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Collection efficiency trailing peers; pro-forma asset quality deteriorates

Credit cost to remain high as asset quality outlook under watch

* DCBB reported strong earnings in 3QFY21, aided by high treasury income and controlled opex. This, even as provisions stood elevated at INR1.5b, as the bank made further COVID-related provisions of INR861m, taking the total provisions to INR2.29b (~1% of loans). Business growth remains under pressure. The management expects loan growth to remain subdued over the next few quarters and rebound from FY22 onwards.

* Collection efficiency improved for Home/CV loans, but deteriorated for Business loans (LAP) in Dec’20. The same remains lower v/s other private peers. Pro-forma asset quality deteriorated sharply and the management expects restructuring to be ~5% of loans (INR6.87b till Dec’20). We remain watchful on asset quality.

* We increase our FY21E/FY22E earnings estimate by 9%/8%, factoring in higher other income, even as we estimate credit cost to remain elevated at 1.9%/1.8%. Maintain Neutral.

Higher treasury income supports earnings; business growth under pressure

* DCBB reported a PAT of INR962m (+17% QoQ, higher than our estimate), aided by high treasury gains of INR741m. Provisions remain elevated at INR1.5b (67% QoQ) as it made COVID-related provisions of INR861m. The latter has increased to ~INR2.3b (~1% of loans).

* NII grew 3.6% YoY to INR3.3b (8% beat) even as margin stood flat at 3.75%. Other income grew 66% YoY to INR1.5b, led by high treasury income and improved fee income, which grew 26% QoQ to INR550m. Net revenue increased 18% YoY.

* Opex declined 6% YoY to INR2.1b, resulting in ~400bp QoQ improvement in C/I ratio to 43.3%. PPOP grew at 46% YoY to INR2.8b. For 9MFY21, the same grew 28% YoY while PAT declined 4% to INR2.6b.

* Loan growth was flat YoY, with CV book falling 15%, while Gold/Corporate loans grew at 27%/12% QoQ. Deposit growth declined 3% YoY to INR288b, led by a 4% fall in CASA, while TD declined 3% YoY. Retail TD decreased by 2% YoY and constitutes 59% of total deposits.

* On the asset quality front, GNPA/NNPA ratio improved by 31bp/24bp QoQ to 1.96%/0.59%. PCR improved by 600bp QoQ to 70.2%. If not for the SC order, GNPA/NNPA would have risen to 3.7%/1.92% as slippages would have been higher by INR4.5b.

* Collection efficiency: Home loans (94.1%), Business loans (89.8%), and CV (80.4%). Customers who have not paid any installment (Apr’20 to Jan’21) is 1.31% of Business loans, 1.55% of Home loans, and 3.2% of the CV portfolio as on 18 Jan’21.

Highlights from the management commentary

* It expects ~5% of loans to seek restructuring under RBI’s resolution framework for COVID stress.

* As of now, the bank has not received any restructuring request in the corporate portfolio. Majorly by majority has been received in LAP, Home loans availed by self-employed customers, and CV portfolio.

* Steady state credit cost to be ~55-60bp. Over the next few quarters, credit cost trend is likely to remain high.

Valuation and view

* DCBB reported moderation in business growth and guided for muted trends as its focus in the near term would be on preservation of the Balance Sheet and controlling risk. On the asset quality front, collection efficiency remains lower v/s peers. The management guided for restructuring to be ~5% of loans. It will continue to face higher delinquency in the CV portfolio. We remain watchful as pro-forma asset quality deteriorated sharply, and thus expect credit cost to remain elevated at 1.9%/1.8% in FY21E/FY22E. We estimate DCBB to deliver FY23E RoA/RoE at 1.1%/12.5%. Maintain Neutral with a TP of INR110/share (0.9x Sep’22E ABV).