DCB Bank stock rated Add by Kotak, says stable asset quality ratio provides comfort

NIM was stable q-o-q at 4.2% while loan growth, off a high base, slowed to 21% y-o-y. Cost-income ratio deteriorated ~300bps q-o-q to ~60% partly led by infrastructure expansion.

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While growth was below trend levels, stable asset quality ratios provide comfort; TP increased marginally to Rs 210.

DCB reported earnings growth of 22% y-o-y, (PBT grew 27% y-o-y) led by strong but slowing revenue growth of ~25% y-o-y. NIM was stable q-o-q at 4.2% while loan growth, off a high base, slowed to 21% y-o-y. Cost-income ratio deteriorated ~300bps q-o-q to ~60% partly led by infrastructure expansion. Stable asset quality ratios, with slippages falling sharply to 1.2% of loans despite a high share of LAP, give comfort. We wait to see growth recover back to trend levels as certain segments are likely witnessing high competition. Maintain Add (TP at Rs 210 from Rs 200 earlier).

Business growth a bit lower than trend levels led by a higher base; P&L metrics stable: DCB delivered 22% y-o-y PAT growth (PBT grew 27% y-o-y) led by 24% y-o-y revenue growth. Operating profit growth was impressive at 23% y-o-y. NII grew 30% y-o-y while non-interest income grew 6% y-o-y. Loan growth, off a high base, trended lower to ~20% y-o-y (7% q-o-q) led by slower growth in LAP portfolio. NIM was stable q-o-q at 4.2%. Deposit growth was slower at ~16% y-o-y, CASA ratio declined ~100 bps q-o-q to 26%. Cost-income ratio increased 300bps q-o-q led by weak revenue and high investments.

Headline NPLs stable q-o-q with NPLs in LAP at 1.6% of loans; slippages comfortable at 1.2%: Gross NPL increased 11% q-o-q and GNPL ratio was flat q-o-q at 1.8% but unlike the previous quarter which had higher slippages in agriculture and SME/MFI portfolio, the ratio was comfortable at 1.2% of loans. Net NPL is 0.9% with comfortable provision coverage of ~72%. Gross NPLs in the LAP portfolio was stable q-o-q at ~1.6% of loans and this is comforting as the growth slowdown appears to be driven by other factors.

Cost ratios still trending lower-than-expected; infrastructure expansion going as planned: Branch expansion continued with the bank opening 20 branches for the quarter taking its total network to ~310 branches. Strong NIM and healthy loan growth is giving adequate headroom to expand infrastructure resulting in better-than-expected performance on cost ratios. Cost-income ratio did deteriorate by 300bps to 60% but this should not be a serious concern as we are closer to the end of peak infrastructure expansion for the bank.

Maintain ADD with Rs 210 TP, from Rs 200 earlier: We value DCB at 2.2X book and 20X September FY2019e EPS for RoEs at 10-12% in the short term but ~20% CAGR in earnings. At this size and scale of business, our approach is to primarily focus on the asset side as their ability to build a strong liability franchise is still a few years away. The performance this quarter on growth was a bit lower-than-comfort levels but stable impairment ratios provide comfort. Also, cost-ratios may not spiral out of hand, given that we could see a slowdown in infrastructure expansion, and this leads to our positive view on the bank.

This article was first uploaded on October twenty-three, twenty seventeen, at five minutes past five in the morning.