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Beat on PPoP; provisions may moderate

DCB Bank (DCB) saw a good quarter with a beat on operating numbers. NII was ahead driven by NIM due to lower funding cost as healthy CASA accretion continues while loan growth is coming back. Disbursal momentum continued, led by mortgage, corporate, co-lending and AIB. DCB intends to double the balance sheet in 3-4 years. Deposit mix further improved with CASA+RTD making up for 88% of deposits (a year ago 82%). While GNPA was higher led by gross slippages at 5.0% (31% from gold loans), the bank is confident of recovering a chunk of these in Q4FY22 which may lead to provision reversal. Healthier recoveries and a better PCR QoQ were positives. Restructured pool was stable at 7.8% of loans with a cover of 17%. We maintain multiple at 1.1x Sep’23 ABV but lower TP to Rs130 as we slightly reduce earnings and increase GNPA for FY23/24. Retain BUY.

Q3FY22 results – Good operating numbers; slippages higher than expected

NII was Rs3.45bn higher to est. of Rs3.32bn owing to lower funding cost while loan growth was bit lower. NIM was ~3.75% (est. 3.6%) while cost of funds was 6.2% (est. 6.4%). Loan growth at 9.3% YoY (est. 9.7%) while LDR was 85.8% (est. 84.8%) as deposit growth was lower at 11.7% YoY (est. 13.4%). Other income at Rs1.18bn was a bit higher (est. Rs1.04mn) as core fee income of Rs890mn (incl. PSLC fees) was a beat. Opex was a miss at Rs2.65bn (est. Rs2.49bn) mainly led by higher other opex at Rs1.3bn (est. Rs1.2bn). PPoP was a beat at Rs2.0bn (est. Rs1.87bn) largely led by better NII. Provisions were a miss at Rs970mn (est. Rs6.0bn) as net slippages were higher than estimates. GNPA was stable QoQ at 4.7% (est. 4.5%) while PCR rose QoQ. PAT was Rs754mn (est. Rs927mn).

Gross slippages were higher though recoveries too were stronger

Gross slippages spiked to Rs4.6bn (est. Rs3.0bn) although recoveries were stronger at Rs4.0bn (est. Rs2.9bn). NPA accretion included Rs140mn from the gold portfolio which emanated due to loss of productivity in branches as a result of rising COVID cases in Dec’21. As loss given default is immaterial in gold loans, net provision impact might be minimal. Also, the bank is confident of recovering a chunk of the gold slippages in Q4FY22 which may lead to provision reversal. All other segments viz. mortgage, SME, agri (ex-gold) and CV/CE witnessed a GNPA reduction QoQ. There was no effect of RBI directive on daily tagging of NPA. The management suggested that slippage ratio would normalise over the next 2-3 quarters. Restructured pool was stable QoQ at 7.8% of loans with a coverage of 17%.

Momentum in credit flow continues

Disbursals were healthy at Rs33.4bn (vs Rs38.4bn in Q2FY22) that was largely attributable to mortgage, AIB, corporate and co-lending. Guidance on doubling the balance sheet in 3-4 years was maintained with mortgage, golds loan, SME and AIB being the growth drivers. DCB targets to cross 400 branches in the next 2-3 quarters which would help business volumes to improve that could lead to decline in cost to income. Deposit mix continues to improve with CASA ratio improving QoQ by 50bps to ~26% and CASA + RTD making up for 88% of deposits (82% a year ago). Wholesale TD share has been shrinking which may fall to 5% in 1.5 years.

Valuation and risks

We raise opex for FY23/24E which would lower PAT by 8%/3%. As strong recoveries continue leading to lower slippages and credit costs, growth momentum is coming back and DCB could see a 18% growth over FY22-24E. Keeping the multiple unchanged at 1.1x on Sep’23 ABV, we revise TP to Rs130 (previously Rs140). Risks: higher stress and slower recovery pace.

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