DCB Bank | Upgrade of lower Tier-II bonds, long term positive for DCB Bank; Maintain ‘HOLD’ rating with price target to remain under review:: IndiaNivesh

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DCB Bank | Upgrade of lower Tier-II bonds, long term positive
for DCB Bank; Maintain ‘HOLD’ rating with price target to remain
under review:
We first recommended DCB Bank with ‘BUY’ rating on November 22, 2013 at Rs 47/-
with initial price target of Rs 59/-. We last revised our price target to Rs 88/- (P/ABV
of 1.5x for FY16E) on July 15, 2014 which was achieved on September 15, 2014 and
then after we kept our rating on ‘HOLD’ with long term positive view. However, the
stock price jumped 12% in yesterday’s (November 17, 2014) trade and close at
Rs 114/- which is far away from our last revised target price. The spike in stock price
can be due to recent revision in rating of its lower Tier-II Bonds. CRISIL has revised
its rating outlook on DCB Bank Ltd’s (DCB) Lower Tier II bonds (under Basel II) to
‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL A-’.
DCB Bank reported overall good set of financial performance across all the business
segments in Q2FY15. The bank has shown consistent improvement across all the
parameters over the last three financial years (FY12-14). We believe that the bank
will continue to improve its asset quality, cost to income ratio and returns ratios
while maintain higher growth in its deposits and advances. So, we are positive on
the stock with long term perspective.
However, the bank had benefit of almost nil tax in last three years. So, part of the
PAT was driven by zero tax. Beginning from FY15, the profitability will be slightly
impacted on account of applicability of income tax at a higher rate and it will be
fully taxed from FY16. So, we believe that DCB’s profitability will continue to be
average till FY16E (RoE of 10% and RoA of 1% by FY16E) but keep improving over
the medium term, driven by business growth and the consequent improvement in
its operational efficiency.
At CMP of Rs 114/-, DCB Bank is trading at P/ABV of 2.2x and 1.9x for FY15E and
FY16E, respectively. We would like to wait for the Q3FY15 results before we revise
our price target. So, we continue to maintain ‘HOLD’ rating on the stock with price
target to remain under review.