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Improving visibility on credit growth revival – the key catalyst for next leg of rerating

DCB Bank’s (DCB) credit growth trajectory was impacted sharply during the past three years due to corporate book consolidation in FY19 and pandemic between FY20-FY22. Credit growth decelerated to 7% CAGR during FY19-FY22 vs 24% CAGR through FY14-FY19. Notably, despite the subdued growth in credit, profitability broadly remained stable as reflected in the average RoA of 0.9% annually between FY19-FY22 (RoA was lowest at 0.7% in FY22). However, profitability retraced in Q4FY22 with RoA improving to 1.06% and sustaining in Q1FY23 (0.9%). With RoA reaching near its historical high, we believe DCB would now start focusing on accelerating credit growth. Addition of ~2,000 people and >50 branches during past 12 months point at the bank’s growth-oriented approach going forward. During the past 3 years, lower credit growth and concern over asset quality amid covid led to decline in valuation. Considering DCB’s strong operational history, stable management team and improving visibility on credit growth revival, we believe the stock is likely to rerate going forward. Maintain BUY with a revised target price of Rs145 (earlier: Rs130), as we roll over our estimates to Sep’23 BVPS. Key risks: 1) Stress exceeding anticipated levels, and 2) deceleration in loan growth.

* With improving visibility on credit growth revival, we model 18% loan CAGR over FY22-FY24E. Since FY11, post the management change in FY10, DCB has consistently delivered high double-digit growth until the onset of pandemic (average credit growth between FY10-FY20 stood at >20% annually. During the covid phase, advances growth moderated sharply to single digits (average loan growth was at 7% between FY20-FY22) due to weak credit demand at system level and management’s priority towards collections over balance sheet growth. However, with abating asset quality challenges, the bank has returned to the growth path – it delivered 6% QoQ credit growth in Q4FY22. Disbursements growth remained robust at 18% QoQ in Q4FY22 – and, even on high base, it grew 2% QoQ in Q1FY23 to Rs36bn, which was highest in the past 6 quarters.

* Network expansion and accelerated workforce addition in recent past to support growth. DCB added >50 branches and >2,000 people in the past 4 quarters. Management derives comfort from the abating asset quality challenges and improved credit demand at systemic level since Q1FY22. Strategically, since Oct’17 (when DCB completed the branch expansion drive it had announced in Oct’15), it has focused on sweating existing assets. As a result, between FY18-FY21, new branch addition was muted at only ~35 and just <400 people were added during the same period.

* Adequate provision on existing NPL (PCR @ 58%) and return of monthly slippages to pre-covid levels ensures credit cost normalisation in FY23E. While the slippage ratio appears to be elevated (5% in Q4FY22, 8% in Q1FY23), it was due to gold loan slippages (nil LGDs). Slippages in the non-gold loan portfolio, largely mortgages, has stabilised and is already back to pre-covid levels. GNPL in the mortgage book is declining steadily (it fell from Rs4.7bn in Q1FY22 to Rs3.3bn in Q1FY23). DCB’s healthy PCR (exwrite/offs) at 58% as at Jun’22, and stability in non-gold loanbook slippages, suggest likely normalisation in credit cost over FY23E/FY24E.

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