DCB Bank’s (DCB) Q3FY19 performance was marked by improvement across core parameters; however, sustainability is crucial. Key highlights: a) higher slippages at 2.1% (driven by Rs 120 mn fraud in agri segment) led to GNPLs of 1.92% (1.84% in Q3FY19); b) though loan book grew 23% YoY, sustained NIM pressure kept NII growth below trend at 17% (25–30% run-rate earlier); and c) better-than-expected improvement in cost ratios with 366bps QoQ dip in cost-income.
However, it still remains high (55%) and sustained improvement is key. While DCB’s performance has been steady, we believe NIM pressure along with high cost ratios will translate in to sub-par RoE (14–15% by FY21E), implying limited upside. Maintain ‘hold’ with revised target price of `211 (`207 earlier) as we roll forward to FY21E.
Loan growth came in at 23%. However, persistent pressure on NIM restricted NII growth to 17%. We believe, sustained pressure on yields along with lower CASA (at 24%) will continue to reflect in sustained NIM pressure. Thus, NIM is likely to be muted and productivity improvement is critical for profitability traction.
Opex growth moderated — up <6% YoY (from >20% earlier) — indicating that operating leverage benefits have started to flow.
Meanwhile, despite improvement, cost ratios remain high and a sustained improvement in operating efficiency is vital. The cost- income will be a key determinant for any improvement in returns ratios, in our view. Slippages rose to `114 crore (2.1%), largely driven by higher agriculture (fraud in commodity account of `120 mn) and mortgage NPLs.
Meanwhile, given higher proportion of LAP & MSME and concerns on these segments keep up guarded.