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Better NIM & cost to assets key levers to core RoA

DCBB saw a good quarter as core PAT was a beat due to better NII and asset quality that led to lower provisions. Loan growth was muted due to seasonality, however, we don’t see a risk to our loan CAGR assumption of 17%. While reported NIM was 4bps down QoQ to 3.35%, margins may improve led by better yields (due to loan mix) & fall in deposit cost. We raise NIM by ~5bps for FY27/28E to 3.15% each. Cost to assets fell by 2.6% in FY25 to 2.45% FY26 and it is likely to further decline to 2.3%. As per bank, ECL impact may not be material due to improving asset quality and floating provision of INR 2.1bn. We keep multiple at 0.9x and raise TP to INR 215. Retain ‘BUY’.

Good quarter due to beat on NII & provisions:

NII was higher at INR 6.84bn (PLe INR 6.59bn) due to NIM (calc.) that was a beat at 3.43% (PLe 3.30%); reported NIM was down 4bps QoQ to 3.35%. Loan growth was lower 17.1% YoY (PLe 19.5%); deposit growth was higher at 20.1% YoY (Ple 18.2%). LDR fell to 80.5% (82.7% in Q4’26). Other income was INR 1.96bn (PLe INR 2.1bn) due to lower treasury; fee was in-line. Opex at INR 5.4bn was 1.5% lower to PLe; higher other opex was offset by lower staff cost. Core PPoP was 10.9% higher at INR 3.23bn; PPoP was INR 3.2bn. Asset quality was better; while gross slippage was in-line at INR 4.1bn higher recovery at INR 3.7bn (PLe INR 3bn) led to lower provision at 41bps (67bps). Core PAT at INR 1.97bn (34.6% beat); PAT was INR 2.13bn.

Loan growth was broad based; guidance remains conservative:

Loan growth was muted at -0.1% QoQ; all segments saw soft growth except agri (+3.3% QoQ). Gold loan LTV is capped internally at 75% LTV (85% RBI ceiling) which led to margin calls being avoided when gold prices corrected sharply during the quarter; asset quality in gold has remained stable. Mortgage book growth is fully organic; bank stopped all DA sourcing a year back after small-ticket DA hurt asset quality in FY24. LAP vs HL mix is now 70:30. CV portfolio remains in run-off mode, with no incremental sourcing or dedicated CV team; book is expected to decline from the current INR 3-4 bn, with no plans to re-enter the segment

Margins guided to improve; staff strength to increase:

Bank expects yields to improve in upcoming quarters, aided by a higher mix of mortgage and secured non-gold loans. Cost of deposits could further decline by 7-8bps. Hence, NIM is guided to increase, driven by better yields and reduction in deposit cost. Bank plans to increase employee strength to 13,000 (from 11,550 currently) to support business growth, with higher staff costs expected to partially offset operating efficiency gains. Cost to assets is expected to remain under 2.5% for FY27.

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