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Slippages elevated, overall recovery to remain gradual

About the stock: DCB Bank is a new generation private sector bank offering a comprehensive range of financial products and has a niche in mortgage lending.

* Mortgage forms 43% of total loans while SME contributes 10%

* The bank has 354 branches, 402 ATMs across 19 states, three UTs in India

Q1FY22 Results: DCB’s PAT was marred by high credit cost and a tepid topline.

* NII growth flattish YoY at | 309 crore; NIMs fell 15 bps QoQ to 3.31%

* C/I ratio down 81 bps QoQ to 53.1%; provisions elevated at | 155.5 crore

* GNPA up 78 bps QoQ to 4.87%, restructured book up ~170 bps at 5.4%

* Loans up 1.7% YoY at | 25496 crore; deposits up 4% YoY at | 30602 crore

What should investors do?

DCB’s share price has given ~20% returns over the past year. We believe business growth could pick up pace, going ahead. However, credit cost is expected to remain elevated in the near term.

* We downgrade our rating from BUY to HOLD on the stock

Target Price and Valuation: We value DCB Bank at ~0.8x FY23E ABV and revise our target price from | 110 to | 100 per share.

Key triggers for future price performance:

* Pick-up in economy & SME segment to aid 10-12% credit growth

* Continued granularisation and reduction in deposit rate to propel margin

* Improvement in RoA visible, given focus on growth, margin & recovery

* Though historic LGD is low, elevated slippage & lesser provision buffer remain near term concerns.

Alternate Stock Idea: Apart from DCB, in our coverage we also like CSB Bank.

* CSB Bank has shown a meaningful transformation in its overall performance in the past few years and currently focuses on gold and SME loans

* BUY with a target price of | 380

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