Add DCB Bank Ltd. For Target Rs.170 By Yes Securities
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Our view – Asset quality, margin and opex outcomes not satisfactory
While gold loan slippages, which are less concerning, made the gross slippage ratio look much worse, the number isn’t great excluding gold loans either: Gross slippage ratio excluding gold loan slippage was at 2.55%. Recoveries and upgrades amounted to Rs 3.39bn for 3QFY24, implying net NPA addition of Rs 0.89bn for the quarter. Total non-tax provisions were Rs 0.41bn, up by 3.3% QoQ and 0.8% YoY, translating to calculated annualised credit cost of 43bps on all-inclusive basis.
Sequential margin decline was particularly material even in the context of the rate environment: Cost of deposits has gone up on sequential basis by 18 bps. Management expects this rise to play out over the next 4-5 months and then stabilize. Yield on advances have declined by -12bps QoQ to 11.4%, largely due to change in loan mix.
Loan growth remains reasonably healthy, sequential deposits traction improves while opex remains sticky at elevated levels: The intention is to increase loan growth to above 20% and double the balance sheet in 3-4 years. Savings deposits have grown by 10.6% QoQ and 14.8% YoY. The savings deposit growth was driven by launch of new products, adoption of technology, effective fintech tie-ups and increased focus at branch level for saving deposits. Cost to assets was at 2.6%.
We maintain a less-than-bullish ‘ADD’ rating on DCB with a revised price target of Rs 170: DCB was among the bottom 2 names in our Sector Initiation Report dated June 2021. We value the bank at 1.0x FY25 P/BV for an FY24E/25E/26E RoE profile of 10.4/11.1/12.2%.
Result Highlights (See “Our View” above for elaboration and insight)
? Asset quality: Gross NPA addition amounted to Rs 4.28bn (annualised slippage ratio of 4.4%) while recoveries and upgrades amounted to at Rs 3.39bn
? Margin picture: NIM at 3.48% was down -21bps/-54bps QoQ/YoY, sequentially lower due to rise in cost of deposits as against fall in yield on advances.
? Asset growth: Advances grew 4.5%/18.2% QoQ/YoY, driven sequentially by AIB, Mortgages, Co-lending and ‘Others’ segments
? Opex control: Total opex rose 3.7%/11.2% QoQ/YoY, employee expenses rose 5%/10.5% QoQ/YoY and other expenses rose 2.3%/11.9% QoQ/YoY
? Fee income: Core fee income rose 1%/40% QoQ/YoY, driven by underline growth in business.
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