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Result Highlights

* Asset quality: Gross NPA addition amounted to Rs 4.03bn(annualised slippage ratio of 4.9%) but recoveries and upgrades were also healthy at Rs 3.75bn

* Margin picture: NIM at 4.02% was up 14bps/41bps QoQ/YoY, sequentially higher due to yield on advances moving up faster than cost of deposits

* Asset growth: Advances grew 5.4%/19.2% QoQ/YoY, driven sequentially by all AIB, Co-lending and ‘Others’ segments

* Opex control: Total opex rose 6.0%/31.3% QoQ/YoY, employee expenses rose 4.6%/30.2% QoQ/YoY and other expenses rose 7.4%/32.5% QoQ/YoY

* Fee income: Core fee income fell/rose -9.1%/11.1% QoQ/YoY, where YoY the PSLC income was lower

Our view – Rise in opex eats into other gains in the RoA tree

While NII and fee income have grown 26% YoY and 23% YoY, respectively, in the 9M period, total opex has grown 32% YoY in the same period: While employee expenses have risen 29% YoY, other expenses have risen 36% YoY in the 9M period. Management has attributed this to the addition of frontline staff. Cost to income ratio for the quarter was 64.1%, broadly stable sequentially but up ~700 bps on YoY basis. Management
stated that it intends to achieve a cost to assets of 2.4% in less than 2 years.

Growth performance has beenimproved in recent quarters compared with recent years: The 2-year FY18-20 pre-pandemic loan growthCAGR was 11.6% which was followed by a 2-year FY20-22 pandemic loan growth CAGR of 7.1%. At this point in time, loan growth is tracking a far healthier 19.2% YoY and management has re-iterated long-term guidance of doubling balance sheet in 3-4 years.

Margin has touched the 4% mark after a long time but, as of now, management has stuck to prior guidance of 365-375 bps: A significant proportion of the loan book is floating rate in nature. Other than tractor loans, gold loans, short-term corporate loans and TREDs book, the loan book is floating rate in nature. The deposit growth performance has been commendable with total deposits growing 23% YoY, CASA growing 31% YoY and SA deposits up ~40% YoY.

Gross slippages continued to look elevated due to gold loan slippages and the ‘Out of Order’ Circular: Slippages due to both these reasons are less of a concern and lead to healthy recoveries and upgrades in a relatively short time-frame.

We maintain ‘Neutral’ on DCB with a revised price target of Rs 125: DCB was among the bottom 2 names in our Sector Initiation Report dated June 2021. We value the bank at 0.8x FY24 P/BV for an FY23E/24E/25E RoE profile of 10.2/11.4/12.3%.

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