Credit growth robust, tax pinch creeping in • DCB :: ICICI Securities, PDF link

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Credit growth robust, tax pinch creeping in
• DCB’s Q2FY15 operational results were healthy with NII registering
growth of 28.9% YoY to | 118 crore (I-direct estimate: | 112.1 crore)
supported by robust 31% YoY increase in credit growth to | 8793
crore (up by | 502 crore QoQ). NIM was maintained at healthy levels
of 3.72% (stable QoQ)
• PAT was in line with our estimate at | 41.1 crore, up 24.2% YoY
aided by healthy NII and other income growth (up 35.5% YoY to | 37
core led by 29% YoY increase in fee income to | 31 crore)
• Asset quality saw some pressure with fresh slippages of | 41.8 crore.
The GNPA ratio surged to 1.9% but remains manageable
• In October, the bank had raised | 250 crore via QIP, post which the
promoter holding has dropped to 16% from current 18%
Posted losses in FY09 & FY10, post conservative growth, pick-up seen
DCB made significant losses of | 88 crore in FY09 and | 79 crore in FY10
on account of large unsecured exposure (29%, | 1176 crore) as on FY08.
The bank is in a turnaround phase and earned | 150 crore in FY14. Post
FY10, the credit monitoring mechanism is a lot more stringent and
cautious now. Unlike the pre-2008 period, DCB has discontinued
extension of loans for properties under construction. At least 80% needs
to be completed. SME loans have been fully collateralised now vs. ~70%
earlier. DCB does not have exposure to any troubled corporate names
floating in the market. Consequently, its GNPA has declined from | 306
crore (GNPA ratio: 9.3%) in FY09 to | 168 crore (GNPA ratio: 1.9%) in
Q2FY15. Such cautious lending provides us comfort on asset quality with
NNPA to sustain at 1%.
Growth on track with target to double balance sheet in three years
The bank has been in a consolidation phase in FY08-11 with ~85
branches with the credit book flat at ~| 4200 crore in FY08-11. Post FY11,
it has almost doubled its credit book from | 4271 crore in FY11 to | 8140
crore in FY14. DCB has steadily shed its risky unsecured loan book in the
past couple of years and loan growth is now contributed by mortgage
(secured book), which now comprises 42% of total credit (| 3693 crore).
As on Q2FY15, agri constituted 13%, SME+MSME– 15%, corporate- 24%
and retail– 45% of credit.
Going ahead, the bank is embarking on a branch expansion and has in the
last year added 40 branches taking its total to 142. It is further estimated
to rise to 185 in FY16E. The management has guided at doubling the
bank’s balance sheet in three years, albeit on a small base. We estimate a
credit book of | 12523 crore (| 8793 crore now) by FY16E implying 24%
CAGR. The bank is targeting a credit mix of 40% retail, 20% SME and
30% corporate in the long term. NIM is expected to be maintained at
3.5% resulting in 23.4% NII CAGR from | 368 crore in FY14 to | 561 crore
in FY16E. Its C/I ratio is high at 63% but is estimated to improve to 55.7%
in FY16E owing to healthy NII growth.
Earning visibility provides comfort
Visibility of earnings growth is strong on the back of i) steady NII growth
and ii) stringent lending mechanism to maintain stable asset quality and
low provisioning. It is adequately capitalised with tier 1 ratio of 12.8%.
DCB is well-placed in terms of capital adequacy and asset quality, which
are major concerns of the banking industry. Return ratios are decent with
1.3% RoA and 15% RoE. Considering the steady credit and NII growth
outlook, we have BUY recommendation on the stock with a TP of | 100.

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