Development Credit Bank - Cashing in on Turnaround; Reiterate "BUY" - Karvy

Demonstrated on Asset Quality: Development Credit Bank (DCB) has demonstrated improvement in asset quality with its Gross NPA rising by 550 bps to 3.2% over last 3 years. In response to extreme stress in retail category, the Bank allowed its unsecured personal loans and CV/CE segment to run off thereby de-risking the portfolio. Its average incremental slippages for past 3 years are within 1.3% (comparable to other private sector banks). The Bank has also improved its provision coverage to 84% from 50.5% in FY09.

Set to Double Its Balance Sheet in Next 3 Years: The Bank is well-positioned to gain market share in next 3 years. While it contracted its unsecured retail book, it grew its mortgage and SME segment by 80% & 35% CAGR, respectively.

Improved Liability Franchise; Rating Upgrade to Support NIMs: On the liability side, the Bank has been able to increase CASA and retail deposit thereby lowering dependence on bulk deposit. Recent rating upgrade of its Tier-II bonds and Certificate of Deposits would help the Bank in reducing its cost of funds and improving funding opportunities of the Bank. Its strategy of metro-centric branches has worked, as it has aggressive branch expansion plans of 20-30 branches each year now as against 94 during FY13.

Operational Leverage to Boost ROA: DCB has so far been able to manage its cost successfully by bringing down the cost-to-income ratio to 70.7% in FY13 from 86.7% in FY10. Unlike some of its peers, DCB doesn't have a staff union, which enables the Bank with higher control in containing cost and managing its staff efficiently. DCB's Management has targeted to improve cost-toincome to 60% by FY15E.

Outlook & Valuation

We reiterate our "BUY" recommendation on DCB with unrevised target price of Rs. 70 per share valuing it at 1.4x P/ABV FY15E.

Source : Equity Bulls

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