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DCB remains the least preferred bank in our coverage

Result Highlights

* Asset quality: Gross NPA addition amounted to Rs 4.55bn(annualised slippage ratio of 5.8%) but recoveries and upgrades were also healthy at Rs 4.53bn

* Margin picture: NIM at 3.88% was up 27bps/51bps QoQ/YoY, sequentially higher due to rise in yield on advances as against fall in cost of funds

* Asset growth: Advances grew 5.0%/16.5% QoQ/YoY driven sequentially by all segments except CV, Gold Loans and Co-lending

* Opex control: Total opex rose 9.2%/33.3% QoQ/YoY, employee expenses rose 10.7%/29.9% QoQ/YoY and other expenses rose 7.6%/37.2% QoQ/YoY

* Fee income: Core fee income rose 18.8%/25.4% QoQ/YoY, due to better loan growth

Our view – DCB remains the least preferred bank in our coverage???????

Management sounded confident that DCB is on track to double its balance sheet in 3- 4 years: Over 2010-2020, the bank displayed a CAGR of 22% whereas, the CAGR over the last 2 years has been 7-8%. Now, the bank has reverted to a loan growth of 18% YoY.

Elevated slippages for the quarter were partly caused by corporate slippages and partly due to RBI’s Out of Order Circular: 4 accounts from the corporate book have slipped, which are very old corporate accounts which were dependent on repayment from quasigovernment agencies. The rise in corporate NPA has amounted to about Rs 1bn. Slippages due to the Out of Order Circular are mainly rule-based and do not indicate underlying stress on the book, which is reflected in the healthy recoveries and upgrades. Slippages would remain elevated for 2 more quarters before normalizing lower. The steady state credit cost is expected to be 50 bps.

Management remained cautious with NIM guidance and reiterated a range of 365-375 bps: The competitive intensity of the term deposits market is high and deposit rates would move up. Wholesale deposits have moved up on sequential basis as loan growth needed to be supported

Operating cost was elevated as DCB continued to invest in frontline capacity: Cost to income ratio for the quarter amounted to 64.2%. Management does not see opex rising in FY24 in the same manner as in FY23. The bank is aiming to get the cost to income ratio below 55%, which would take about 3-4 quarters.

We maintain ‘Neutral’ on DCB with a revised price target of Rs 125: DCB was among the bottom 2 names in our Sector Initiation Report dated June 2021. We value the bank at 0.8x FY24 P/BV for an FY23E/24E/25E RoE profile of 9.1/11.5/12.5%.

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