Development Credit Bank - Emerging from the ashes ::Macquarie Research,

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Development Credit Bank
Emerging from the ashes
Event
 Turnaround visible and return ratios to improve: We met with the CEO of
DCB (DEVB IN, Unrated, CMP Rs60) and other members of the senior
management team to get a brief update about the changes carried out in the
bank and the outlook going forward. Management indicated that return ratios
are likely to improve driven by improving margins and cost efficiencies and
tight checks on credit costs.
Impact
 Greater involvement of the board: Over the past 12 months, the board has
started involving itself more actively in the operations of the bank and the
Chairman and various directors of the board now have greater oversight.
Loan proposals of larger sizes are now vetted by the credit committee of the
board and regular monthly committee meetings are being conducted to review
the business. There were also gaps in the credit monitoring and assessment
side which has now been addressed by the new management.
 Regulators getting more comfortable; branch licenses now being given:
After nearly a 2 year hiatus on sanction of branch licenses by RBI, the bank
has now received permission from RBI to open 10 branches. The RBI is now
becoming more comfortable with the bank as it has turned profitable, brought
down NPLs and improved coverage levels and capital position.
 Focus is on building liabilities franchise: From a mere 52% of overall
deposit base in FY08, retail liabilities (retail CASA + retail TD) now constitute
nearly 81% of overall deposit base. CASA deposits itself during this period
have gone up from 24% to 35%. The bank during this period addressed the
product gaps that it had, trained/added more agents and staff force to garner
CASA and has linked a large portion of incentives to CASA mobilisation.
 On the asset side, the focus is more on secured assets: After the debacle
related to personal loans, the bank is now focusing on secured assets which
now form nearly 80% of its overall loan portfolio, up from 60% two years ago.
Personal loans portfolio has been almost run down fully and even in SME
lending, which forms 24% of its portfolio, the bank insists on collateral. The
focus on the retail side continues to be self-employed professionals as the
bank believes the market there is relatively less competitive.
 Efficiency ratios should gradually improve going ahead: As the business
grows, scale efficiencies should kick in. The bank is also restructuring its
branches and workforce to ensure that cost-income ratio improves. However,
the improvement is likely going to be slow as the bank continues to invest in
physical infrastructure and manpower.
Outlook
 Trading at lower valuations to new generation peers: The stock trades at
1.6x FY13E P/BV, based on Bloomberg consensus estimates, which is at a
30% discount to its new generation peers. Management expects ROA to
stabilise around 1% over the next 3-4 years and ROE to be around 16-17%.
Return ratios are relatively low and valuations probably factor in the
turnaround/optimism.