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Earnings in line; asset quality deteriorates slightly

Margins moderates 14bp QoQ to 3.69%

* DCB Bank (DCBB) reported 13% YoY growth in PAT at INR1.3b (in line) driven by lower provisions (9% lower than MOFSLe). NII grew 16% YoY to INR4.8b (flat QoQ, inline). NIM moderated 14bp QoQ to 3.69% in 2QFY24.

* Advances grew 19% YoY, supported by healthy disbursements across segments. Deposits jumped 23% YoY, led by 7% QoQ growth in term deposits. CASA mix moderated 93bp QoQ to 25% in 2QFY24.

* Slippages mounted to INR3.9b (v/s INR3.4b in 1QFY24), which resulted in a deterioration in the GNPA/NNPA ratios by 10bp/9bp QoQ. Restructured book declined QoQ but remained elevated at ~INR12.7b (3.4% of loans).

* We estimate DCBB’s FY25E RoA/RoE at 1.0%/13.3%. Reiterate Neutral with a TP of INR130 (based on 0.8x FY25E ABV).

Business growth healthy; CASA mix moderates 93bp QoQ to 25%

* DCBB reported 2QFY24 PAT of INR1.3b (+13% YoY, in line), led by lower provisions of INR397m (9% lower than MOFSLe) in 2QFY24.

* NII jumped ~16% YoY (flat QoQ) to INR4.8b (in line) due to 14bp QoQ moderation in margins to 3.69%. Other income grew 8% YoY (flat QoQ, 8.5% lower than MOFSLe) with fee income increasing 29% QoQ. Total revenue grew 14% YoY (flat QoQ) during the quarter.

* Opex increased 14% YoY as the bank continued to make investments in the business, and hence, PPoP rose 15% YoY (4% miss) in 2QFY24.

* Advances grew 19% YoY/5% QoQ, supported by healthy disbursements across mortgages and AIB segments.

* Deposits jumped 23% YoY (+5.8% QoQ), led by 7% QoQ growth in term deposits while CASA deposits grew 2% QoQ to 113.9b. CASA mix thus moderated 93bp QoQ to 25.04%.

* GNPA/NNPA ratio deteriorated 10bp/9bp QoQ to 3.36%/1.28% with slippages increasing sequentially to INR 3.9b. PCR moderated 130bp QoQ to 62.8% (~75.5% including TWO).

* Restructured book stood at INR12.7b (3.4% of loans). CE increased across segments and stood at 97.3%/97.6%/90.6%, including delinquent and restructured book, in Business/Home/CV Loans.

Highlights from the management commentary

* Management targets for ~20% business growth and aims to double the book in the next 3-4 years.

* DCBB expects credit cost to be in the range of 35-40bp.

* The bank expects that changing product mix towards business loans should drive NIM and RoA of 1% and RoE of 14%.

* NIM is likely to be stabilized going ahead. Management guides for a NIM of 3.65-3.75%.

* The bank’s new MD & CEO application has already put to the RBI and the bank is waiting for the RBI to revert on the same.

Valuation and view

DCBB reported a mixed quarter with in-line earnings driven by lower provisions, and moderation in margins on expected lines. Loan growth was steady led by mortgages and AIB segments, while deposit growth was led by term deposits resulting in a slight moderation in CASA ratio. Fresh slippages were elevated along with higher restructured book, which led to a slight deterioration in asset quality ratios. Higher slippages were seen in mortgages as the restructured book came out of the moratorium. Management suggested collection trends from the restructured book to improve gradually and will thus enable a decline in slippage run-rate over the next 2-3 quarters. We estimate FY25E RoA/RoE at 1.0%/13.3%, and maintain our Neutral rating with a TP of INR130 (premised on 0.8x FY25E ABV).

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