Rating: Hold; Target Price: Rs75; CMP: Rs65; Upside: 14%
Broader picture intact, but valuations stretched
DCB Bank’s Q4FY14 results were in line with our estimates and
re-iterates our belief on cost controls with adequate balance growth.
As operating levers continue to play, return ratios will see further
improvement. Our preference for the bank has seen the stock outperform
its peers and currently trades at 1.2x FY16ABV of Rs54.2. Though we
continue to prefer DCB Bank, dilution risk and overhang on tax related
provisioning could see return ratios moderate in the near term. We
thereby downgrade the stock to HOLD but retain our TP at Rs75.
$ Q4FY14 in-line results: DCB Bank’s Q4FY14 results were in-line with
our estimates – NII at Rs1bn (+24% yoy) and net profit at Rs391mn
(+14% yoy). NIM (calc) at 3.2% declined 4bps qoq. Cost rationalisation
measures have seen the ratio of cost/ average assets moderate to 2.6%.
Asset quality improved with GNPA at Rs1.3bn (-33% qoq) and was
primarily led by write-off of the legacy portfolio. Slippages could
have remained higher at Rs300mn (1.5% of loans). However, with lower
provisioning (PCR stood at 46.5%) NNPA at Rs740mn grew 30% qoq. The
bank saw fresh restructuring of Rs350mn for Q4 and cumulative
portfolio is at 0.9% of loans.
$ Operating levers playing out well; non-interest income to be the
next trigger: Cost rationalisation measures have seen the ratio of
cost / average assets decline from 3.03% in FY12 to 2.64% in FY14.
With improved revenue line and increasing penetration into smaller
cities, we expect the ratio to further decline to 2.5% by end-FY16.
Share of non-interest income (11% of total) has remained on the lower
side and will be the next trigger for overall RoA improvement.
$ Loan growth driven by non-SME segment; 77% of deposits are retail in
nature: Concerns over asset quality have forced DCB Bank to cautiously
lower its exposure towards SME segment. This was also reflected in Q4
results that saw 9% yoy decline in credit growth to this segment
vis-à-vis 23.6% yoy growth in loan portfolio. GNPA from this segment
stood at 6.5% of loans. Given the relatively small nature of balance
sheet and branch presence (130 branches), we continue to remain
impressed by DCB Bank’s strategy on deposit profile. 77% of deposits
are retail in nature and provide comfort on the stickiness of deposit
profile and cost controls.
$ Downgrade to HOLD: Our preference for DCB Bank given improved
operating levers, adequate control over asset quality and balance
sheet growth has seen the stock outperform its peers in the recent
past. However, giving impending risk to return ratios following
capital dilution, impact of tax liability beginning FY16 and any
sudden asset quality shocks given increased level of stress in SME and
large corporate segment, we believe valuations at 1.2x FY16ABV of
Rs54.2 are on the higher side. We thereby downgrade the stock to HOLD
with target price of Rs75. DCB Bank however remains our preferred pick
in the mid-cap banking space.
��
Broader picture intact, but valuations stretched
DCB Bank’s Q4FY14 results were in line with our estimates and
re-iterates our belief on cost controls with adequate balance growth.
As operating levers continue to play, return ratios will see further
improvement. Our preference for the bank has seen the stock outperform
its peers and currently trades at 1.2x FY16ABV of Rs54.2. Though we
continue to prefer DCB Bank, dilution risk and overhang on tax related
provisioning could see return ratios moderate in the near term. We
thereby downgrade the stock to HOLD but retain our TP at Rs75.
$ Q4FY14 in-line results: DCB Bank’s Q4FY14 results were in-line with
our estimates – NII at Rs1bn (+24% yoy) and net profit at Rs391mn
(+14% yoy). NIM (calc) at 3.2% declined 4bps qoq. Cost rationalisation
measures have seen the ratio of cost/ average assets moderate to 2.6%.
Asset quality improved with GNPA at Rs1.3bn (-33% qoq) and was
primarily led by write-off of the legacy portfolio. Slippages could
have remained higher at Rs300mn (1.5% of loans). However, with lower
provisioning (PCR stood at 46.5%) NNPA at Rs740mn grew 30% qoq. The
bank saw fresh restructuring of Rs350mn for Q4 and cumulative
portfolio is at 0.9% of loans.
$ Operating levers playing out well; non-interest income to be the
next trigger: Cost rationalisation measures have seen the ratio of
cost / average assets decline from 3.03% in FY12 to 2.64% in FY14.
With improved revenue line and increasing penetration into smaller
cities, we expect the ratio to further decline to 2.5% by end-FY16.
Share of non-interest income (11% of total) has remained on the lower
side and will be the next trigger for overall RoA improvement.
$ Loan growth driven by non-SME segment; 77% of deposits are retail in
nature: Concerns over asset quality have forced DCB Bank to cautiously
lower its exposure towards SME segment. This was also reflected in Q4
results that saw 9% yoy decline in credit growth to this segment
vis-à-vis 23.6% yoy growth in loan portfolio. GNPA from this segment
stood at 6.5% of loans. Given the relatively small nature of balance
sheet and branch presence (130 branches), we continue to remain
impressed by DCB Bank’s strategy on deposit profile. 77% of deposits
are retail in nature and provide comfort on the stickiness of deposit
profile and cost controls.
$ Downgrade to HOLD: Our preference for DCB Bank given improved
operating levers, adequate control over asset quality and balance
sheet growth has seen the stock outperform its peers in the recent
past. However, giving impending risk to return ratios following
capital dilution, impact of tax liability beginning FY16 and any
sudden asset quality shocks given increased level of stress in SME and
large corporate segment, we believe valuations at 1.2x FY16ABV of
Rs54.2 are on the higher side. We thereby downgrade the stock to HOLD
with target price of Rs75. DCB Bank however remains our preferred pick
in the mid-cap banking space.
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