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Weak operating performance; loan growth seeing a recovery

Restructured portfolio remains elevated ~6.1% of loans

? DCBB reported a weak operating performance, led by miss on both NII/PPOP, while PAT came in healthy at INR970m (up 188% YoY; 6% beat) on the back of lower provisions. NIM moderated sharply by 32bp QoQ to 3.61%. On the business front, advances/deposits grew by ~18%/15% YoY.

? Slippages increased sharply to INR5.7b (v/s INR3.8b in 4QFY22). However, healthy upgrades resulted in an improvement in GNPA/NNPA ratio. The outstanding restructured book remains elevated at INR18.2b (6.1% of loans). Collection efficiency remained steady within Home loans and LAP, but continued to be lower in the CV portfolio.

? We remain watchful of asset quality due to a higher restructuring book and estimate RoA/RoE at 1%/12.7% in FY24. We maintain our Neutral rating.

Lower provisions drive earnings; NIM contracts by 32bp QoQ

? PAT grew 188% YoY to INR970m in 1QFY23 (6% beat), supported by lower provisions (down 78%). NII grew by ~21% YoY, but fell 2% QoQ to INR3.7b, resulting in a 32bp QoQ contraction in margin to 3.61%.

? Other income declined by 24% YoY to INR924m, primarily weighed by lower treasury gains. Fee income grew strongly at 37% YoY to INR648m. OPEX grew by 32% YoY (12% miss) as the bank continues to hire employees and make investments in the business. PPOP declined by 18% YoY (24% miss).

? On the business front, the loan book grew 18% YoY and 2.5% QoQ supported by healthy disbursements across mortgages. The share of the Corporate book was stable at 10%. Deposits grew 15% YoY, led by a 51% growth in CASA deposits. The CASA mix grew 182bp QoQ to 28.6%.

? GNPA/NNPA ratio declined by 11bp/15bp QoQ to 4.21%/1.82%, even as slippages increased sharply to INR5.7b (~9% annualized). This was supported by healthy recoveries and upgrades of INR5.7b. PCR improved to 57.8% (~69% including TWO). The outstanding restructured book stands elevated at INR18.2b (6.1% of loans).

? Collection efficiency remained steady within Home loans and LAP, but continued to be lower in the CV portfolio. Collection efficiency (including the delinquent and restructured book) in Home/Business/CV loans stood at 98.4%/97%/88.6% in Jun’22.

Highlights from the management commentary

? Cost-to-income/cost-to-asset ratio is expected to moderate gradually to 55%/2.4% over the next four-to-five quarters.

? NIM is expected to stabilize in the 3.65-3.75% range.

? The management’s focus is on doubling the Balance Sheet in three-to-four years. It aims to achieve a RoA/RoE of 1%/14% in four-to-five quarters.

Valuation and view

DCBB reported a tepid operating performance as NII and margin witnessed a sequential decline, while lower provisions drove earnings. Business growth came in healthy, led by traction across segments, primarily mortgages, while deposit growth was healthy. There was a sharp increase in fresh slippages. However, healthy recoveries and upgrades resulted in an improvement in asset quality ratios. CE remains lower in the CV business. We remain watchful of asset quality due to a higher restructuring book and estimate a FY24 RoA/RoE of 1%/12.7%. We maintain our Neutral rating with an unchanged TP of INR90 (0.6x FY24E P/ABV).

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