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Our view – NIM deteriorates due to regulatory changes, but business growth healthy

Net Interest Margin - NIM adversely impacted on sequential basis largely due to change in regulations: NIM at 3.39% was down -23bps/-44bps QoQ/YoY, sequentially lower due to repricing of deposits and certain changes in regulation relating to penal interest and date of charging of interest. The yield on advances has fallen -21bps QoQ to 11.50% for 1Q. However, the management has maintained its NIM guidance of 365- 375bps which they believe can be achieved through mix change on both sides of the balance sheet.

Balance sheet growth – Growth outcomes continues to be healthy on both sides of the balance sheet: Advances grew 3.1%/18.9% QoQ/YoY, driven sequentially by Mortgages, Gold Loans, SME and MSME and ‘Others’ segments. Within mortgages the share of business loans and home loans is 50:50 but going forward the share of business loans is expected to increase. Advances are expected to grow at 19-20% YoY. The growth in deposits at 4.7% QoQ was higher than advances and consequently the loan to deposit ratio has fallen by -132bps QoQ to 81.6%. The management aspires to bring it below 80%.

Asset Quality - Gross slippage ratio sequentially deteriorates but recoveries remain healthy: For the quarter, Gross NPA additions had amounted to Rs 3.73bn, implying an annualised gross slippage ratio of 3.5%, while recoveries and upgrades amounted to Rs 2.87bn. The calculated credit cost for the quarter was at 27bps up 3bps QoQ but the management has guided that on a steady state basis the business model would have a credit cost of 35bps.

We maintain a less-than-bullish ‘ADD’ rating on DCB with a revised price target of Rs 150: 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 FY25E/26E RoE profile of 11.8/12.6% 

Other Aspects (See “Our View” above for elaboration and insight)

? Opex control: Total opex rose 5.9%/17.7% QoQ/YoY, employee expenses rose 6.3%/15.5% QoQ/YoY and other expenses rose 5.5%/20.1% QoQ/YoY

? Fee income: Core fee income fell/rose -3.4%/52% QoQ/YoY, driven YoY by TP distribution, proc. fees and change in regulations with regards to penal charges.

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