IGI Logo

Steady Q3; consistency, key to re-rating

DCB Bank’s (DCBB IN) Q3 PAT at INR 1.51bn was marginally higher than estimates on better NIMs and higher other income, even as credit cost was higher. Core profitability saw some improvement, given rise in NIM and lower opex, but was still below trend and sector averages. Asset quality trends were stable, but warrant a closer watch. The discussion hereon will be focused on: a) NIM trajectory, b) growth trajectory, which may feed into operating leverage benefit, and c) recovery trends and credit cost delivery. While DCBB has been wading through challenges, the pressure points on core are still visible. We believe consistent delivery is the key trigger for a rerating. The bank trades at 0.6x FY26E P/BV for medium term RoEs of 12-13%, which renders risk-reward favorable. Maintain BUY with TP at INR 155 (unchanged), but consistency will be critical for a rerating.

NIM improves; trajectory, the key:

DCBB saw better performance on core PPoP given better loan growth, better NIMs and lower opex. That said, it remains below trend and below sector averages. We see one of the key deliverables for the bank as NIMs, which needs to be addressed but is not easy given the situation. Loan growth was much better but was largely driven by co-lending book (proportion now ~11% of book). While this looks a low risk strategy, we are generally not enthused by such higher proportion of co-lending book. We believe sustained focus and growth delivery are critical as these may drive operating leverage benefits, essential to improve return ratios.

Asset quality as expected; monitor volatility:

Q3 slippages were elevated at INR 3.96bn (3.6% versus 3.7% QoQ), but higher write-offs pushed down headline GNPLs. Looking at various segments, GNPLs in the mortgage segment have risen marginally – Monitor this trend closely. While gross slippages have been elevated, recoveries have entailed lower credit cost, with DCBB sounding confident on sustained recoveries, a trend that may warrant further monitoring.

Recommend Buy with TP of INR 155:

While DCBB has performed well this cycle, structural operational limitations (long walk on liabilities, investment requirement) may cap returns – RoE of 12-13% in FY26E. Moreover, volatility between the quarters is a challenge and thus, we refrain from ascribing higher structural multiples, and see DCBB as more of a tactical play than a structural story at this juncture. Maintain BUY with TP of INR 155 (unchanged). The stock trades at 0.6x FY26E P/BV, which renders risk-reward favorable. That said, a consistent rerating will be contingent on sustained core delivery, which has certain limitations.

Please refer disclaimer at Report
SEBI Registration number is INH000000933