Buy DCB Bank Ltd For Target Rs.146 - Anand Rathi Shares and Stock Brokers
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Decent quarter, RoA to hold near 1%; maintaining a Buy
Higher opex counterbalanced DCB Bank’s strong NII growth, keeping the C/I ratio above 60%; benign credit cost, however, aided profitability, with the RoA coming near ~1%. Higher slippages kept asset quality under pressure. Key positives for the quarter were 1) collection efficiency improving across key segments, 2) strong recoveries/upgrades, 3) decline in stress across core segments (excl. Corp.) and 4) strong traction in disbursements across key segments. With credit growth expected to pick up and normalising credit costs, earnings would improve. We retain our Buy rating, with a TP of Rs146, valuing the stock at 0.8x P/ABV on the FY25e book.
Slippages to moderate in a couple of quarters. Slippages for the quarter were a high Rs4.0bn (5.1% of loans), ~11% lower than in the previous quarter. Recoveries/upgrades were strong, reflecting the bank’s collection efforts. Collection efficiency (incl. NPA and the restructured pool), the key portfolio (details in Fig. 7) has been steadily improving. The net standard restructured book was Rs16.3bn (4.9% of the loans). With improvements in business activities and collections across various segments, slippages are expected to moderate in a couple of quarters.
RoA to hold at ~1% in the medium term. With growth expected to be in midteens and a moderating slippage run-rate, medium-term credit costs are expected to be soft. Higher business growth combined with benign credit costs would lead to strong profitability in the medium term. We estimate a ~1% RoA through FY24 and FY25.
Valuation. Our Jan’24 target of Rs146 is based on the two-stage DDM model. This implies a ~0.8x P/ABV multiple on its FY25e book. Risks: Less-thanexpected loan-book growth; large slippages from the mortgage book.
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