Add DCB Bank Ltd For Target Rs. 135 By Yes Securities Ltd
Growth alone does not warrant an upgrade
Our view – Margin stabilizes at lower level, while slippages sustain at higher level
Balance sheet growth – Loan growth remains healthy with co-lending driving growth for the quarter: Advances grew 7.5%/22.7% QoQ/YoY, driven sequentially by Co-lending and Commercial Vehicle segments. The Co-lending book was at Rs 53.92bn, up by 61% YoY as one large partner resumed lending after a brief pause. Excluding co-lending, the overall loan growth would be about 18-19% YoY, which is similar to the trend of previous quarters.
Net Interest Margin – Long-term NIM decline was arrested but margin seems to settle at a modest level: NIM at 3.30% was up/down 3bps/-18bps QoQ/YoY. The yield on advances in 3Q was at 11.44%, up by 5bps QoQ but flat YoY. The Cost of deposits in 3Q was at 7.12%, up by 3bps QoQ and 17bps YoY. Cost of funds has risen 3 bps due to Tier 2 capital raise, which is higher cost and also due to tightness in the system. Management did not provide margin guidance, per se, but stated that boosting RoA will not involve diluting risk metrics to pursue higher NIM.
Asset Quality – Slippages rose somewhat on sequential basis driven by the usual stressed segments: For the quarter, Gross NPA additions had amounted to Rs 3.96bn (Rs 3.89bn in 2QFY25), implying an annualised gross slippage ratio of 3.4%. Recoveries and upgrades amounted to Rs 2.92bn. The slight rise in slippages was driven by the microfinance and unsecured retail segments. Provisions were Rs 0.67bn, up by 47.3% QoQ and 63.9% YoY, translating to calculated annualised credit cost of 58bps. For the bank’s business, the credit cost should range between 45-55 bps.
We maintain a less-than-bullish ‘ADD’ rating on DCB with a revised price target of Rs 135: DCB was among the bottom 2 names in our Sector Initiation Report dated June 2021. We value the bank at 0.7x FY26 P/BV for an FY25/26/27E RoE profile of 11.2/11.9/13.0%.
(See Comprehensive con call takeaways on page 2 for significant incremental colour.)
Other Highlights (See “Our View” above for elaboration and insight)
* Opex control: Total cost to income ratio at 62.7% was down by -156/-191bps QoQ/YoY and the Cost to assets was at 2.6% down by -15/-3bps QoQ/YoY
* Fee income: Core fee income to average assets was at 0.8%, down/up -3/14bps QoQ/YoY.
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