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Margin moderates 21bp QoQ to 3.48%

-      DCB Bank (DCBB) reported 11% YoY/flattish QoQ growth in PAT to INR1.3b (in line), led by weak NII growth (6% lower than MOSLe). NII grew 6% YoY to INR4.7b (flat QoQ, 3% lower than MOSLe). NIM continued to moderate 21bp QoQ to 3.48% during the quarter.

-      Advances grew 18% YoY, supported by healthy growth in mortgages, Agri, and co-lending advances. Deposits rose 19% YoY/3.6% QoQ, led by growth in SA deposits, resulting in a 109bp QoQ increase in CASA ratio to 26.1%.

-      Slippages increased to INR4.3b (vs. INR INR3.9b in 2QFY24) resulting in a 7bp QoQ rise in GNPA to 3.4%. The restructured book declined QoQ but remained elevated at ~INR11.6b (3% of loans). PCR improved to 65%.

-      We trim our earnings estimates by 3.7%/7.5% for FY24/FY25, amid cost and margin pressures. We estimate FY25E RoA/RoE at 0.9%/12.2%. Reiterate Neutral with a TP of INR150 (based on 0.9x Sep’25E ABV).

Business growth healthy; CASA mix improves to 26%

-      DCBB reported a 3QFY24 PAT of INR1.3b (+11% YoY, 6% miss on MOSLe), led by weak NII growth, and partly offset by a lower LLP of INR410m (15% lower than MOSLe). The bank made AIF-related provisions of INR454m.

-      NII grew ~6.3% YoY (flat QoQ) to INR4.7b (3% lower than MOSLe) led by 21bp QoQ moderation in margins to 3.48%. Other income grew 30% YoY (15.2% QoQ, in line) thus driving 10% YoY growth in total revenue.

-      Opex increased 11% YoY as the bank continued to make investments in the business, and hence PPoP grew 9% YoY (8% miss) for the quarter.

-      Advances grew 18% YoY/4.5% QoQ, supported by healthy growth in mortgages, Agri, and co-lending advances. Deposits grew 19% YoY (+3.6% QoQ), led by 11% QoQ growth in SA deposits. CASA deposits thus grew 13% YoY/8% QoQ to INR123b, while CASA mix improved to 26.1%.

-      GNPA ratio deteriorated 7bp QoQ to 3.43%, while NNPA stood at 1.2%, with slippages increasing sequentially to INR 4.3b. PCR improved 232bp QoQ to 65.1% (~76.4% including TWO).

-      The restructured book stood at INR11.6b (3% of loans). CE across segments continued to be healthy at 97.4%/97.7%/91.6%, including delinquent and restructured book in Business/Home/CV Loans.

Highlights from the management commentary

-      Management guided for an RoA of 1% or above and RoE closer to 14% in near term.

-      The bank guided for a C/I ratio of 55% or below in the near term, and cost- to-average assets of 2.4%-2.5%.

-      The bank targets for a 20% loan growth and aims to double the book in the next 3-4 years.

-      Margins have been affected by TD rates only. The bank does not expect higher SA rates to affect margins. Cost of deposits is likely to stabilize after 4-5 months. Management guided for 3.65-3.75% of NIM over the medium term.

-      On the deposits front, the bank aims to focus on CASA and for this it has launched new products. Fintech tie-ups also enabled inflows in SA deposits.

Valuation and view

DCBB reported a modest quarter with earnings miss amid weak NII growth, partly offset by lower provisions. Margin moderated sharply by 21bp QoQ to 3.48%. Loan growth was steady led by healthy growth in mortgages, Agri and co-lending, while deposits grew at a decent pace led by SA deposits. This resulted in an improvement in CASA ratio. However, the cost of deposits rose 18bp QoQ due to high SA rates offered by the bank. Fresh slippages continued to rise and stood elevated, while restructured book too remained high at 3% of loans. Higher slippages were seen in mortgages, as the restructured book came out of moratorium. We trim our earnings estimates by 3.7%/7.5% for FY24/FY25 amid cost and margin pressures. We estimate FY25E RoA/RoE of 0.9%/12.2%, and maintain our Neutral rating with a TP of INR150 (premised on 0.9x Sep’25E ABV).

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