Development Credit Bank - On track to deliver steady, healthy performance - ICICIdirect

Development Credit Bank's (DCB) results were largely in line with our estimates. The bank has been de-risking its business model by reducing exposure to unsecured loans and increasing reliance on steady retail deposits. DCB has transformed itself from a loss making company in FY10 to recording Rs. 100 crore profit in FY13 and Rs. 138 crore estimated in FY14E. The bank has managed to maintain this strong performance in Q2FY14 as NII grew 36.3% YoY while the asset quality remained stable with GNPA rising marginally by Rs. 9 crore QoQ to Rs. 235 crore and NNPA increasing by a mere Rs. 3 crore QoQ to Rs. 57 crore. Considering the management's focus on building steady business model, we estimate PAT will grow at a strong 30.8% CAGR to Rs. 175 crore over FY13-15E. We maintain BUY rating on the stock with a target price of Rs. 52.

Business grows 20.7%, NIM strong at 3.7%, asset quality stable in Q2FY14

Credit grew 17.7% YoY to Rs. 6676 crore (up by Rs. 205 crore QoQ) with equal incremental contribution from the retail & corporate segments in Q2FY14. NIM improved 24 bps QoQ to 3.7% as DCB raised its base rate by 35 bps QoQ to 10.85% from September 1, 2013. The cost of funds declined 20 bps QoQ to 7.56% as deposits may have been mobilised at the fag end of Q2FY14 and its interest cost may accrue in Q3FY13E. Hence, we expect NIM to scale down again and settle at 3.4-3.5%. GNPA and NNPA ratios stood at 3.43% and 0.86%, respectively. PCR of 84% provides comfort.

Management's focus on steady business model provides comfort

The management expects to double its balance sheet in three years albeit on a lower base while maintaining its NIM. Post the 2009 crisis, the management is cautious on the lending side. Under mortgages, DCB does not extend loans for a property that is under construction. At least 80% needs to be completed, while under SME & MSME category DCB does not cater to first time businessmen. Also, 80% of corporate & SME portfolio is in A or BBB category. The bank has 47.2% exposure towards retail, which is so far holding up well while its exposure to stressed corporates is limited.

Valuations to catch up as bank consistently delivers strong performance

Despite a sharp improvement in financials post FY10, the stock has given limited capital appreciation to investors in the past three years, which leaves adequate margin of safety. DCB is also a likely acquisition target if foreign banks are permitted to do so or if groups getting new bank license look for acquisition to grow. We revise our target multiple from 1.1x to 1.2x FY15E ABV on consistent performance with a TP of Rs. 56. Maintain BUY.

Source : Equity Bulls

Keywords