DCB Bank : Decent quarter, earnings to pick up; maintaining a Buy - Anand Rathi Share and Stock Brokers
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Decent quarter, earnings to pick up; maintaining a Buy
Strong growth in NII was counterbalanced by higher opex, keeping C/I ratio above 60%; however, benign credit cost aided profitability with RoA coming at ~1%. Higher slippages kept asset quality under pressure. Key positives for the quarter were 1) collection efficiency near pre-Covid levels, 2) strong recoveries/upgrades, 3) decline in stress across core segments (excl. Corp.) and 4) strong pick-up in disbursements in its core mortgage book. With credit growth expected to pick up and normalising credit costs, earnings would improve. We maintain our Buy rating, with a TP of Rs150, valuing the stock at 0.8x P/ABV on the FY25e book.
Slippages to moderate. Slippages for the quarter were elevated at Rs4.6bn (6.1% of loans), which were ~20% lower than in the previous quarter. Recoveries/upgrades were strong, reflecting the bank’s collection efforts. Collection efficiency (including NPA and restructured pool), the key portfolio (details in Fig. 7) has been steadily improving. The net standard restructured book was Rs17.1bn (5.5% 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 be 1% in H2FY23. With majority of the bank’s book linked to EBLR, margins should be maintainable at current levels as transmission in yields would be faster than costs even with a further increase in interest rates. With a pick-up in business growth and normalised slippages from H2FY23, credit cost should be modest. Higher business growth combined with moderate credit cost would keep profitability strong. We estimate a 1% RoA in H2FY23.
Valuation. Our Nov’23 target of Rs150 is based on the two-stage DDM model. This implies a ~0.8x P/ABV multiple on its FY25e book. Risks: Lessthan-expected loan-book growth; large slippages from the mortgage book.
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