Sell DCB Bank - AnandRathi Institutional Research

DCB Bank - Strategic decision to drive ROE to lower levels:

Strategic changes / decisions: DCB Bank reported its 2QFY16 numbers which were below expectations at Rs. 369m. However, the key highlight of the quarter was the strategic decisions / changes taken by the management. Key announcements are:

- Install over 150 new branches in the next 12 months (160 branches as on 30th September 2015). Earlier the management had indicated to add 25-30 branches every year. Overall branches to rise over 300 by December 2016. We believe this will have a significant negative impact on the P&L of the bank.Branch expansion would be concentration on Tier 2 to Tier 6 locations.

- Invest heavily in customer facing and frontline enabling technologies. This we believe, will further impact the cost to income ratio of the bank which is already amongst the highest in the industry.

Valuation; downgrade to Sell. The above decisions will impact both the return and profitability ratios. As per the management, the profit of FY16 will get impacted by Rs. 90-150m, FY17 by Rs. 500-650mn and FY18 by Rs. 200-350m on account of the above decision. We believe the ROA and ROE of DCB will range of 50-60bps and 6-9% respectively. Cost to income ratio could rise to 65-70% for the next 3 years leading to a significant downward revision in our estimates. Hence, we downgrade the stock to Sell.

Results. DCB's Q2FY16 PAT was below our expectations at Rs. 369 m (down 10.1% YoY& 21.2% QoQ) led by lower treasury income and higher provisions. PBT ex-trading income is up 22% yoy and 19% qoq to Rs. 512m. Cost to income ratio was 61% during the quarter. Asset quality deteriorated with gross NPA up by 9% to Rs. 2.2bn. Business growth was strong with 27% yoy and 7% qoq growth in advances and 24% yoy and 2% qoq growth in deposits. Margins remained strong at 3.79% during the quarter though the sa me would come under pressure while we move toward the fourth quarter and the pressure of priority sector lending jumps in.

Shares of DCB Bank Limited was last trading in BSE at Rs.106.8 as compared to the previous close of Rs. 133.45. The total number of shares traded during the day was 3721076 in over 14488 trades.

The stock hit an intraday high of Rs. 120 and intraday low of 106.8. The net turnover during the day was Rs. 401413388.

Source : Equity Bulls

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