Buy Development Credit Bank - Karvy Stock Broking

Leading brokerage house Karvy Stock Broking has recommended a 'BUY' rating on Development Credit Bank with a Target Price of Rs. 70/- for the stock.

Set to Sustain Growth Momentum

Structurally, Development Credit Bank (DCB) is well-positioned to sustain high growth momentum. Under new leadership, it witnessed major transformation across multiple fronts to address the losses incurred owing to sharp spike in delinquencies seen in FY09-10, after which the Bank cleaned up its books and cut down its exposure to unsecured retail products. With capital and liability franchise in place, DCB targets to double its balance sheet in next three years.

Marked Improvement in Asset Quality: DCB has displayed marked improvement in asset quality with Gross NPA improving by 550 bps in last three years to 3.2%. In response to extreme stress in retail category, it allowed its unsecured personal loans & CV/CE segment to run off thereby to de-risk its debilitating portfolio. DCB's average incremental slippages for past three years are within 1.3%, which is comparable to other private sector banks. It has also improved its provision coverage to 85.7% from 50.5% in FY09.

Balance Sheet Set to Double in Next Three Years: DCB is well-positioned to gain market share in next three years. While the Bank reduced its unsecured retail book, it grew its Mortgage & SME segments by 80% and 35% CAGR, respectively. On liability side, DCB has been able to increase CASA & Retail deposit thereby lowering dependence on bulk deposits. Meanwhile, the recent rating upgrade by CRISIL on its Tier-II bonds and Certificate of Deposits would help DCB to reduce cost of funds and improve funding opportunities for the Bank. With the success of metro-centric branch network strategy, DCB plans to expand its network by 20-30 more branches each year from 94 currently.

Operational Leverage to Boost RoA: DCB has so far been able to successfully manage its cost by reducing cost-to-income ratio to 70.7% in FY13 from 86.7% in FY10. Unlike few of its peers, DCB does not have trade-unionism, which enables the Bank in containing cost as well as efficient staff management. Its Management has targeted to improve cost-to-income to 60% by FY15E.

Outlook & Valuation

Asset quality is a key catalyst for DCB with average slippages of 1.3% over FY11-13. As the Bank is adequately capitalized, it doesn't need to raise capital for another three years. We expect its RoE to rise by 360 bps to 14.6% in FY13- 15. We initiate coverage on DCB with "BUY" recommendation with a target price Rs. 70 per share valuing by residual income model and implying valuation of 1.4x P/ABV FY15E.

Source : Equity Bulls

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