Development Credit Bank: Results beat expectation on account of lower provisioning: Nirmal Bang,

Results beat expectation on account of lower provisioning
Development Credit Bank (DCB)’s performance for Q1FY13 was above estimates. DCB reported a net profit of Rs.18.9 crs in Q1FY13 resulting in a growth of 114.3% on YoY basis and QoQ increase of 9.2%.

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 NIM’s witnessed an improvement
Net Interest Margin (NIM) of the bank stood at 3.18% as compared to 3.1% in Q1FY12 and 3.12% in Q4FY12. NIMs witnessed an improvement as the full benefit of the capital (~Rs 190 cr) which was raised during Q4FY12 was visible mainly in this quarter. Management expects that NIMs will be broadly in the range of 300-325 bps for FY13E. We expect NIMs to be at 3.2% for FY13E and FY14E respectively.
 Non-interest income declines sequentially
Non Interest Income declined marginally on a sequential basis but increased YoY by 17.3% to Rs 27.5 crs. The bank’s core fee income declined 9.8% QoQ but increased 18.8% YoY to Rs 20.2 cr. The share of non interest income as % of total income stood at 30.1% in Q1FY13. Management expects the momentum in fee income to continue going forward.
 Cost to income ratio witnesses increase
The cost to income ratio of the bank stood at 72.8% as compared to 71.9% in Q4FY12 and 78.1% in Q1FY12 mainly due to higher employee expenses. We expect cost to income ratio to come down to 68.6% in FY13E and 65.6% in FY14E as compared to 70.7% in FY12.
 Some stress on asset quality persists
The asset quality of the bank showed a significant improvement with Gross NPA in absolute terms declining by 10.0% YoY and 2.3% QoQ. Gross NPA ratio and Net NPA ratio were at 4.18% and 0.75% respectively in Q1FY12. However, slippages increased during the quarter and stood at Rs 20 crs vs slippages of Rs 5 cr in Q4FY12. We expect the bank’s GNPAs to come down to 3.85% in FY13E and 3.46% in FY14E.
 Loan book shows growth both sequentially and YoY
DCB reported growth both on QoQ and YoY basis (+ 28.7% YoY and 3.1% QoQ) at Rs 5,449 cr. This was mainly due to increase in the corporate banking segment and growth in the bank’s mortgage book. The bank’s SME book witnessed a flattish growth due to repayment in the existing books. However, Management has mentioned that the pipeline for the SME book continues to remain strong. We have factored in 19.8% growth in advances in FY13E and 18.2% growth in FY14E.
Valuation & Recommendation
At the current price of Rs. 46, DCB is trading at a PE of 13.82x and 10.56x of FY13E and FY14E EPS & at P/ABV of 1.20x and 1.08x of FY13E and FY14E respectively. We recommend BUY on the stock with a target price of Rs 65 (1.7x FY13E ABV).