Maintain ‘buy’ on DBC Bank and our positive view reflects the bank’s healthy tier-1 ratio, low impairment ratios, high growth phase and strong execution. DCB is one of our preferred small-cap banks with a target price of R140. We value the stock at 2.2x book and 16x EPS for RoEs in the range of 13-14% with strong earnings CAGR of 17-20% over the next few years.
Despite the recent outperformance, we still think DCB is a good bank to own. Given its size, we are not too worried about lofty valuations even though they are on the higher side; however, we see DCB as a good compounding story for the next few years. DCB reported 61% y-o-y growth in earnings (PBT grew 37% y-o-y) on the back of 32% y-o-y revenue growth. NII grew 30% y-o-y on similar loan growth. NIM was maintained at 3.7% but we see funding costs easing; this should be a significant tailwind for the bank considering its weak low-cost liability franchise. Strong contribution from treasury and recovery boosted non-interest income growth (38% y-o-y). Slippages were a bit higher, primarily from the corporate segment but sale of select SME loans resulted in a decline in headline NPL ratios.
We have seen three key areas of discussion for DCB. Weak liability franchise, lower-than-peers return ratios and full valuations. These are valid concerns, but we think it is premature to expect two of the three concerns to be addressed given the bank’s own cycle of growth.
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