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Price Analysis:

DCB bank’s 3QFY20 earnings demonstrated sequentially lower provisioning expenses (₹1.0bn v/s ₹1.47n in 3QFY21) and net profit of ₹779mn; down by 19% sequentially. The headline PCR decreased sequentially to 6.4% as fresh slippages remained high.

Pursuant to the Supreme Court’s directive, the bank has resumed NPA recognition and reported slippages of ₹6.67bn, higher write-offs (₹518mn v/s ₹394mn in 3QFY21) and muted advance growth have resulted in GNPA ratio (4.09% v/s 3.72% pro-forma in the previous quarter) and NNPA ratio (2.29% v/s proforma 1.92%).

On the business front, the bank reported muted growth in net advances (growth of 2.6% QoQ) and stable deposit traction of 2.9% QoQ. Gold loan grew at a healthy pace of 23% sequentially. The collection efficiencies of the bank is improving significantly and stood at ~96% in March-21 against 97% in pre-covid period. Factoring the current scenario, the management believes the NPA to increase in next 3 – 4 quarters but it can be managed with healthy operating performance. Considering an inexpensive valuation (0.7x Adj. BVPS) and improving collection scenario we recommend BUY.

Gazing the core:

Collection improving but Asset quality blip is likely: Among business segments, Business Loans (LAP), HL, and CV has 0.9%, 1.43%, and 2.74% by value respectively have not paid any installment since Apr-20 to Mar-21. Around 98.5% of MSME customers (in numbers) have demonstrated credit churn in their accounts between April 2020 and Mar 2021.

Collections: As of Mar-21, the collection efficiency improved month on month across verticals and on Business loans, Home Loans and CV stood 95.2%, 96.8% and 86.0% respectively against 97.7%, 98%, and 89.4% in Feb20 (Pre COVID era). As on 4QFY20, the net restructured standard advances stood at ₹9.68bn (3.73% of net advances) largely contributed by mortgages, CVs and MSMEs.

The bank believes the NPA to go up in next 3-4 quarters but having strong operating profit to absorb additional provisions. Additionally the bank has contingent provision (141bps of total standard book) which will provide cushion.

Sound liquidity with risk aversion:

The bank’s net advances stood at ₹256bn; grew marginally by 2.4% YoY and 2.6% QoQ. Mortgage book (42% contribution) grew by 2.6% QoQ. CV financing (5% contribution) de-grew by 14.5% QoQ. Agriculture & inclusive business (22% contribution) grew by 7.5% QoQ. Gold loans (6% contribution) have witnessed robust growth of 23.1% QoQ. MSME advances (10% contribution) de-grew by 6.7% QoQ. Corporate advances (11% contribution) grew by 12.9% QoQ. Management sounded caution on further loan book growth. As of 19 April 2021, the bank has sanctioned ₹21.45bn and disbursed ₹9.16bn under ECLGS 1.0 and 2.0 program. The bank is carefully and systematically disbursing ECLGS loans. The bank’s liquidity position remains adequate with daily average LCR of 138.3% against the revised mandatory requirement of 90%.

Tepid operational quarter and sequentially lower provisioning expenses:

The bank’s NII stood at ₹3112mn; de-grew by 7% sequentially because of lower NIMs which decreased sequentially by 29bps to 3.46% aided by 54bps reduction in YoA and 9bps reduction in CoF. The NIM compression was because of interest reversal. Management expects the NIM to come down further if slippages accelerate owing to Covid 2.0. Separately, cost-to-income ratio was high at 53.9% (v/s 43.3% in 3QFY21) and the sequentially lower provisioning expenses (₹1012mn v/s ₹1477mn in 3QFY21) have resulted in 19% sequential growth in PAT of ₹779mn. The bank’s annualized ROA and ROE stood at 0.80% and 8.96% respectively.

Outlook & Valuations

We expect the bank to post a ROA/ROE of 1.3%/12.5% by FY23E led by cautious balance sheet growth along with slight deterioration in asset quality. We value the bank at PBV of 1xFY23E Adj. BVPS to arrive at a price target of ₹123.

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