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Characteristically weak quarter

Weak core performance; monitor related volatility

DCB Bank’s (DCBB IN) Q3 PAT at INR 1.27bn (up 11% YoY/flat QoQ) came in line with estimates, supported by higher other income and curtailed credit cost but underlying core saw softer trends. Core profitability was down >4% QoQ, given 21bps QoQ NIM decline (below the guided range, decline more than peers that have reported earnings thus far). Asset quality trends are stable, supporting earnings. The discussion hereon will rather be focused on: a) NIM trajectory – further funding cost strain likely, b) growth trajectory, which may feed into operating leverage benefit and c) recovery trends and credit cost delivery. While DCBB has been wading through challenges, the pressure points on core are disappointing. We believe, consistent delivery is the key trigger.    

NIM decline feeds into softer core; trajectory, the key   

DCBB saw softer core profitability (down >4% QoQ), led by 21bps QoQ NIM drop, largely due to funding cost impact, which was further impacted by lower lending yields (a disappointment). With this, NIMs (at 3.48%) fell below the guided range, and with likely further strain on funding cost, expect NIMs to be under strain, near term. We believe sustained focus and growth delivery are critical as these may drive operating leverage benefits – essential to improve return ratios.

Asset quality as expected; monitor volatility

Q3 slippages were higher at INR 4.3bn (4.6% versus 4.5% QoQ, higher than for peers, largely led by higher slippages in the mortgage segments (a large chunk came out of moratorium). That said, recovery/upgrades were higher, which curtailed the GNPL rise. While gross slippages have been elevated, recoveries have entailed lower credit cost, with DCBB sounding confident on higher recoveries hereon – a trend that may warrant further monitoring.      

Valuations: Downgrade to Accumulate; TP revised to INR 165

While DCBB has performed well this cycle, we see structural operational limitations (long walk on liabilities, investment requirement) to cap returns – RoE of 12-13% in FY25E. Moreover, volatility between the quarters is a challenge and thus, we refrain from ascribing higher structural multiples, and see DCBB as more of a tactical play than a structural story at this juncture. We introduce FY26E estimates and roll over to September 2025E, leading to revised TP of INR 165 (from INR 147, multiples unchanged). Post our upgrade, the stock had outperformed >20% in the past three months, thus rendering limited upside – Downgrade to Accumulate from BUY.

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