Sell DCB Bank Ltd For Target Rs.75 - Emkay Global
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Weak growth, asset-quality risk set to persist
* Amid sub-par credit growth, muted margins and asset-quality risk coming to the fore, DCB Bank reported a beat on PAT at Rs0.78bn (est. Rs0.57bn), mainly due to better core fee income and under-provisioning. The bank carries a Covid-19 contingent buffer of 0.5% of loans, which looks sub-par given the elevated potential stress.
* Reported GNPA stands high at 4.1% vs. pro forma GNPA of 3.7% in Q3 due to lower recoveries, while the restructured pool also seems to be high at 4.3% of loans. We believe that the bank has relatively higher dependence on the self-employed category which remains the most impacted in the second Covid wave.
* In our view, growth may remain subdued, while asset quality should remain weak with the onset of second wave, keeping earnings under pressure. We expect the bank’s RoA/RoE to remain moderate at 0.8-0.9%/9-11% over FY22-24E.
* Maintain Sell and cut TP to Rs75 from Rs95, factoring in a slight cut in earnings (13% in FY23E) and TP multiple to 0.6x from 0.8x which reflects the weakness in growth/asset quality. The shorter tenure of current MD (1 year) also adds to volatility.
Sub-par business momentum; margins remain impacted:
Credit growth, though turned positive, remained subdued (up 2% yoy/3% qoq) due to conscious downtrend in the corporate and SME book, partially offset by growth in the retail business, driven by mortgage and gold loans. DCB continues to focus on growing business loans (LAP), home loans, gold loans, KCC, tractor loans, MFI & MFI-BC and short-term corporate loans, and has guided for highteens growth once things settle after the second wave. Deposits have taken a hit (down 2% yoy) as the bank consciously shed high-cost bulk deposits. Margins were down 30bps qoq to 3.5% in Q4 due to higher liquidity, interest reversals on NPAs and interest waiver.
Asset-quality pain to accentuate:
Reported GNPA remained elevated at 4.1% vs. pro forma GNPA of 3.7% in Q3 due to lower recoveries. Further, the restructured book stood at a high of 4.3% of loans. According to management, although collection efficiency seems to have improved (BL- 95%, HL- 97% and CV- 86%), it could show a downtrend with increasing logistical restrictions due to the second wave Covid picking up pace. The bank carries a Covidrelated contingent provision of Rs1.2bn, 0.5% of loans, and a floating provision of Rs1.1bn, which we believe is sub-par given the elevated risk. In our view, the risk of elevated fresh delinquencies and relapse from the restructured pool should keep LLP at higher levels of 1.6- 1.5% over FY22E-24E, keeping RoA under pressure.
Retain Sell:
Maintain Sell and reduce TP to Rs75 from Rs95, factoring in a slight cut in earnings (13% in FY23E) and TP multiple to 0.6x from 0.8x which reflects the weakness in growth/asset quality. The shorter tenure of current MD (1 year) also adds to volatility. Key risk: better-than-expected growth/asset-quality experience, driven by shorter lockdowns and a sharp rebound in economic activity.
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