DCB Bank - Near-term concerns adequately priced-in - ICICI Securities

DCB Bank's (DCB) Q1FY21 earnings were driven by cost flexibility and lower provisions sequentially. Net revenues fell 11% QoQ due to sluggish NII and 29% YoY decline in other income, but the same is likely to improve with gradual growth in business volumes. DCB continues to build contingency buffer with further provision of Rs320mn towards Covid and taking the cumulative buffer to Rs3bn (~1.25% of loans) with provision of ~Rs1bn each towards Covid / floating / standard assets. Notably, it remains committed to strengthening the balance sheet on liability side with improving retail deposit share (top-20 deposit share fell to 8.1% in Jul'20 from 9.3% in Mar'20) and maintaining LCR @ 138% as at Jun'20. Collection efficiency (59%/67% in LAP and home loans) and recovery in SMA accounts is encouraging. However, non-paying customer rate (by value) at 29%/21% LAP / home loans poses asset quality risk if customer activation rate in these accounts remains low post moratorium. Current valuation at 0.7x FY22E ABVPS largely captures the near-term concerns on growth and asset quality, in our view. Maintain ADD with a revised target price of Rs87 (earlier: Rs70).

- Net revenues lower but transitory in nature; cost ratio at current level is not sustainable, but bank remains committed to improve it from FY20 level. For the third consecutive quarter, total operating expenses fell in absolute terms (down 13% QoQ and cost/assets @ 2%). However, management highlighted that the cost ratio at current level is not sustainable and is likely to increase with pick-up in business volumes. But over the medium term, it plans to reduce cost/asset to 2.2% from 2.4% in FY20. Net revenues fell 11% QoQ largely due to margin contraction of 20bps QoQ on higher liquidity and 29% QoQ decline in other income. Overall, DCB expects NII to remain flat YoY and core fee income to decline 30-35% owing to lower business volumes.

- Near-term focus on gold, home, tractor and business loans. Deceleration in loan growth, which started in Q4FY19, continued and fell to a multi-year low at 4% YoY in Jun'20. Amid a highly uncertain environment, management highlighted that near-term focus would be on capital conservation. Hence, the emphasis would be on growing gold, home, tractor and business loans selectively. As a result, management indicated that the credit portfolio in FY21 might decline 5%. However, given DCB's niche in financing small-ticket self-employed customers and its tier-1 capital at a comfortable 14%, we expect its credit growth to revive quicker than peers.

- Asset quality held up well in Q1FY21 with coverage ratio increasing to 60%; collections in non-paying accounts would be the key monitorable. Fresh slippages in Q1FY21 remained negligible at Rs52mn due to the ongoing moratorium, but management prudently increased the coverage ratio to 60% on the existing NPL pool to factor-in delayed recovery due to Covid. Overall GNPA ratio remained flat at 2.44% while the NNPA ratio fell to 0.99% vs 1.16% in Q4FY20. It further strengthened the balance sheet by building additional floating and Covid-related provisions taking the total buffer to Rs3bn, or ~125bps of loans. The total buffer of Rs3bn is divided into ~Rs1bn each towards Covid, floating, and standard asset. While asset quality has held up well till now, collections in non-paying accounts would be the key monitorable, which will decide asset quality behaviour over the near term.

Shares of DCB Bank Limited was last trading in BSE at Rs.82.95 as compared to the previous close of Rs. 82.5. The total number of shares traded during the day was 439956 in over 1308 trades.

The stock hit an intraday high of Rs. 83.55 and intraday low of 82.5. The net turnover during the day was Rs. 36653892.

Source : Equity Bulls

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