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Weak quarter, but recoveries were healthy

DCB Bank’s (DCB) earnings were weak, driven by NII/NIM miss, in turn led by interest reversals, higher interest cost, and provisioning spike. Lower NII was partly offset by higher treasury gains while opex was in-line, though PPoP was a miss. While credit flow was marred in Q1FY22, July’21 saw good momentum and DCB expects a 10-12% credit growth in FY22.

Gross slippage ratio spiked to 8.2% but recoveries in Q1FY22 were strong at Rs2.5bn (FY21 Rs1.1bn). GNPA/NNPA rose by 77bp/53bp sequentially to 4.9%/2.8%. Restructured pool increased QoQ from 4.2% to 6.1% of loans and the bank does not expect severe problems from this pool since it carries adequate collateral cover and underlying cash flows are intact. Recovery outlook is better while buffer provisions stand at Rs1.08bn or 42bp of closing loans. Maintain ADD and multiple at 0.9x FY23E ABV, but change TP to Rs110.

Q1FY22 results – miss on PPoP due to lower NII; provisions surge

NII was Rs3.1bn lower than estimate of Rs3.3bn due to interest reversals and softer LDR due to higher deposit growth. Loan growth was 1.7% YoY (est. 2.6%) while LDR was 83% (est. 88%). Cost of funds rose QoQ from 6.2% to 6.3%. Hence, NIM was a miss at 3.4% (est. 3.8%). Other income at Rs1.2bn (est. Rs1bn) was higher, led by treasury gains of Rs538mn (est. Rs100mn) while fee income was lower at Rs472mn (est. Rs600mn).

Opex was in-line at Rs2.3bn with employee cost being slightly higher, which was offset by lower other opex. GNPA/NNPA worsened QoQ by 77bp/53bp to 4.9%/2.8%, led by higher than expected slippages, though recoveries were healthy. Provisions surged QoQ to Rs1.6bn (est. Rs1.2bn), which included NPA Rs1.3bn, floating Rs30mn and standard Rs170mn. PAT was Rs338mn (est. Rs654mn).

Spike in gross slippages partially offset by better recoveries

Gross slippages for the quarter were much higher at Rs5.2bn, though recoveries and upgrades were healthy at Rs2.5bn. Hence, net slippage ratio was 4.2% (est. 3.9%). Higher upgrades were not due to OTR, as it only had a minimal impact on upgrades. Restructured pool increased QoQ from 4.2% to 6.1% of loans, majorly driven by mortgage, SME and CV segments while Rs160-170mn came from the PL segment. The bank does not expect severe problems from the restructured pool, as it carries adequate collateral cover and underlying business cash flows are intact. The bank expects recoveries to pick up, as July’21 collections were materially better. Buffer provisions stand at Rs1.08bn or 42bp of closing loans.

Credit flow weak in Q1, but picked up in July

Disbursals were impacted in Q1FY22, but saw strong momentum in July’21 on a MoM basis. Healthy credit flow could continue assuming there are no major disruptions on account of a third wave. Credit growth for FY22 is expected to be in the 10-12% range against previous guidance of high-teens, due to lower disbursals in Q1FY22. DCB is seeing good opportunities in the home loan segment, which constitutes around 22% of the loan book and its share may go up to 30% in 1-2 years. Also, RoE for this product is attractive at 14%. Traction in RTD continues with its share rising to 62% from 57% a year ago. Interbank deposit contribution reduced from 12% to 8%, which may further decline to 5% in 1-1.5 years.

Valuation and risks

Due to lower NII and higher slippages, we lower our PAT estimates for FY22/23 by 13%/6%. Recoveries saw good traction in the quarter, but we would wait for the pace of recovery to sustain before we upgrade the stock. We maintain multiple at 0.9x FY23E ABV but revise TP to Rs110 (earlier Rs102). Retain ADD. Risks: higher stress and slower recovery pace.

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