Buy DCB Bank Ltd For Target Rs.245 by Motilal Oswal Financial Services Ltd
Steady quarter; business outlook remains healthy RoA improves to 1.03%
* DCB Bank (DCBB) reported 29% YoY growth in PAT to INR2.36b (7% beat).
* NII grew 17% YoY/2% QoQ to INR7.0b (in line). NIM contracted 10bp QoQ to 3.25% (vs 3.33% MOFSLe) owing to the adverse impact of FCNR(B) deposit mobilization.
* Other income rose 34% YoY/27% QoQ to INR2.5b (17% higher vs MOFSLe) amid 11% QoQ pick up in core fee income and healthy treasury gains. PPoP stood at INR3.8b (up 26% YoY/11% QoQ; 6% beat).
* Business growth remained healthy, with advances growth of 21% YoY/7% QoQ, while deposits grew 19% YoY/3% QoQ, led by FCNR(B) deposit mobilization of USD194m. CASA mix improved to 22.3% vs 21.7% in 1QFY27.
* GNPA/NNPA ratios improved to 2.29%/0.73% (down 14bp/11bp QoQ), while PCR increased to ~69%. Slippage ratio increased to 3.6% vs. 3.5% in 1QFY27.
* The Board has approved the re-appointment of Mr. Praveen Kutty as MD & CEO for a further period of three years w.e.f. Apr’27, subject to RBI approval.
* We fine-tune our earnings and estimate FY27E RoA/RoE of 1.02%/14.8%. Reiterate BUY with a TP of INR245 (based on 1.0x FY28E ABV).
Asset quality improves; business growth remains healthy
* DCBB reported PAT of INR2.36b (up 29% YoY/11% QoQ; 7% beat) amid strong other income and healthy operating performance.
* NII grew 17% YoY/2% QoQ to INR7.0b (in line). NIM contracted 10bp QoQ to 3.25% (v/s 3.33% of MOFSLe). Other income rose 34% YoY/27% QoQ to INR2.5b (17% higher vs MOFSLe) amid robust growth in core fee income.
* Opex grew 18% YoY/5% QoQ to INR5.7b. PPoP, thus, grew 26% YoY/11% QoQ to INR3.8b (beat by 6%).
* Provisions were higher at INR645m (6% YoY/13% QoQ, in line). PBT grew to INR3.18b (31% YoY/11% QoQ, 7% beat).
* Advances grew 21% YoY/7% QoQ, led by gold loans (30% QoQ), steady growth in mortgages (4% QoQ), and moderate growth in co-lending book (2% QoQ). Corporate advances witness a surge of 13% QoQ as well.
* Deposits grew healthy at 19% YoY/3% QoQ with strong FCNR(B) deposits mobilization of USD194m, while CASA deposits growth came in at 12.5% YoY/6.3% QoQ. As a result, CASA ratio rose to 22.3% vs 21.7% in 1QFY27. CD ratio rose 297bp QoQ to 83.5%.
* Fresh slippages rose 8% QoQ to INR4.4b, with annualized slippage ratio increasing to 3.6% vs 3.5% in 1QFY27. GNPA/NNPA ratios improved to 2.29%/0.73% (down 14bp/11bp QoQ), while PCR increased to ~69%.
Highlights from the management commentary
* Despite the expected capital infusion next quarter, management expects RoE to remain above 13.5%.
* NIMs are expected to improve in 3QFY27 and 4QFY27, supported by the passthrough of repo rate hikes
* The bank holds INR2.18b in floating provisions, which it has been building since 2015. Provisioning cover stands at 5.93x operating profit.
* Gold loans account for 23% of total advances, and management is comfortable increasing the share to 25% of overall loan mix.
Valuation and view
DCBB reported a steady performance, with strong other income driving PAT beat, while operating performance remained healthy. Margins contracted 10bp QoQ, while management expects NIM to expand in the coming quarters on the back of repo rate hike pass-through. Business growth remained healthy, supported by an increased focus on higher-yielding segments such mortgages and gold loans. Asset quality improved, with a decline in GNPA ratio and NNPA ratios. The bank expects growth to remain robust, guiding for RoE to remain above 13.5% in FY27 despite expected capital infusion in the near term, driven by an improving NIM trajectory, controlled provisions, and enhanced operating efficiency. We fine-tune our earnings and estimate FY27E RoA/RoE of 1.02%/14.8%. Reiterate BUY with a TP of INR245 (based on 1.0x FY28E ABV).
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