Maintain ADD on DCB Bank - Lower provisions drive beat in earnings - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

DCB Bank's (DCBB) 4QFY21 earnings were ahead of our expectations on account of lower-than-expected provisions. Asset mobilisation witnessed an uptick (2.4% YoY) after bottoming out in the previous quarter, while deposit mobilisation was largely driven by retail term deposits (+19% YoY). Asset quality remains along expected lines, although second wave of pandemic is likely to impair collection efficiency and slippages in the near term. We revise our FY22/FY23E earnings estimates downwards by 2.4%/3.5%, due to higher credit costs and moderation in loan growth expectations. Maintain ADD with revised TP of INR136. Inexpensive valuations and the bank's conservative approach to lending underpin our stance.

Stress build-up along expected lines, gradual in asset resolution: DCCBB reported slippages in FY21 at 2.7%, with increasing stress from mortgages, MSME, gold loans, and CV segment. Recoveries and upgrades were low (0.4%); however, management remains upbeat on recoveries as ~95% of loan book is secured. Restructured pool was at ~3.8% of loans, in line with management guidance and we will remain watchful of this trend with RBI's Restructuring 2.0 scheme.

Provisions likely to remain elevated in the near term: DCBB's 4QFY21 non- tax provisions (1.6% annualised) were 25% lower than our estimates. While the bank has created surplus buffer of INR2.9bn (~1.1% of loans), we expect provisions to remain elevated on account of relatively lower PCR (45%), slippages with deteriorating economic environment, and high restructured pool. We factor in average LLPs of 1.2% during FY22-FY23E.

Traction in loan growth likely to face near-term headwinds: DCBB's loan growth witnessed an uptick during the quarter (2.4%/2.6% YoY/QoQ), driven largely by home loans (15% YoY) and gold loans (172% YoY). The bank continues its focus on the SME/MSME segment with largely secured loans. However, the second wave of the pandemic is likely to disrupt credit growth at least in 1QFY22, while the management has maintained its guidance of "high-teens" growth in the medium term.

Shares of DCB Bank Limited was last trading in BSE at Rs.92.7 as compared to the previous close of Rs. 90.75. The total number of shares traded during the day was 330719 in over 3275 trades.

The stock hit an intraday high of Rs. 94.65 and intraday low of 91.1. The net turnover during the day was Rs. 30840697.

Source : Equity Bulls

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