Development Credit Bank - Improving credit profile leads to NIMs surprise; result update Q2FY14; Buy - Edelweiss

Development Credit Bank (DCB) reported Q2FY14 PAT of INR331mn (up 49% YoY). Key highlights were: (1) Beating industry trend, DCB reported a ~20bps expansion in margin; (2) Asset quality continues to be stable controlled slippages at ~1.1% (vis-à-vis ~1.5 in FY13); (3) Loan growth moderated to 17.7% YoY owing to conscious decision of the management to moderate growth in MSME segment; and (4) Cost-to-income (C/I) ratio continue to improve (~ 66% in Q2FY14 from 72% in Q2FY13). We expect DCB to deliver 30% earnings CAGR, which will further improve return ratios resulting in re-rating. We maintain Rs. BUY' with TP of INR65.

Slippages in check, lower write-offs lead to 4% rise in GNPL

Slippages came in at INR180mn (1.1%), largely contributed by slippages in MSME segment. However, the management stated it has adequate collateral towards this. In absence of write-offs, GNPLs inched up to INR2.35bn (up 4% QoQ). It maintained a healthy provision coverage ratio (PCR) of ~85%. There was no restructuring during the quarter. Outstanding restructured book stood at 0.4% consisting of 5 accounts.

NIMs improve 24bps QoQ to 3.68%

NIMs surged 24bps to 3.68% - a positive surprise specifically this quarter, given the rise in short term rates in the current quarter. Overall cost of funds came off by 20bps to 7.58%. Factors supporting margins were: a) At the end of Q1- before the spurt in wholesale rates it raised INR5bn of CD at sub 9%; b) Replaced INR3bn of market borrowing – with retail deposit that came in at 75bps lower cost; c) Increased base rate by 35bps during the quarter and d) As the bank was largely liquid, it deployed funds in the money market at attractive yields.

Outlook and valuations: Re-rating on cards; maintain 'BUY'

Having successfully walked through the consolidation phase with focused effort on balance sheet health, DCB is all set to reap the benefits now. We believe re-rating will flow from improving return ratios led by higher productivity levels, taking RoA to 1.3% by FY15E from 1.1% in FY13. We expect ROEs to inch up to 15% from the current level of 12%. Valuing the bank at 1.3x FY15E adjusted book value, we maintain 'BUY/SO' with a target price of INR65.

Source : Equity Bulls

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