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Provisioning cushion emerges ahead of expectations

DCBB’s 3QFY21 earnings were significantly ahead of estimates on account of strong treasury gains and CoF tailwinds, despite higher-than-anticipated provisions. We’ve revised our earnings estimates to factor in a slight improvement in margins and a higher non-interest income trajectory. We maintain ADD with a target price of Rs 157 (1.2xFY23E). Inexpensive valuations and the bank’s conservative approach to lending, underpin our stance. We will watch for trends in asset quality and credit growth.  Stress build-up visible: Pro forma asset quality metrics registered significant deterioration- GNPAs at 3.7% (vs. ~2.4% in 2QFY21) and slippages at ~2.4% annualised (9MFY21). However, these included accounts to the tune of ~Rs 1.6bn, which were eligible for restructuring. The outstanding stock of restructured advances stood at Rs 6.9bn (2.7% of loans) and the management continued to guide that this eventually inch up to 3- 5%. We continue to expect GNPAs to reach 4.1% in FY21E.

* Provisions remain elevated: The bank clocked a 150.4/30.6% rise in non-tax provisions, which came in ~38% higher than our estimates, at Rs 1.48bn; including additional COVID-19 related provisions of Rs 860mn. The total stock of such provisions stood at ~Rs 2.3bn (~90bps of loans). We have increased our FY21E LLP estimates to 1.76% (vs. 1.53% earlier).

* Focus to shift to growth: We expect DCBB’s credit growth to have bottomed in 3QFY21 at -0.5/+1.7% YoY/QoQ. At present, growth appears to be limited to select segments such home loans (+11% YoY) gold loans (+105% YoY). A more broad-based uptick in growth across the bank’s portfolio is likely post FY21. We estimate DCBB to register a loan CAGR of 16.8% over FY22-23E. The management has guided for ‘double digit’ to ‘high-teen’ growth in FY22E and has begun building operational capacity.

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