DCB - Results vindicate our positive stance - Centrum

DCB Bank's Q3FY14 results were marginally ahead of our estimates and vindicate our positive stance. The progressive steps towards a) cost rationalisation - cost/income ratio at 63.5% (-270bps qoq) b) concentrated loan profile, granularity in the deposit franchise and c) abating asset quality concerns (GNPA at 2.8%, -12% yoy) are certain to bear fruit. We believe the focus on balance sheet growth should translate into sustainable return ratio at 1.2% / 14.3% (RoA / RoE) over FY13-16E. Retain BUY with a target price of Rs70 (Dec'15E ABV of Rs56). It remains a preferred pick in our coverage universe.

Asset quality surprises on the upside: Efforts to rationalize loan exposure with focus on recovery have reduced asset quality concerns in the past few quarters. Q3FY14 GNPA at Rs2.1bn declined 12% yoy and was led by higher than expected write-offs, primarily from the personal loan segment. Slippages for the quarter stood at Rs237mn (1.3% annualized). We do not expect any write-offs in Q4FY14 and factor in slippages/ GNPA at 1.3%/ 3.1% respectively for FY14. Restructured portfolio stood at 0.4% of loans.

NIM compression along expected lines: Q3FY14 NIM at 3.55% (-13bps) was along expected lines as the bank benefited from low cost borrowings in the preceding quarter (CP raised in early-July'13). We believe that sticky deposit profile (70% retail in nature), recent upgrade in credit rating and focused loan exposure should enable DCB bank to retain its NIM at 3.1% levels over FY13-16E. Also, as the benefit of operating leverage continues with economies of scale, we expect cost-income ratio to go down to sub-60% by end-FY16 or 2.4% of assets.

Loans grow 23.4% yoy; growth in deposits higher at 27% yoy: Cautious strategy towards loan portfolio has ensured that growth comes from secured assets of retail (35% yoy), agri (48% yoy) and corporate (25% yoy) sectors. Growth in deposits at 27% yoy was led by a sharp 34% yoy uptick in term deposits. Hence, CASA ratio at 24.8% declined 211bps qoq. We, however, believe that the enhanced branch reach will help further improve CASA's proportion.

Retain BUY: We have revised our estimates by +4% / +2% for FY14/15E and are now factoring in 21% CAGR in both NII and loans over FY13-16E. Cost efficiency with stable margins and receding asset quality concerns will translate into a higher 30% CAGR in profit over the same time frame. With positive levers in place, the bank offers decent value proposition at reasonable valuations of 1x Dec'15E ABV of Rs56. We have valued the bank at 10% premium to PB multiple (under our singlestage Gordon growth model) and arrived at a target price of Rs70. BUY.

Source : Equity Bulls

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