DCB Bank: Momentum sustained :: Kotak Sec,report

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Momentum sustained. 3QFY15 registered a strong quarter with PBT growing 37% yoy
(PAT grew 17% yoy) on the back of strong revenue growth (34% yoy) and improvement
in cost-income ratio (370 bps yoy, 150 bps qoq). NII growth was probably the only key
disappointing item given the recent capital infusion. The management’s guidance of a
lower CASA ratio in the medium term was expected. We maintain our positive view (TP
revised to `140 from `120 to reflect changes to our earnings and growth assumptions).

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Growth impressive as previous few quarters; performance on NII a bit disappointing
DCBB reported 17% yoy growth in earnings (PBT grew 37% yoy) on the back of 34% yoy
revenue growth. NII grew 30% yoy but was lower than expectations primarily due to lower yield
on loans, which we believe has occurred due to the impact of higher restructuring of loans qoq.
Strong contribution from treasury boosted non-interest income growth (46% yoy). The full benefit
from the recently raised capital was offset by lower returns from loans. Loan growth was strong at
29% yoy primarily driven by mortgages. Slippages were negligible but restructured loans
increased 100 bps to 5% of loans (total number of restructured accounts is low at eight).
Guidance on CASA lowered to 20-22%, which is on expected lines
The management has cut its guidance on CASA ratio to 20-22% in the short term, which is on
expected lines. We maintain our view that expecting an improvement in CASA ratio at this
stage was premature as there is higher focus on the assets side of the balance sheet and the
focus would be to invest a large share of revenues back into business. We are factoring CASA
ratio to decline in the medium term. Building a strong liability franchise would require a much
higher scale, size of net worth and products/service, especially for current account, even as the
bank would need to invest in brand, especially for retail customers. We would broadly monitor
(1) risk-adjusted NIM, (2) relative movement of the cost of liabilities with growth in CASA on an
absolute basis and (3) loan mix to understand risk.
Maintain BUY as we believe execution would remain strong
We maintain our BUY rating on the bank and value the stock at `140 (from `120 earlier)
reflecting changes to earnings and medium-term growth assumptions. At our target price,
we are valuing the bank at 2.2X book and 16X EPS for RoEs in the range of 13-14% but strong
earnings growth at 17-20% CAGR over the next few years. Despite the recent outperformance,
we still think DCBB is a good bank to own. The scope for valuation expansion is probably limited
but we see this bank as a good earnings compounding idea over the long term. We don’t see
RoEs expanding in the medium term as the bank would continue to keep cost growth at
relatively high levels to build its liability franchise. A strong tier-1 ratio, low impairment risks,
high growth phase and strong execution of the current management make it one of the best
among peers. DCBB remains our preferred mid-cap pick.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily14012015bb.pdf