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Growth outlook steady; RoA likely to improve to 1%

* DCB Bank (DCBB) has experienced a healthy recovery in loan growth over the past two years after reporting tepid trends over FY20-22. The bank continues to focus on granular retail loans with a retail mix (ex-Agri) at 65% of the overall portfolio.

* DCBB arrested the downward pressure on NIM in 3QFY25, and the bank can maintain a resilient performance despite 25-50bp repo cuts. Aided by a granular liability profile, limited reliance on bulk deposits & improving asset mix, we estimate the bank to retain its NIM at ~3.4%.

* While opex has been high owing to investments in business, we expect operating leverage to kick in, aiding the move of RoA towards 1%. We believe the C/I ratio has broadly peaked at 64% in FY24 and expect the ratio to moderate to ~59% by FY27E. ? We expect a healthy 22% CAGR in total income over FY25-27 amid limited downside in margins and steady loan growth. We estimate its RoA/RoE to reach 1%/15% by FY27.

* With a likely recovery in loan growth and anticipated improvements in operating leverage, we estimate a 26% earnings CAGR over FY25-27.

* We find the current valuation of 0.52x FY26E ABV attractive for an RoA of ~1% and ~26% earnings CAGR over FY25-27E. We reiterate our BUY rating on the stock with a TP of INR150 (premised on 0.8xSep’26E ABV).

Loan CAGR to be healthy at ~23%, loan book to double in 3-4 years

DCBB is set to maintain a robust growth trajectory with its loan book projected to double over the next 3-4 years (implying 22-23% growth CAGR). The bank reported a 22.7% YoY growth in advances for 3QFY25, reflecting sustained momentum. This growth is fueled by strategic initiatives such as optimizing business from its existing branch network and enhancing digital capabilities to improve customer experience. The bank has focused on expanding granular retail loans and increasing business loan exposure to drive profitable growth. Thus, mortgages now form 53% of the loan book, while co-lending partnerships contribute 11% to advances and have emerged as a significant growth catalyst.

Retail mix healthy; focus remains on improving productivity levels

DCBB continues to strengthen its retail portfolio, with retail loans (ex-Agri) forming ~65% of the loan book, reflecting the bank’s emphasis on granular, customer-focused lending. This retail-heavy mix aligns with the bank’s strategy to leverage branch-level productivity for sustainable growth. The bank is optimizing its branch network to drive higher business per branch, leveraging digital capabilities and enhancing productivity at existing locations. To drive higher business per branch, the bank has focused on enhancing digital capabilities and improving operational efficiency while maintaining strong cost controls. We thus estimate the C/I ratio to reduce to 61%/59% by FY26E/FY27E from 64% in FY24.

NIM to remain resilient amid repo rate cuts

DCBB’s NIM is likely to remain resilient even with a potential ~50bp repo rate cut driven by several strategic levers. The bank looks to cushion its NIM effectively by leveraging SA rate adjustments. DCBB offers higher interest rates in the SA book and thus has the flexibility to review its SA rates, which will help limit the impact of declining interest rates on margins. This is supported by a granular liability profile, limited reliance on bulk deposits, and a favorable asset mix resulting from a deliberate reduction in low-margin corporate loans. Additionally, with deposit re-pricing behind, the bank is better positioned to maintain control of its funding costs while the repricing of asset books that were originated and disbursed a few years ago (fixed-rate in initial years) will support lending yields. We estimate its NIM to sustain at ~3.4-3.5% over FY25-27 (3.3% in 3QFY25) with the CASA mix anticipated to remain stable.

NII growth to track closer to loan growth; operating efficiency to aid RoAs

We estimate NII growth to closely mirror loan growth over FY25-27, propelled by steady advances and resilient margins. Notably, 3QFY25 marked a turnaround for NII growth, signaling a momentum that is expected to continue. During 3Q, the bank reported a 3bp expansion in NIM to reach 3.3%. Further, operational improvements are central to the bank’s strategy. It focuses sharply on reducing the C/I ratio, as the bank sees limited requirements to invest in augmenting the existing infrastructure. Improving productivity will be a significant growth driver for DCBB over the coming years. We thus estimate the C/I ratio to improve from 64% in FY24 to 59% by FY27, as we pencil in opex growth at 17% CAGR over FY25-27 (vs. 22% CAGR over FY21- 24). With healthy NII growth, a receding C/I ratio amid operating leverage gains, and steady asset quality, we estimate DCBB to report 0.9-1.0% RoA over FY25-27.

Asset quality outlook healthy; credit costs to remain contained at 0.5-0.7%

DCBB’s asset quality outlook remains healthy with continued improvements in key metrics underscoring the bank's focus on prudent lending practices and effective risk management. The bank’s asset quality resilience is further supported by enhanced collection processes and a restructured book that is steadily declining. DCBB has strengthened its recovery mechanisms, leading to a sharp improvement in collection efficiency, particularly in key segments such as LAP and home loans. A secured portfolio mix and stringent underwriting standards support controlled credit costs, which are projected at 0.5-0.7% over FY25-27. DCBB’s proactive risk management, combined with its improved portfolio composition and enhanced collection efficiencies, is expected to drive GNPA reductions. We thus estimate GNPA/NNPA ratios to improve to 2.9%/1.0% by FY26 and credit costs to sustain at 0.6% in FY26.

Valuation attractive at 0.52x FY26E BV; Reiterate BUY

DCBB has seen a healthy recovery in loan growth after witnessing sluggish trends during FY20-22, and we estimate loan growth to remain steady at ~23% CAGR over FY25-27E. The bank's shift in loan mix toward retail loans has helped maintain healthy NIMs. With a healthy retail mix, operating leverage at play, and a resilient NIM outlook, we expect DCB to report sustained traction in the balance sheet and earnings growth. We thus estimate RoA to sustain at 0.9-1% for FY25-27E. We find the current valuations at 0.52x FY26E ABV attractive for a potential RoA of ~1% and ~26% earnings CAGR estimated over FY25-27E. We reiterate our BUY rating with a TP of INR150 (premised on 0.8xSep’26E ABV).

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