Slowdown in growth and sharp valuation expansion behind downgrade to ‘Add’; TP up to Rs 250 from Rs 230.
DCB reported 17% y-o-y earnings growth led by muted 10% growth in revenues. Loan growth slowed to 13% y-o-y and margins remained under pressure. Asset quality saw marginal deterioration with corporate book seeing some write-offs in Q1FY20. We downgrade DCB Bank to Add from BUY with a revised fair value of Rs 250 (from Rs 230) on the back of slowdown in business growth coupled with faster-than expected valuation expansion in recent months.
Overall performance on the weaker side
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DCB reported 17% y-o-y earnings growth on the back of 10% y-o-y growth in revenues and muted 5% y-o-y rise in operating expenses. NII increased 12% y-o-y led by modest loan growth of 13% (slowdown in corporate loans), partially offset by NIM compression (down 10 bps q-o-q/25 bps y-o-y). Non-interest income showed muted growth of 4% y-o-y. GNPL increased 10 bps q-o-q to 2% of loans led by higher slippages (2.5% of loans) in agriculture and SME sectors. Growth in CASA of 15% y-o-y was in line with deposit growth; CASA ratio has increased by 50 bps q-o-q to 25%. The bank has announced that it would take over select loans (`10 bn) and deposits (`11 bn) of Abu Dhabi Commercial Bank. These would be 4% of business for the bank.
The slowdown in business is a reflection of lowering risk to balance sheet
A few key concerns following the results:
(i) Sharp slowdown in loan growth, (ii) muted fee income performance and NIM compression, (iii) sustainability of cost control with any impact on business growth in the medium term and (iv) possibility of slowdown reflecting into an asset quality issue in latter quarters. We are probably not too worried on any of the above factors as the slowdown that we are witnessing is a reflection of being cautious. The management is preferring a slow growth approach to risking the balance sheet to any untoward stress. We believe that NIM recovery should be underway in the next couple of quarters as the wholesale funding costs have started to ease.
Outperformance unlikely to continue
We value the bank at 2.3X book and 16X June 2021e EPS for RoEs moving closer to 14-15% in this period. DCB Bank has started to improve its underlying return ratio, which has given greater confidence resulting in sharp outperformance of the stock in the past year. However, valuation expansion has been a bit faster than expected and we should expect some correction, to the least, in the stock till we see an improvement in business growth.