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Asset quality deteriorates; business growth under pressure

Credit cost to remain high; restructuring book high ~4.3%

* DCBB reported a weak operating performance, impacted by higher interest reversals, even as provisions fell sequentially, which supported earnings. Business growth continues to remain under pressure. The management guided for loan growth to remain subdued over the next few quarters due to the surge in COVID-19 cases and lockdowns in key states.

* Asset quality deteriorated further, with a rise in GNPA/NNPA ratio from pro forma levels in Dec’20. The gross restructuring book stood at 4.3% of loans (higher than peers). Collection efficiency, which improved in Mar’21, has again got impacted in Apr’21. We thus remain watchful on asset quality.

* We cut our FY22E/FY23E earnings estimate by 10%/7% to factor in lower other income, higher opex, and elevated credit cost of 1.9%/1.5% in FY22E/FY23E. Maintain Neutral.

Higher interest reversal impacts operating performance; PCR moderates to 45%

* DCBB reported a PAT of INR779m (-19% QoQ; higher than our estimate), impacted by higher interest reversal of INR370m on NPAs and INR100m for interest-on-interest waiver, though supported by lower provisions. For FY21, NII/PPOP grew 2%/19% YoY, while PAT stood flat at INR3.36b.

* NII declined 3.9% YoY (-7% QoQ) to INR3.1b (8% miss), with margin contracting 29bp QoQ to 3.46%, impacted by higher interest reversals. Other income grew 22% YoY to INR1.34b, led by improved fee income, which grew 28% QoQ to INR702m. Overall, net revenue grew by 3% YoY.

* Opex grew 8% YoY to INR2.4b, resulting in an increase in core C/I ratio by 300bp QoQ to 54.1%. C/I ratio stood at 53.9% v/s 43.3% in 3QFY21. PPOP declined 3% YoY to INR2.05b (MOFSLe: INR2.37b).

* Loan book grew 2.4% YoY (2.6% QoQ), led by Home/Gold loans, which grew 15%/172% YoY. AIB book grew 7% YoY. CV book declined 27% YoY, while Corporate loans grew 2.6% QoQ. Deposits declined 2% YoY to INR297b, even as CASA deposits grew 4%, while TD fell 4%. Retail TD grew 4% YoY and forms 60% of total deposits.

* On the asset quality front, GNPA/NNPA ratio deteriorated further to 4.09%/2.29% v/s pro forma GNPA/NNPA of 3.70%/1.92 as of Dec’20. PCR moderated sharply to 45.2%. Gross restructuring book stood at 4.3%, while net restructured book stood at INR9.68b (3.7% of loans). The bank carries additional contingent provisions of INR1.24b as on Mar’21.

* Collection efficiency update: Home loans (96.8%), Business loans (95.2%), CV (88%). Customers who have not paid any installment in FY21 is 0.9% of Business loans, 1.43% of Home loans, and 2.74% of the CV portfolio as of 31st Mar’21.

Highlights from the management commentary

* Collection efficiency in Apr’21 declined v/s Mar’21. The management remains cautious given the current environment as it could impact asset quality.

* It said the recent surge and lockdown has impacted the growth momentum. The management is targeting to maintain NIM in the 3.65-3.8% range.

* Cost could increase over the next few quarters due to a higher headcount. The management is targeting to bring cost-to-assets ratio to ~2.2%.

Valuation and view

* DCBB reported a weak operating performance, impacted by higher interest reversals, while business growth continues to remain under pressure. The management guided for muted trends due to a surge in COVID-19 cases and lockdowns in key states, with the near term focus on preservation of the Balance Sheet and controlling risk. On the asset quality front, collection efficiency, which improved in Mar’21, was impacted again in Apr’21, while the restructuring book remains high at 4.3%.

* We remain watchful on asset quality as the same deteriorated further and expect credit cost trends to remain elevated at 1.9%/1.5% in FY22E/FY23E. We expect DCBB to deliver FY23E RoA/RoE at 1.1%/12%. We maintain our Neutral stance on the stock with a TP of INR100 (0.8x FY23E ABV).

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