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Margin decline and opex rise not comforting

Result Highlights

* Asset quality: Gross slippages amounted to Rs 5.71bn (annualized slippage ratio of 7.9%) but recoveries and upgrades were also healthy at Rs 5.70bn

* Margin picture: NIM at 3.61% was down -32bps QoQ, sequentially lower due to excess liquidity that had to be maintained at the beginning of the quarter

* Asset growth: Advances grew 2.5%/16.9% QoQ/YoY driven sequentially by all segments except co-lending

* Opex control: Total opex rose 9.4%/31.9% QoQ/YoY, employee expenses rose 6.1%/26.4% QoQ/YoY and other expenses rose 13.2%/38.3% QoQ/YoY

* Fee income: Commission, exchange, brokerage fell/rose -2.3%/37.3% QoQ/YoY, significantly up YoY due to low base

Our view – Margin decline and opex rise not comforting

Excess liquidity was partly seasonal and partly due to meeting wholesale lending demand: Management stated that the stable NIM would be in the range of 365-375 bps. 40 bps worth of repo rate hike has been passed on whereas, the remaining 50 bps hike will be passed on in August. The reset period for EBLR-linked loans is 3 months. Other than tractor loans, CV and gold loans, the loan book is essentially on floating rate

Management stated that the bank has been adding frontline staff and branches and opex would remain elevated this financial year: New employees have been hired for various businesses across the board including mortgages, home loans, gold loans, tractors, CASA and term deposits, operations, credit and technology. In terms of medium-term guidance, in about 4-5 quarters, cost to income ratio would decline to 55%. Cost to average assets would come down as volume moves up.

Elevated gross slippages for the quarter were driven by the gold loan book due to the 'Out of Order' circular of RBI but were essentially transient in nature: In the gold loan book, the bank provides an OD product which requires monthly repayment whereas, some customers are used to bullet repayments (at the end of the tenure), which NBFCs used to offer them. Management guided that slippages from the mortgages, CV and SME book would be at or below the pre-Covid level in 2-3 quarters. Credit cost in the current financial year would be lower than in FY22 and on a steady state basis, would be 50-60 bps. The outstanding standard restructured advances stood at Rs 20.94 bn or 6.85% of gross advances but most of this book comprises secured loans.

We downgrade DCB to ‘Neutral’ from ‘Add’ with an unchanged price target of Rs 95: We value the bank at 0.6x FY24 P/BV for an FY23E/24E/25E RoE profile of 8.9/11.5/12.7%. The stock remains right at the bottom of our pecking order. (See Comprehensive con call takeaways on page 2 for significant incremental colour.)

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