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Buy DCB Bank Ltd For Target Rs.130

Fresh slippages elevated; visibility on growth improving

DCB Bank’s (DCB) Q1FY22 earnings were QoQ lower at Rs337mn due to higher provision at Rs1.5bn vs Rs1bn in Q4FY21, 43% QoQ decline in disbursements, and 28bps QoQ NIM contraction. Higher interest reversal and excess liquidity on balance sheet adversely impacted NIMs. While fresh slippages remained elevated at Rs5bn, recoveries/upgrades witnessed sharp improvement to Rs2.5bn vs and the same contained net slippages at lower levels. GNPL increased to 4.9% vs 4.1% in Q4FY21, while NNPL stood at 2.8%. PCR fell to an all-time low of 43%.

Considering collections in LAP / HL at 92% / 96% respectively (still lagging Mar’21 levels), DCB carried a contingency provision buffer of Rs1.08bn as at Jun’21. Notably, the bank remains committed to building a granular retail liability as seen in strong retail TD growth of 17% YoY and top-20 deposit share falling to 6.4% vs 6.9% in Mar’21. While near-term asset quality concerns persist, trend in recoveries and management narrative on growth revival improves visibility on RoA marching towards 1% by FY23E. Maintain BUY with a revised target price of Rs130 (earlier: Rs144). Key risks: 1) stress exceeding anticipated levels, and 2) delay in loan growth recovery.

* Disbursements were down 43% QoQ, but Jul’21 trend is encouraging; expect credit growth at ~10-12% in FY22E. Advances fell 2% QoQ and grew only 2% YoY due to disruption in disbursement momentum in Q1FY22 as reflected in 43% QoQ decline. However, July’21 disbursements are encouraging. Gold loans were up 100% YoY with ~20% incremental disbursement and, correspondingly, its share in overall loans jumped to 6% in Q1FY22 from 3% in Q1FY21. Gold loan LTV was contained at slightly above 75% for majority of the book while loans above 80% of LTV were very limited. Taking cognisance of improved disbursement in H2FY22, while entering FY22E, DCB has budgeted for 15-17% credit growth in the current fiscal. Nevertheless, due to a subdued Q1FY22, it now expects credit growth to remain in the 10-12% range.

* Fresh slippages elevated, but recoveries too were higher. While fresh slippages in Q1FY22 remained elevated at Rs5bn (~2% of loans) vs ~Rs7bn in FY21, recoveries and upgrades too remained significantly higher at Rs2.5bn vs ~Rs1bn in FY21. GNPL ratio increased to 4.9% from 4.1% in Q4FY21 while, with drop in coverage ratio, NNPL increased to 2.8% from 2.3% in Q4FY21. Total restructured portfolio stood at Rs13.7bn (~5.4% of loans) while ECLGS disbursements were at Rs9.95bn (~3.9% of loans), against which DCB carries a provision of Rs3.1bn (~1.2% of loans). Jul’21 collections in LAP and home loans are still lagging Mar21 levels at 92% and 96%, respectively vs ~98% in Mar’21.

* Granularisation of balance sheet continued despite operational challenges; NIMs settled lower. Retail TD growth was at 17% YoY vs 4% YoY total deposit growth and top-20 deposit share was at 6.4% vs 6.9% in Mar’21. Around 86% of advances are of ticket size of Rs30mn and less, which indicates successful execution of the granularisation strategy. NIMs contracted 28bps QoQ due to higher interest reversal and liquidity on balance sheet. Further, with improved visibility on growth, DCB plans to invest for growth and the same is likely to keep cost ratios higher in the near future.

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