DCB Bank Ltd. share price target

DCB's Q1FY20 numbers have overall come in weak and quite below our expectation. NII and PAT growth remained sluggish at 11.5/16.5% YoY vs. our expectation of +15/+24%. Loan growth ex-corporate segment is ~19% vs. overall growth of 13%. Interest expenses were a drag on the topline due to fixed rate refinance being garnered from NABARD and SIDBI. Cost-to-income ratio on a QoQ basis has increased by 370bps on account of salary hikes given. Over FY17-19, loan growth ex-corporate segment has been at 21%-27% which the management now expects at Q1 level of ~19% for FY20. Further, management has also highlighted risk of increased corporate slippages in the...

Sector: Banking /Mid-Cap | Earnings Update 1QFY20 Background: DCB Bank Limited (formerly Development Credit Bank Limited) has a deposit base of INR 287bn and advances of INR 241bn at the end of 1QFY20, making it the smallest bank in the listed private sector space, including both new and old generation private sector banks. Promoter group the Aga Khan Fund for Economic Development (AKFED) & Platinum Jubilee Investments holds ~15% stake. DCB services entails Corporate Banking - 13%, SME -12%, Agriculture 20%, Mortgages ...

While DCBB's asset quality slip in 1Q exceeded seasonal trends, our faith is not fully shaken, given management's conservative stance and stellar record across cycles. Our earnings estimates fall by ~8% over FY20-21E to factor in slower growth and NIM compression, with no change in asset quality trajectory. However, valuations are ample at 2.1x FY21E ABV (RoAA ~1.1%). DOWNGRADE to NEUTRAL, despite DCBB's multi-year growth/compounding promise. Our stance is premised on (1) The substantial jump in stress (GNPAs up 8% QoQ), (2) Growth slowing, (unexpectedly) to 13/2% on a small base, and (3) NIM compression 11bps QoQ, that can linger. We are constrained to downgrade DCB Bank (DCBB) to NEUTRAL with a TP of Rs 234 (2x Jun-21E ABV of Rs 117) post a disappointing show in 1QFY20.

DCB Bank has delivered a sub-par performance in 1QFY20 led by decline in loan growth to 13% YoY, sequential rise in fresh slippages and NPAs, and continued pressure on margin. Sequential loan growth (at 2% QoQ) moderated across key segments, including mortgage, SME and AIB, though CV and AIB loan growth was healthy at over 25% YoY. Segmental NPAs were higher across segments, barring corporate, where decline in NPA was mainly driven by higher write-offs. Consequently, provision coverage (excluding technical-write-offs) also declined by 600bps QoQ to 59%. Given the management's focus towards increasing share of retail deposits, cost of deposits continued to rise and consequently, NIM was lower by 11bps QoQ and 23 bps YoY. We expect interim...

Other income growth came in lower at ~5% YoY to ~| 87 crore, on the back of de-growth of ~9% YoY in CEB book, which was at ~| 55 crore in Q1FY20 (~| 65 crore in Q4FY19). Lower growth in CEB book is attributable to lower credit growth & one off loss in ATM fee income of | 3 crore. Operating profit came in at ~| 167 crore, up 18% YoY, well below our estimates (~| 201 crore) led by muted NII & other income growth. PAT came in at | 81 crore, significantly below estimates. Slippages for the quarter surged 38% YoY to | 148 crore led by stress in...

DCB Bank started Q1FY20 on a weaker note led by lower loan growth and margin pressure. It has reported 17% YoY profit growth & muted 10% YoY growth in total income. Advances growth moderated to 13% YoY on the back of de-growth in the Corporate Loan book and decline in NIMs. Asset quality saw marginal deterioration while corporate book saw some writeoffs in 1QFY20. Given the management's focus towards increasing share of Retail Deposits, cost of deposits continued to increase further and consequently, NIM was declined by 11bps QoQ and 23 bps YoY. We expect asset quality and growth concern to weigh on the bank's earnings visibility....

16 July 2019 1QFY20 PAT came in at INR811m (+17% YoY), significantly below our estimate of INR973m due to lower fee income, margin pressure and muted loan growth. NII grew 11.6% YoY (v/s +14.1% YoY in 4QFY19) as margins further compressed by 10bp QoQ to 3.7%. This, coupled with weak fee income (-9% YoY), drove modest 10% YoY growth in total revenue. Opex increased 4.7% QoQ to INR2.3b due to salary hikes to employees. Thus, the C/I ratio rose 380bp QoQ to 57.5% (500bp increase in the core C/I ratio). Loan growth moderated to 13.2%/2.0% YoY/QoQ (v/s +15.9%/3.

DCB Bank's exit quarter Q4FY19 guidance given 3 years back on operational efficiency is largely met. Cost-to-income, ROA and ROE is at 53.7%, 1.1% and 13.7% against its guidance of 55%, 1% and 14% respectively. Earnings for Q4FY19 are 8% ahead of our estimates. Loan growth ex of corporate segment is healthy at 21%. NIMs are steady sequentially at 3.8%. Cost-to-income has eased by 568bps YoY to 53.7%. As a result PAT has grown by 50% YoY. Asset quality continues to be one of the best among peers. We move our valuations to FY21. We retain our BUY rating and increase our TP to Rs250...

DCB Bank reported NII of INR 3.0bn (14% y-o-y & 2% q-o-q) led by loan book growth of (16% y-o-y & 3% q-o-q) to INR 236bn. Margin for the quarter remained stable at 3.78% (-38bps y-o-y & -5bps q-o-q). Higher Other Income (17% y-o-y & 5% q-oq) and moderation in opex (4% y-o-y & 0% q-o-q) resulted in 31% y-o-y & 7% q-o-q growth in PPOP to INR 1.85bn. GNPA / NNPA declined marginally to 1.8% / 0.65% (-8bps / -6bps q-o-q) respectively. We continue to believe that RoA expansion for DCB Bank will depend upon opex moderation going ahead....

Despite macro challenges (Demon and GST), DCBB fulfilled its almost prophetic guidance of 1% RoAA. While loan growth disappointed in 4QFY19 (16%), stable margins, improving op-lev and asset quality impressed. With its core growth engine intact, we believe DCBB has the potential to grow at faster rates. Upgrade earnings by ~12/16% for FY20/21E. A significant improvement in resulting efficiencies (anticipated) drives up our RoAA estimate to ~1.2% by FY21E. 4QFY19 marked the fulfillment of dual commitments by DCBB, viz. (1) Achievement of 1% RoAA in FY19A, (2) A meaningful improvement in operating efficiency (C-I ratio lowest in 20 qtrs). We maintain BUY with a TP of Rs 228 (2x FY21E ABV of Rs 114).