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Strategic overhaul enables profitability…
Development Credit Bank (DCB) is a small new generation private
sector bank serving ~ 600,000 customers with a network of 80 branches
and 112 ATMs. DCB is advancing steadily after a steep fall in FY09 as
strategic decisions backfired wiping out profits. The bank has returned
to profitability with a PAT of | 4.8 crore in Q2FY11 after a gruelling two
years of restructuring its loan book by running down unsecured
personal loans, diversifying exposure and evolving its liability franchise
by shrugging off bulk deposits. We expect business mix growth of 23%
CAGR over FY10-13E buoyed by diversified loan book and retail deposit
franchise.
PAT turns positive, derived from an evolved business mix…
We expect PAT to bounce back and cross FY08 profit levels by FY12E.
However, this time the quality of profit would be driven by, well
diversified loan book with focus on MSME, SME and AMRB*
segment and restructured liability franchise. DCB has increased its
deposits base despite shedding bulk deposits (share down to 21% in
Q2FY11 from 57% in FY08) and improved its CASA from 24% in FY08 to
35% in FY10. This structural shift has been instrumental in lowering cost
of funds for the bank to 5.6% in Q2FY11, thus improving NIM at 3%.
Asset quality reined in with adequate provisioning…
DCB suffered from high slippages especially in unsecured personal loans
during grim economic conditions in FY09 with the onset of massive
movement in NPA in Q4FY09 leading to GNPA and NNPA shooting up to
11.2% and 4.7% in Q2FY10, respectively. The asset quality has been
improving steadily with GNPA ratio down to 7.6% and NNPA at 1.9% in
Q2FY11 with provisioning high at ~80%. This gives us hope that the
worst is behind the bank for now.
Valuations
At the CMP of | 66, the stock is trading at an attractive 1.6x FY13E P/ABV.
DCB has emerged stronger post it’s restructuring and is poised to
undertake sustained business growth. We believe this would lead to RoE
improving to 9.5% and RoA to 0.9% by FY13E. We are confident that the
bank will be able to control its incremental slippages and maintain NIM in
the range of 2.9-3.1% levels by FY13E. We have factored in a capital
dilution of 11% and 10% in FY11E and FY13E, respectively. We value the
stock at 2.0x FY13E ABV and arrived at a target price of |81. We are
initiating coverage on the bank with a STRONG BUY rating.
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