Maintain ADD on DCB Bank - Provisioning cushion emerges ahead of expectations - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

DCBB's 3QFY21 earnings were significantly ahead of estimates on account of strong treasury gains and CoF tailwinds, despite higher-than-anticipated provisions. We've revised our earnings estimates to factor in a slight improvement in margins and a higher non-interest income trajectory. We maintain ADD with a target price of Rs 157 (1.2xFY23E). Inexpensive valuations and the bank's conservative approach to lending, underpin our stance. We will watch for trends in asset quality and credit growth.

Stress build-up visible: Pro forma asset quality metrics registered significant deterioration- GNPAs at 3.7% (vs. ~2.4% in 2QFY21) and slippages at ~2.4% annualised (9MFY21). However, these included accounts to the tune of ~Rs 1.6bn, which were eligible for restructuring. The outstanding stock of restructured advances stood at Rs 6.9bn (2.7% of loans) and the management continued to guide that this eventually inch up to 3- 5%. We continue to expect GNPAs to reach 4.1% in FY21E.

Provisions remain elevated: The bank clocked a 150.4/30.6% rise in non-tax provisions, which came in ~38% higher than our estimates, at Rs 1.48bn; including additional COVID-19 related provisions of Rs 860mn. The total stock of such provisions stood at ~Rs 2.3bn (~90bps of loans). We have increased our FY21E LLP estimates to 1.76% (vs. 1.53% earlier).

Focus to shift to growth: We expect DCBB's credit growth to have bottomed in 3QFY21 at -0.5/+1.7% YoY/QoQ. At present, growth appears to be limited to select segments such home loans (+11% YoY) gold loans (+105% YoY). A more broad-based uptick in growth across the bank's portfolio is likely post FY21. We estimate DCBB to register a loan CAGR of 16.8% over FY22-23E.

The management has guided for 'double digit' to 'high-teen' growth in FY22E and has begun building operational capacity.

Shares of DCB Bank Limited was last trading in BSE at Rs.114.4 as compared to the previous close of Rs. 115.8. The total number of shares traded during the day was 174677 in over 2227 trades.

The stock hit an intraday high of Rs. 119.65 and intraday low of 113.4. The net turnover during the day was Rs. 20222726.

Source : Equity Bulls

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