind of high competition that you got to deal within the sector? How much do you see your cost of funds as well as yields rising?
The margins at 4 per cent we have done better than what we expected. The competition like you stated is very keen in all segments of the book, especially in the segment that we operate which is self employed. We get competition from NBFCs, banks, the new players, everyone. If you look at our CASA our savings growth has been 27 per cent and overall CASA growth has been 25 per cent which has helped us to maintain margin. If we keep a very tight control on the NPAs then also, the margins remain. I would say the long-term business model that we have thought about is that as long as our margins are 375 bps or slightly above than that, we are good. But I do expect margin compression in the coming quarters.
Q4 GNPA ratios improved slightly to 1.8 per cent with Q4 slippages lower and upgrades recovery holding well. Do you see GNPAs sustain at below 1.8 for FY19, especially when we are seeing small business like SMEs strained post GST?
As long as we can keep our gross NPA below 2 per cent and net NPA below 1 per cent, we are following our business model. We are targeting self-employed segment which is considered to be slightly more risky than salaried segment.
However, I would like to say that we do secure lending, bulk of our lending is secure therefore even if we do have some kind of slippage, our recoveries over time becomes better. Therefore, we are able to kind of control the net NPA. Having said that, we are very watchful.
Fortunately, the corporate lending book is only about 17 per cent for us and we do not intend to kind of grow that aggressively so when you have big ticket kind of NPAs it is very hard to recover quickly. So, since our corporate lending is limited and we are doing secured lending and targeting very carefully, I expect that our gross NPA to be below 2 per cent and net NPA to be below 1 per cent.
You raised about Rs 380 crore in 2017, how long will the current capital last to support growth?
With the kind of investment that we have made, we are confident about our organic growth capabilities. So, at the moment our focus would be on organic growth. Regarding capital, our capital adequacy is above 16 per cent and even if we do grow at 20-25 per cent, it should be sufficient to take us through for 12-18 months. When we come to the point, we will consider capital raising.
What is it that you are expecting in terms of cost to income ratio because that still remains relatively high versus your peers which are currently quoting and ruling at 59 per cent mark? How is it that you see or plan to improve your operating efficiencies? Where do you see your cost to income ratio by the end of FY19-20?
On a long term basis, we want our cost income ratios to be certainly below 50 per cent. Since we have made so much of investment in the last two years, it is taking us time to bring down the cost income ratio. The cost is because the branches that we put takes about 18-22 months to break even and it takes about 36-40 months to reach a 50-55 per cent cost income ratio.
By the time we reach the fourth quarter of 2019, we have a stretched target of being at 55 per cent cost income ratio at least for the fourth quarter. These will come because of the efficiency of the frontline sales team and introduction of frontline and customer facing technology that can reduce the cost. So, there are various measures being taken and it is the upfront investment that we have done in branches which has caused the increase in cost income ratio and over a period of time, we certainly believe that we can bring it down.