Credit growth remained sluggish, but profitability intact
DCB Bank’s (DCB) Q2FY20 reported earnings grew 25% YoY to Rs914mn, driven by higher other income and controlled opex. On the flip side, deceleration in credit growth continued as it moderated to a multi-year low at 12% YoY. Slippage ratio increased to 2.6% (annualised) driven by deterioration in mortgage and CV portfolios, but the predominantly retail nature of slippages would help the management navigate the current cycle with minimal impact on profitability. Exit RoA of 1% in Q2FY20 (despite elevated credit cost and higher tax) gives us confidence about the management’s ability to maintain profitability. However, its response towards: a) revival in credit growth, and b) incremental fresh slippages in H2FY20 would be critical. We upgrade the stock to BUY (from Add) with a revised target price of Rs240 (earlier: Rs275) as we factor-in the near-term challenges to credit growth and marginally higher credit cost.
* Near-term growth challenges persist, but medium-term outlook intact. Deceleration in loan growth, which started in Q4FY19, continued through Q2FY20 though it fell to a multi-year low at 12% YoY during the quarter. Management attributes the lower credit growth to: a) lower acceptance ratio in mortgage/SME portfolios (41%/12% of loans) as it does not want to chase growth in the currently difficult environment, b) lower net disbursement in CV portfolio as the management is focusing more on used CVs, and c) consolidation in corporate portfolio. However, the management has maintained its target of doubling the balance sheet in 3/3.5 years and expects credit growth to be better H2FY20.
* Deteriorating asset quality in mortgage/CV is cause for concern, but management is confident of containing slippage ratio at current level. Fresh slippages in Q2FY20 stood at Rs1.61bn (slippage ratio at 2.61% is highest in past many quarters) driven by higher slippages in mortgage and CV/CE portfolios. Overall GNPA ratio increased to 2.1% while NNPA ratio jumped to 1%. Given the economic slowdown and visible stress in some pockets in CV/CE and AIB, the management expects slippages to remain at elevated levels over next couple of quarters.
* Operating leverage to help sustain RoA at 1%. Cost/income ratio fell 200bps in Q2FY20 to 55.5% as opex growth was contained at 2.3% QoQ / 10% YoY. Further, the management remains committed in bringing down cost/assets ratio to <2% from the current 2.5% over next two/three years, which would help maintain RoA at 1% despite near-term challenges on credit cost and growth.
* Outlook. Though Q2FY20 was a subdued quarter in terms of growth, the management remains committed to its long-term growth strategy and achieving an RoA of 1.25% over the next three years. Its focus on effective use of capital and sharp improvement in productivity in FY19, gives us reason to believe that DCB is on the right track. Hence, we upgrade the stock to BUY (from Add) with a revised target price of Rs240 (earlier: Rs275) as we reduce our FY20E credit growth estimate to 14% YoY (earlier: 20%).
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