Focus on productivity and use of capital, coupled with best-in-class asset quality, behind ‘Buy’ rating.
We met Murali Natrajan, MD and CEO, DCB Bank, to get an update on the business. Key takeaways: (i) management is cautiously calibrating growth amid a challenging macro-environment, but remains confident of reviving loan growth over next couple of quarters; (ii) management has laid down a detailed roadmap to reach an RoA of 1.25% from ~1% currently over next 2/2.5 years; (iii) management expects fee income/assets to improve to 1.1% from 0.9% currently over next 2/2.5 years; (iv) management is focusing on building best-in-class retail liability and plans to reduce top-20 depositor share to 5% of total deposits over next couple of years from 12% in Mar’19. DCB has revamped its business architecture over the past couple of years and expects it to help achieve the desired RoA of 1.25%. Maintain Buy with a TP of Rs 240.
Focus on productivity improvement: Post the completion of branch expansion drive in Oct’17, the management has aggressively started focusing on sweating existing assets more effectively. To start with, it dealt with the relatively low employee productivity and redefined the strategy to boost the same. This is reflected in marked improvement in advances per employee to ~Rs 38 mn in Mar’19 after remaining static at ~Rs 30 mn between FY13-FY17.
Management’s continued efforts to increase productivity and improve return ratios are yielding positive results as reflected in a healthy RoE of 12.7% and RoA of 1.0% during Q3FY20.
Revamped business architecture to improve cross-selling and fee income: Over the past couple of years, DCB has built a robust digital analytics team.
Simultaneously, it has developed an MIS called EDSR (Electronic Daily Sales Report) to capture lead generation and track progress on leads generated. EDSR also helps conduct training for fleet-on-street if they find challenges in lead conversion. In order to intensify the focus on fee income, DCB has realigned branch and fleet-on-street’s scorecard with higher weightage for this category of income.
Maintain BUY; operating leverage to drive return ratios: Given DCB’s incremental focus on improving branch productivity and garnering higher business from the recently added branches, the management expects cost/assets ratio to moderate to 2.2% from the current 2.4% over the next 2/2.5 years. This, coupled with best-in-class asset quality (GNPL at 2.2% in Dec’19 is one of the lowest in banking industry) and focus on effective use of capital and profitability, gives us reason to maintain our Buy rating. The stock is trading at 1.3x FY21e and 1.2x FY22e BV, respectively. We estimate ~7/100bps improvement in RoA/RoE by FY21e.