DCB Bank Ltd - Results Update - Results vindicate our positive stance - Centrum

Rating: Hold; Target Price: Rs75; CMP: Rs65; Upside: 14%

Broader picture intact, but valuations stretched

DCB Bank's Q4FY14 results were in line with our estimates and re-iterates our belief on cost controls with adequate balance growth. As operating levers continue to play, return ratios will see further improvement. Our preference for the bank has seen the stock outperform its peers and currently trades at 1.2x FY16ABV of Rs54.2. Though we continue to prefer DCB Bank, dilution risk and overhang on tax related provisioning could see return ratios moderate in the near term. We thereby downgrade the stock to HOLD but retain our TP at Rs75.

Q4FY14 in-line results: DCB Bank's Q4FY14 results were in-line with our estimates – NII at Rs1bn (+24% yoy) and net profit at Rs391mn (+14% yoy). NIM (calc) at 3.2% declined 4bps qoq. Cost rationalisation measures have seen the ratio of cost/ average assets moderate to 2.6%. Asset quality improved with GNPA at Rs1.3bn (-33% qoq) and was primarily led by write-off of the legacy portfolio. Slippages could have remained higher at Rs300mn (1.5% of loans). However, with lower provisioning (PCR stood at 46.5%) NNPA at Rs740mn grew 30% qoq. The bank saw fresh restructuring of Rs350mn for Q4 and cumulative portfolio is at 0.9% of loans.

Operating levers playing out well; non-interest income to be the next trigger: Cost rationalisation measures have seen the ratio of cost / average assets decline from 3.03% in FY12 to 2.64% in FY14. With improved revenue line and increasing penetration into smaller cities, we expect the ratio to further decline to 2.5% by end-FY16. Share of non-interest income (11% of total) has remained on the lower side and will be the next trigger for overall RoA improvement.

Loan growth driven by non-SME segment; 77% of deposits are retail in nature: Concerns over asset quality have forced DCB Bank to cautiously lower its exposure towards SME segment. This was also reflected in Q4 results that saw 9% yoy decline in credit growth to this segment vis-à-vis 23.6% yoy growth in loan portfolio. GNPA from this segment stood at 6.5% of loans. Given the relatively small nature of balance sheet and branch presence (130 branches), we continue to remain impressed by DCB Bank's strategy on deposit profile. 77% of deposits are retail in nature and provide comfort on the stickiness of deposit profile and cost controls.

Downgrade to HOLD: Our preference for DCB Bank given improved operating levers, adequate control over asset quality and balance sheet growth has seen the stock outperform its peers in the recent past. However, giving impending risk to return ratios following capital dilution, impact of tax liability beginning FY16 and any sudden asset quality shocks given increased level of stress in SME and large corporate segment, we believe valuations at 1.2x FY16ABV of Rs54.2 are on the higher side. We thereby downgrade the stock to HOLD with target price of Rs75. DCB Bank however remains our preferred pick in the mid-cap banking space.

Source : Equity Bulls

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