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Result Highlights

* Asset quality: Annualized slippage ratio for 1QFY22 was elevated at 8.0%, with management stating that extrapolating first quarter slippages was inappropriate

* Margin picture: NIM at 3.31% was down 15 bps QoQ primarily due to elevated interest reversals, which were caused by elevated slippages

* Asset growth: Advances de-grew/grew -1.8%/1.7% QoQ/YoY supported only by mortgages, which displayed minor sequential growth

* Opex control: Total opex de-grew/grew -5.1%/17.9% QoQ/YoY, with year-on-year growth due to increments and headcount addition

* Fee income: Fee income declined/rose -32.8%/75.5% QoQ/YoY due to weakness in business activity on sequential basis

Our view –

Multi-year high slippages show that MSME environment remains particularly challenged

Commentary on slippage guidance though alluding to declining slippages lacked clarity and conviction:

The only silver lining was healthy upgrades amounting to Rs 1.62bn, with management stating, this time with confidence, that upgrades would remain healthy going forward. Net restructured standard loans amounted to Rs 13.74bn compared with Rs 9.68bn as of March. Provisions jumped 53.7% QoQ to Rs 1.56bn, of which Rs 1.3bn were specific provisions. Covid provisions outstanding declined Rs 0.16bn QoQ to Rs 1.08bn. Provisions outstanding on restructured book stood at Rs 1.89bn compared with Rs 1.39bn as of March.

Management commentary was tantamount to NIM having bottomed out but there is little solace from bouncing off multi-year low NIM:

The management expects cost of deposits to decline further on the back of deposit rate cuts. For the quarter, both cost of deposits and yield on advances declined in identical fashion by -15 bps QoQ to 6.23% and 10.50%, respectively.

Management stated that, barring a disruptive third wave of Covid-19, the bank can deliver growth in the realm of 10-12% or better for the year:

Management stated that home loans would continue to be key focus area for them and the share of home loans in total loan book could rise from ~22% currently to ~30% in 2-3 years. Growth for the overall mortgages book (including home loans), based on a calculation, amounted to 0.6% QoQ.

We maintain ‘Reduce’ rating on DCB with a revised price target of Rs 101:

We value the bank at 0.7x FY23 P/BV for an FY22E/23E/24E RoE profile of 6.5/9.6/10.4%.

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