Our recent interaction with the management of DCB Bank offers comfort that implementation is broadly on track with what was indicated earlier. With a healthy tier-1 ratio, low impairment-related issues and a stable revenue profile, the bank has been steadily growing its balance sheet by 25% CAGR in recent years with a large part of revenue invested back in expanding the bank’s presence. We like the bank’s execution skills and maintain it as our preferred small-cap idea despite strong outperformance. Maintain ‘buy’ with target price changed to R120 from R105.
Loan growth is likely to remain close to current levels with greater emphasis on retail and the large corporate segment. Changes in lending in the SME portfolio is hurting growth though there should be a gradual increase in contribution over the next few years. Within retail, mortgages will continue to grow and recent branch expansion has helped the bank to disburse other retail products, especially those compliant with priority-sector loans.
We believe that expecting an improvement in CASA ratio at this stage of the growth cycle would be quite premature as there is sharper focus on the assets side of the balance sheet and investing a large share of revenue back in the business. We are factoring a decline in CASA ratio in the medium term. However, building a strong liability franchise would require a much higher scale, size of net worth and products/services, especially for the current account, while the bank would have to invest in the brand, especially for retail customers.
Kotak Institutional Equities