DCB Bank - Core Steady; Higher Opex Suppress Profitability; Result Update Q2FY15 :: Edelweiss report link

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DCB Bank’s Q2FY15 PAT at INR411mn came in marginally ahead of our estimate supported by one-time interest on income tax refund (INR50mn), which the bank used to make prudent provisions (based on stress loan assessment). The quarter was characterised by improved core profitability—NII growth, excluding one-time income, surged 23% following above industry loan growth of over 30% and stable NIMs. Other highlights were: (1) slippages were higher at INR418mn (2.0% versus run rate of 1.4% over past 5 quarters); and (2) opex growth was higher at 21% (versus 16% run rate) given the bank’s investment in branch network. Factoring in higher loan growth and recent equity infusion (INR2.5bn), we revise our earnings upwards by 12%/6% for FY15/16E. Maintain ‘BUY’ with TP of INR102 (earlier INR94), assigning 1.7x FY16E ABV.

Slippages marginally higher; outlook stable

Slippages were marginally higher driven by 2 accounts in corporate banking (INR120mn) and agri inclusive banking (INR75mn). The bank has adequate collateral against these and expects recovery going forward. DCB Bank has been able to maintain benign asset quality—GNPLs improved from 4.67% in FY09 to 1.9% currently (albeit up marginally by 12bps QoQ). Given the bank’s focus on improving underwriting process and adequate collateral cover, we expect asset quality to remain benign.

Improving cost efficiencies key focus area

One of the major impediments to DCB Bank delivering higher return ratios has been the high cost structure, which has been management’s key focus area. During Q2FY15, cost-income ratio (adjusted) improved marginally to 61.3% (versus 66.0% in Q2FY14) on healthy revenue traction despite higher opex growth at 21% YoY. The industry operates at much efficient ratio and we believe the bank is focused on keeping a tight leash on costs with progress likely to be driven by improved productivity.

LINK
https://www.edelweiss.in/research/DCB-Bank--Core-Steady;-Higher-Opex-Suppress-Profitability;-Result-Update-Q2FY15/27507.html