DCB Bank's (DCB) Q3FY21 performance was characterised by balance sheet strengthening (built contingency buffer of Rs0.86bn), improving collections across segments, undisrupted focus on cost optimisation and calibrated approach in new business sourcing (disbursements up >50% QoQ). Notably, it remains committed to build a granular retail liability as reflect in strong Retail TD growth at 22% YoY and top-20 deposit share falling to 7.3% in Dec'20 from 9.3% in Mar'20. While uncertainty around incremental stressed asset formation persists, there has been a sharp reduction in the non-paying customer pool (now at 1-1.5% in LAP and home loan segment). This, in addition to a cumulative provision buffer of Rs5bn (~2% of net loans), improves visibility on DCB's superior management of its asset quality and credit cost vis-à-vis peers. Further, operating leverage and focus on achieving double-digit loan growth in FY22 and beyond, is likely to improve RoA to 1.1% by FY23. Maintain BUY with a revised target price of Rs144 (earlier: Rs140), valuing the stock at 1.1x FY23E P/BV. Key risks: 1) stress exceeding anticipated levels; and 2) delay in loan growth recovery.
- Asset quality (proforma) deteriorated; bank continued to build contingency buffer. While fresh slippages in Q3FY21 remained nil due to the Supreme Court's interim order, management disclosed proforma slippages at Rs4.4bn including potential restructured pool of Rs1.6bn and proforma GNPL at 3.7% (NNPL at 1.92%). Reported GNPA ratio improved to 1.96% while NNPA fell to 0.6%. DCB continued to strengthen its balance sheet by building additional provisions taking the total buffer to Rs5bn, or ~2% of loans. Collections in LAP and home loans improved to 90% and 94% respectively with the non- paying customer pool at 1-1.5%. Management estimates potential incremental restructuring of 3-5% in the coming quarters.
- Disbursement trend improving, but bank would continue to pursue calibrated growth. Deceleration in loan growth, which started in FY20, continued through Q3FY21. However, DCB is gradually getting back to rebuild new business momentum as reflected in the >50% QoQ growth in disbursements. While broad-based recovery in disbursements is likely to take some time, the bank targets double-digit growth in FY22 with emphasis on growing gold, home, tractor, business & MSME segments selectively.
- Cost rationalisation to continue. Management highlighted that the cost ratio at current level is not sustainable and is likely to increase with pick-up in business. However, over the medium term (next 18-24 months), it plans to reduce the cost/asset ratio to 2.2% from 2.4% in FY20. For the full year FY21, it expects total costs to decline 8-10% and NII to remain flat YoY. With margins likely to remain at the current level of ~3.75%, the desired steady-state RoA at 1.1 / 1.2% would be largely driven by operating leverage and normalised credit cost of 55-60bps vs 240bps in Q3FY21.
- Earnings revision. Factoring-in the improving collection trend and pick-up in disbursements, we increase our earnings estimates for FY21E and FY22E by 24% and 4% respectively by lowering our operating cost and credit cost assumptions.
Shares of DCB Bank Limited was last trading in BSE at Rs.116 as compared to the previous close of Rs. 117.7. The total number of shares traded during the day was 43542 in over 620 trades.
The stock hit an intraday high of Rs. 118.25 and intraday low of 114.75. The net turnover during the day was Rs. 5081385.