Collection efficiency trails peers; Business growth moderates
Credit cost to remain high as asset quality outlook under watch
* DCB Bank (DCBB) reported strong operating profits, aided by margin expansion and controlled opex. However, business growth moderated in both loans and deposits. The management has further guided for loan growth trends to remain subdued over the next few quarters, while it expects a rebound from FY22.
* Collection efficiency (CE) improved, but was lower v/s other private peers. DCB expects restructuring in 3–5% of loans, with the CV portfolio remaining vulnerable. Overall, we remain watchful on the asset quality outlook.
* We remain conservative in our earnings estimate and further cut FY22 earnings by ~3%. We estimate credit cost to remain elevated for FY21/FY22 at 1.6%/1.5%. Maintain Neutral.
Margins expand sharply; CE improves, but trails peers
* DCBB reported PAT of INR823m (10% YoY decline; higher than estimates) as margins expanded sharply by 32bp QoQ to 3.74% and the bank reported treasury gains of INR293m. However, provisions remained elevated at ~INR1.1b (35% QoQ) as it created COVID-related provisions of INR480m. As a result, the COVID-related provision buffer increased to ~INR1.4b (57bp of loans).
* NII grew 6.6% YoY to INR3.3b (14% beat) as margins expanded sharply to 3.74%. However, other income declined 9% YoY to INR925m as core fee income fell 25% YoY (but improved sequentially) to INR435m. Thus, overall net revenue increased 3% YoY.
* Opex declined 12% YoY to INR2.0b, resulting in the C/I ratio improving by ~300bp QoQ to 47.3%. Overall, PPoP grew at 22% YoY to INR1.9b. For 1HFY21, PAT declined 6% YoY, affected by higher provisions (135% YoY).
* Loan growth was flat YoY, with the corporate/CV portfolio declining sharply by 17%/15% QoQ. On the other hand, gold loans grew at a robust 32% QoQ. Deposit growth declined 2% YoY to INR288b, led by 5% YoY decrease in CASA, while TD grew 2% YoY. However, Retail TD grew at 33% YoY, thus forming 59% of total deposits.
* On the asset quality front, the GNPA/NNPA ratio improved by 17bp/16bp QoQ to 2.27%/0.83%. PCR thus improved 410bp QoQ to 64.1%. If not for the SC order, GNPA/NNPA would have been higher at 2.39%/0.92%.
* CE update: In terms of CE, most segments showed improving trends (but lower v/s peers) – Home Loans: 91.3%; Business Loans: 87.5%; and CV: 77.1%. Furthermore, the share of customers who did not pay any installments (over Apr–Oct’20) stood at 7.4% in Business Loans, 5.4% in Home Loans, and 10.8% in the CV portfolio as of 30th Oct’20.
Highlights from management commentary
* Overall, expect 3–5% of the total portfolio to seek some form of restructuring.
* The CV portfolio would remain vulnerable; thus, expect higher slippages from this portfolio. Overall, credit cost would remain high for 3–4 quarters.
* Approval rates are yet to pick up and remain below pre-COVID levels. It expects business to return to normal by Mar/April’21.
Valuation and view
DCBB reported moderation in business growth and guided for muted trends as the focus in the near term would be on preserving the balance sheet and controlling risk. On the asset quality front, collection efficiency improved, but remained lower v/s peers. It has guide d for restructuring to in 3–5% of loans. It would continue to face higher delinquency in the CV portfolio. Overall, we remain watchful on the asset quality front and thus expect credit cost trends to remain elevated at 1.6%/1.5% for FY21/FY22. We estimate DCBB to deliver FY22 RoA/RoE at 0.9%/9.7%. Maintain Neutral, with revised TP of INR87 (0.7x Sep’22 ABV).
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