DCB Bank - Better NIM, improving productivity, high NPA coverage; Buy - Anand Rathi

Modest growth, NIM expands. While DCB Bank's deposits grew 26.9%, its advances were up 23.4% yoy. This resulted in 25.4% yoy business growth, faster than the past four-quarter average of 24.7%. Despite a drop (407bps yoy) in the proportion of CASA to 24.8%, NIM rose 24bps yoy (down 18bps qoq) to 3.6%, led by strong retail advances (35.2% yoy, 5.7% qoq). We expect the business to register a 25.8% CAGR over FY13-16, led by secured loans in SME, micro-SME, retail-mortgage and commercial-vehicle segments.

Robust fees, better productivity. Boosted by robust growth in fees (20.3% yoy), fees-to-earning assets were 1%. Productivity improved, with yoy core cost-income falling 700bps to 66.7%, and cost-to-assets falling 12bps yoy (10bps qoq) to 3%. In CY14, network expansion is likely in tier-2 to tier-6 cities, where operating costs are low. With the likelihood of higher-than-in-the-past business growth, the operating leverage could improve further. We estimate cost-to-assets to fall from 2.8% in FY13 to 2.6% over FY14-15.

Asset quality improves, well capitalized. Gross NPA declined 11.6% qoq, with net NPA at 0.8% of loans and NPA coverage of 72.6%, one of the highest among peers. Over Dec'11-13, gross NPA have seen a 10% compounded annual decline, realised through cautious lending and an aggressive emphasis on recoveries. The bank is well capitalized, with sufficient tier-1 capital (12%) to sustain 23% business growth over FY14-15.

Our take. Supported by better productivity assumptions, we raise our FY14 and FY15 PAT estimates 5.3% and 4.2% respectively. On the higher RoE, we raise our target from Rs. 64 to Rs. 71. We maintain our Buy call, as we expect the improving business growth, better productivity and stable credit costs to support robust profitability over FY14-16. At our Mar'15 price target, the stock would trade at PBV of 1.3x FY15e and 1.1x FY16e. Our target price is based on the two-stage DDM (CoE: 21.1%; beta: 1.3; Rf: 8.5%). Risks. More-than-expected credit cost; change in management.

Source : Equity Bulls

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