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Initiated as a least preferred name 2+ years ago, DCB continues to deliver sub-par outcomes

Result Highlights (See “Our View” below for elaboration and insight)

? Asset quality: Gross NPA addition amounted to Rs 3.95bn (annualised slippage ratio of 4.3%) while recoveries and upgrades amounted to at Rs 2.89bn

? Margin picture: NIM at 3.69% was down -14bps/-19bps QoQ/YoY, sequentially lower due to cost of deposits rising more than yield on advances.

? Asset growth: Advances grew 5.1%/19.1% QoQ/YoY, driven sequentially by Corporate Banking, AIB, Co-lending and ‘Others’ segments

? Opex control: Total opex rose 1%/13.7% QoQ/YoY, employee expenses fell/rose -3.1%/10.1% QoQ/YoY and other expenses rose 5.6%/17.6% QoQ/YoY

? Fee income: Core fee income rose 29.3%/26% QoQ/YoY, supported by growth in advances.

Our view–Mortgage asset quality and SA rate hike symptomatic for DCB

Gold loan book was not the only key source of slippages as restructured mortgages are proving to be a troublesome area: Most of the slippages emerged from the restructured book, which in turn were mainly mortgage customers who have just come out of moratorium. Slippages from restructured book are expected to stabilize in 2 quarters. Gold loan slippages continue and the gross slippage ratio excluding gold loan slippages amounted to 2.69%, which has declined on sequential basis.

Management did not sound confident with regard to margin commentary: Cost of funds has gone up on sequential basis by 16 bps and management expects this rise to play out over the next 2 quarters and then stabilize. In terms of moving parts, there is the SA bucket of Rs 1mn-20mn for which the bank has hiked the interest rate from less than 7% to 8% at the fag end of 2Q. On the other hand, there is some upward residual repricing remaining on the floating rate book.

Presently, DCB seems to be growing at a better pace than its not too distant past: It may be noted that YoY disbursement growth was negative primarily due to slowing down TREDs business where PSU banks are offering lower rates. AIB loans are growing at 30% plus YoY and it continues to remain a focus area. The intention is to increase overall loan growth to above 20% and still to double the balance sheet in 3-3.5 years.

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 0.8x FY25 P/BV for an FY24E/25E/26E RoE profile of 11.2/11.9/12.9%.

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