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DCB reported a 14% miss on PAT at Rs1.3bn (Emkay: Rs1.5bn) due to lower margins, other income, and one-off provisioning for AIF (Rs45mn). Credit growth remains high at 18% YoY/4% QoQ, with the Retail/Agri book growing at a faster pace. Mortgage remains a dominant portfolio contributor (45%) and growth driver, as the portfolio diversification strategy (CV, GL) largely backfired. CASA ratio remains rigidly lower than peers’ at 26%, despite a higher rate offering which, coupled with the need to accelerate TD growth for funding credit growth, should continue to weigh on margins (down by 21bps QoQ to 3.5% in 3Q). We cut FY24-26E earnings by 6-15%, factoring-in the lower margins/higher LLP, and expect the bank’s RoA trajectory to remain sub-par at 0.8-0.9%. RBI has recently approved appointing Praveen Kutty (internal candidate; Head - Retail/Agri Banking) as MD & CEO w.e.f. 29-Apr-2024, raising hopes of a long-elusive turnaround that we believe will not be an easy task. We retain SELL; revise TP to Rs110/sh (earlier Rs95); roll fwd at 0.7x Dec-25E ABV.

Higher growth continues to weigh on margins

Credit growth remains high at 18% YoY/4%, with Retail/Agri book growing at a faster pace. Within the Mortgage book (~45% share of total loans), the management plans to expand the share of LAP book vs the earlier plan of the HL book to drive-in higher yields – a strategy that we in our view could be fraught with asset quality challenges. Bank continues to run down its CV book due to underlying asset quality stress, more so given the risky customer profile and product segment. Gold loan book too has been on a declining trend, given higher NPAs. CASA ratio remains rigidly lower than peers’ at 26%, despite the higher rate offering that, along with need to accelerate TD growth for funding credit growth, should continue to weight on margins (down 21bps QoQ to 3.5% in 3Q).

Asset quality still haunts

Fresh slippages remain extremely high, at Rs4.3bn/4.4% of closing loans (vs Rs3.9bn/4.2% of loans in Q2FY24), leading to further increase in GNPA ratio by 7bps QoQ to 3.43% despite the higher growth. Bank also carries a higher restructured book at Rs13.5bn/3.5%, which could accentuate NPA formation as the moratorium ends gradually. Specific PCR remains sub-par at 65%, which we believe the bank needs to shore-up amid the rising asset quality noise.

We retain SELL

We cut our earnings estimates for FY24-26 by 6-15%, factoring-in the lower margins/higher LLP and expect the bank’s RoA trajectory to remain sub-par at 0.8-0.9%. The RBI has recently approved appointment of Praveen Kutty (internal candidate; Head - Retail/Agri Banking) as the MD & CEO w.e.f. 29-Apr-2024, raising hopes of the longelusive turnaround, which we believe will not be an easy task. We retain SELL on the stock, with revised TP of Rs110/share, rolling fwd at 0.7x Dec-25E ABV.

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