DCB Bank :Strong upside possible
Call & Research Report by HDFC Securities Research
Report Date: 29 October 2021
CMP Rs. 91, Target Rs. 132
Target Period : 1 Quarters
DCB Bank’s (DCBB) Q2FY22 earnings were ~10% below estimates on account of muted asset growth and lower fee income traction. Asset quality witnessed healthy improvement with ~0.3% net slippages, driven by strong upgrades
and recoveries in the quarter. Although the headline numbers indicate a large stressed pool (gross slippages at 6.4%, restructured book at 6.8%), DCBB’s granular secured book (~95%) provides comfort on eventual low LGDs from
the stressed portfolio (already evidenced in H1FY22). PCR inched up to 45%, alongside a 15% provisioning on the restructured portfolio. While asset quality remains on the mend, we opine that muted asset growth, margin
compression and subdued fee income traction will continue to weigh down on return ratios. We hack our FY22/FY23 earnings estimates by 20% and 9% respectively. Maintain ADD with a revised TP of INR132 (1x Sep’23 ABVPS).
Asset quality improving: DCBB’s GNPA/NNPA moderated marginally to 4.7%/2.6% (Q1FY22: 4.9%/2.8%). Impairment ratios improved across most segments with collection efficiencies near pre-COVID levels except in the CV
segment, where collection efficiencies continue to be inferior. DCBB has witnessed healthy collection & recoveries in H1 (5% of loans) due to its largely secured book and increased focus on collections. With ~95% of loan
book secured (and ~99% of restructured portfolio as secured), our forecasts are aligned to management assessment of low LGDs from the stressed pool.
Muted operating performance: DCBB reported an NII decline of 3% YoY, largely due to high interest reversals, pressure on yields, and muted asset growth (+8% YoY). Fee income traction was also soft (0.6% of assets), although stronger than in previous quarters. Loan growth saw an uptick (+8% YoY, +5% QoQ), with disbursements at ~INR38.3bn (14% of loans), although sustainability is yet to be seen; loan growth has been subdued for over nine quarters and is a cause for concern, especially given the scarce deployment opportunities in the bank’s core segments (MSMEs) amidst a soft economic environment. Our forecasts build in a 13% loan CAGR over FY21-24E.