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Neutral DCB Bank Ltd For Target Rs.100

Weak operating performance; asset quality remains under pressure

Restructured book increases to ~5.4% of loans

* DCB Bank (DCBB) reported a weak operating performance, affected by higher slippage, sluggish NII growth, and elevated provisions. NIMs declined 15bp QoQ to 3.31%, impacted by high interest reversals and excess liquidity. On the business front, advances declined ~2% QoQ, while retail TD grew 17% YoY.

* Asset quality deteriorated further, with the GNPA/NNPA ratio increasing by 78bp/53bp QoQ to 4.87%/2.82%. PCR moderated to 43.3% (v/s 45.2% in FY21). Also, the gross restructured book increased to INR13.7b (5.4% of loans) v/s 4.3% of loans in FY21. CE in Home Loans / LAP recovered to Mar’21 levels in July’21, while it remained lower in the CV portfolio.

* We cut our earnings estimate for FY22/FY23 by 15%/12%, factoring in lower NII and elevated credit costs. Maintain Neutral.

Sluggish NII and elevated provisions drag down earnings; asset quality deteriorates

* DCBB reported PAT of INR338m (-57% YoY, significantly below estimates), affected by elevated provisions (86% YoY, 33% above estimate). NII growth was weak at ~1% YoY to INR3.1b (4% miss), with margins contracting 15bp QoQ to 3.31% due to high interest reversals and excess liquidity.

* Other income grew 55% YoY (10% QoQ decline) to INR1.2b (treasury gains: INR538m), with fee income growing 75% YoY (33% QoQ decline). Total revenues improved ~12% YoY. Opex grew ~18% YoY to INR2.3b; thus, the C/I ratio stood at 53.1% (v/s 53.9% in 4QFY21). Overall, PPoP grew at 5.3% YoY to INR2.0b (5% miss).

* On the business front, the loan book declined ~2% QoQ, impacted by weak disbursements (INR15.3b), with mortgage growth broadly flat QoQ. Conversely, all other segments (AIB/CV/Gold/Corporate/SME) posted ~2% QoQ decline. The share of the corporate book stands at 11% of loans. Deposit growth came in at 4% YoY (3% QoQ), led by retail TD (17% YoY), while CASA growth was weak (~3% YoY). Overall, the share of retail TD forms ~62% of total deposits.

* The GNPA/NNPA ratio deteriorated further by 78bp/53bp sequentially to 4.87%/2.82% as total slippage was elevated at INR5.15b (annualized slippage rate of ~8%). PCR moderated to 43.3% (v/s 45.2% in FY21). The gross restructured book increased to INR13.7b (5.4% of loans) v/s 4.3% in FY21.

* Collection efficiency update: Collection efficiency (standard loans) in Home Loans / LAP recovered to Mar’21 levels in July’21, while it remained lower in the CV portfolio. Collection efficiency stood at 98.6% in Home Loans, 97% in Business Loans, and 84.2% in CV.

Highlights from management commentary

* The management expects loan growth for FY22E at 11–12% (assuming no severe COVID wave 3.0).

* The approximate LTV on Mortgages NPA stands at ~40%, while it is 52% on restructured assets.

Valuation and view

DCB Bank reported a weak quarter, impacted by high interest reversals and elevated provisions. Business growth continues to remain under pressure, led by sequential decline in the loan book across segments. Asset quality deteriorated further with a rise in GNPA/NNPA ratio, while the restructured loan book also increased to 5.4% of loans.

We expect credit cost trends to remain elevated at 1.9%/1.6% for FY22/FY23 as the bank focuses on improving the coverage ratio, which has moderated to 43.3%. Thus, we cut our earnings estimates by 15%/12% for FY22/FY23 and expect DCBB to deliver FY23 RoA/RoE at 0.9%/10.6%. Maintain Neutral, with unchanged TP of INR100 (0.8x FY23E ABV).

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