We maintain ‘buy’ on DCB Bank with target price of R102 (earlier R94), assigning 1.7x FY16e adjusted book value (ABV). Withstanding challenges, DCB Bank has made a remarkable turnaround and is well-placed to deliver steady performance. The stack is trading at 1.6x FY16 ABV.
DCB Bank’s loan growth picked up to 31% y-o-y in Q2FY15 as it gained traction in corporate banking (up 33% y-o-y, 5.2% q-o-q). This was further aided by healthy growth in retail segment (up 35% y-o-y, 13% q-o-q) and agri (up 78% y-o-y, albeit down q-o-q given higher base in Q1FY15). Retail growth was driven by healthy growth in mortgage segment (up 35% y-o-y, 10.4% q-o-q—more tilted towards LAP portfolio).
Management continued to maintain a cautious stance on SME book due to stress in this segment. Hence, the bank continued with its strategy of focusing on small-ticket loans, leading to a flat SME book.
The bank continued to report healthy NIMs at 3.72%, largely drawing support from 6 bps q-o-q improvement in funding cost (7.73%) which offset the 24 bps decline in lending yields. During the quarter, DCB Bank used excess SLR investment to support the lending requirement, reflected in CD ratio inching up to 81% from 79% in previous quarter. Going forward, management expects slight pressure on NIMs from current level.