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History and Business Model
Development Credit Bank (DCB) was founded in 1930 as a co-operative bank by
its promoter – the Aga Khan Fund for Economic Development (AKFED). AKFED
operates as a network of affiliates comprising 90 separate project companies. DCB
was converted into a scheduled commercial bank on 31 May 1995. It has a
distribution network of 82 branches across 28 cities and 140 ATMs (as on
September 30, 2011). It has managed a turnaround in its business over FY08-11.
From retail assets driven (mainly unsecured loans) and wholesale funded bank,
DCB has transformed itself into having a diversified, secured and floating loan
assets and stable low cost liability franchise. The successful restructuring has
improved balance sheet strength and bank’s credibility immensely. It turned
profitable in Q2FY11 (after seven quarters of losses due to higher provisioning);
DCB’s profitability has improved materially in every following quarter.
Financials
DCB has suffered huge losses in the past due to poor asset quality. Its second
revival attempt led by Mr. Murli Natrajan is showing more convincing signs. Over
the years, the bank has shown inconsistent growth in advances with its six-year
CAGR of 12%. In its earlier recovery attempt advances grew by 47% in FY06-08
which got fizzled out in FY08 turmoil. It has been able to maintain its margins at
~2.9% over the past four years despite the falling spreads. In FY11, the bank
managed to improve its NIM to 3.13%. The main reason for the improvement has
been sustenance of a healthy CASA and the asset composition.
Growth Drivers
• It has a very good clientele portfolio. With focus shifting towards SME & retail
portfolio (which are higher yielding portfolio) we believe that the bank will be
able to sustain NIM above 3% which is seen to be on the healthier side.
• Cleaner asset book to help support growth: The GNPA of the bank has
reduced significantly from 11.24% in Q2FY10 to 5.75% in Q2FY12 due to
intense recovery and control on new accretions. The coverage ratio is healthy
at 87.9%. With legacy issues sufficiently addressed, DCB is expected to focus
on growth going forward which had stagnated since FY08.
• Reduction in promoter stake: Following the new banking license draft which
allows 15% holding by promoters, the stake of AKFED is expected to reduce.
DCB is planning to raise money through QIP in FY12 as the feels that this will
be sufficient for them to grow their balance sheet at 20% in FY12E.DCB is
planning to raise capital in the near term which will increase their book value
which augments well for the growth story. Though the RoEs will be impacted
for few quarters, it will be back on track once the balance sheet grows.
• Approval to open new branches: RBI has permitted it to open 10 new
branches after a static branch count of ~80 for nearly two years. This will help
the bank in increasing their CASA base and retail
lending portfolio.
Outlook:
At the CMP, the stock trades at P/Adj. BV of 1.34 which is at a discount to its new
generation banking peers. Going forward it is expected to witness strong earnings
growth on a low base mainly driven by improved operating efficiency, benign
provisioning and lower tax rate (due to unabsorbed losses). Assigning a multiple of
2x to its Adj BV, the target price comes at Rs 64. We recommend a Buy.
Technicals
The stock has been stuck in a range which is having crucial support around Rs 37-
40 levels. The upside would be locked for a while till 38% retracement level
towards of Rs 70. Declining volume activity suggests lack of selling interest at
lower levels. We recommend investing around lower boundary of Rs 37 for a good
upside till Rs 55.
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