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.
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 `120 mn fraud in agri segment) led to GNPLs of 1.92% (1.84% in Q3FY19); (b) though loan book grew 23% y-o-y, sustained NIM pressure kept NII growth below trend at 17% (25–30% run-rate earlier); and (c) better-than-expected improvement in costratios with 366 bps q-o-q 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 a revised target price of `211 (`207 earlier) as we roll forward to FY21E. 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% y-o-y (from >20% earlier) – indicating that operating leverage benefits have started to flow.
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 `1.14 bn (2.1%), largely driven by higher agriculture (fraud in commodity account of `120 m) and mortgage NPLs. Meanwhile, given higher proportion of LAP & MSME and concerns on these segments keep up guarded.
Meanwhile, productivity is in focus and we expect operating leverage to play out. Factoring 40% plus EPS CAGR over FY18–21 (albeit on lower base) with operating leverage benefits, we value DCB at 2x FY21E ABV for RoE potential of 14–15%, yielding TP of `211. Slippages during the quarter came in a tad higher at 2.1%, largely following a fraud of `120 mn pertaining to a commodity funding account in Gujarat (other bank has also apparently taken some impact on this account).