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Meets guidance on NPA but stay conservative

DCB Bank posted moderation in operating performance due to interest reversals on NPA recognition, deterioration in asset quality on proforma basis and tepid business growth. Net interest income was down 7% QoQ, 4% YoY to | 311 crore due to reversal of interest worth | 37 crore due to NPA recognition and | 10 crore towards interest on interest relief.

Net interest margin (NIM) dipped from 29 bps sequentially to 3.5% as yields declined due to interest reversal. Other income also fell 13.4% QoQ to | 134 crore owing to a sharp decline in treasury income. Opex jumped 9.5% QoQ as business activity increased. As a result of stunted topline and higher opex, C/I ratio increased 483 bps sequentially to 36.1%. Provisions for the quarter were at | 101 crore while net profit came in at | 78 crore, below our estimate.

Asset quality, on a proforma basis, deteriorated as GNPA ratio was up from 3.7% (proforma) to 4.09% QoQ while net NPA increased to 2.29% from 1.92% (proforma) QoQ. Restructured book, including those under implementation, were at ~| 1100 crore (4.2% of loans), below the management’s earlier guidance of 5%. Recoveries were impacted during the year and Q4FY21 due to standstill norms by the SC, which restricted use of SARFAESI act. Collection efficiency in each business segment saw an improvement in March over December. However, the management has indicated that collections in April have shown some decline but did not comment on numbers.

DCB currently has contingency provisions of | 124 crore on restructured and stressed assets & floating provisions worth | 109 crore on its books. Provisions on restructured standard assets increased from | 47 crore to | 139 crore QoQ. Overall, the bank has provisions worth 3.3% of net loans. Business growth for the bank has remained muted as credit growth was at 2.4% YoY to | 25959 crore.

The company is now focused on expanding LAP, gold loans, etc. Agri loans saw a healthy sequential pick-up of 7.5% while home loans were up 2.6% QoQ. New disbursements saw a steady rise till March 2021 but post lock down disbursement growth has been impacted in April and May 2021. On the deposit front also, growth was tepid as total deposit book was up 2.9% QoQ to | 29704 crore. CASA ratio declined to 22.8% from 23.1% QoQ due to slower CASA growth than overall deposits.

Valuation & Outlook

The management has guided for loan growth of ~15-16% and also expects recoveries to increase from Q2 onwards. We believe with ~95% of secured nature of book and ability to use SARFAESI now higher quantum of recoveries is possible. In turn, this may aid asset quality improvement. Near term uncertainty due to partial lockdowns and early indicators like a drop in collection point towards rising stress. However, we believe low valuations factor in some of the risks and limit downside. Thus, we upgrade our rating from HOLD to BUY with a revised target price of | 110 (| 130 earlier) and value the bank at ~0.8x FY23EABV.

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