Buy DCB Bank -Performance becoming more consistent… :: ICICI Securities, report

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Performance becoming more consistent…
• Profit grew 17% YoY to | 42.5 crore marginally lower than our
estimate of | 43.7 crore, which factored in 20% YoY growth, mainly
due to higher-than-expected provisions and opex. Strong other
income supported PAT
• Other income grew 46% YoY to | 48 crore vs. our estimate of | 38
crore, mainly due to higher treasury gains of | 12.6 crore vs. | 4
crore in Q2FY15 and significantly higher than our expectation
• Asset quality was stable as GNPA was flat at 1.19% increasing
marginally from | 169 crore to | 179 crore (adding | 10 crore) on a
QoQ basis while NNPA was same at | 95 crore. The PCR was
maintained at 77%. In spite of lower NPAs, provisioning QoQ was up
| 18 crore (I-direct estimate: | 12 crore)
• Credit, deposits grew higher than estimates at 29% YoY (| 9491
crore) and 24% YoY (| 11850 crore), respectively. NIM stable at 3.7%
Posts losses in FY09, FY10, conservative growth; pick-up seen
DCB made significant losses of | 88 crore in FY09 and | 79 crore in FY10
due to 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 & 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. Consequently,
its GNPA has declined from | 306 crore (GNPA ratio: 9.3%) in FY09 to
| 179 crore (GNPA ratio: 1.9%) in Q3FY15. Such cautious lending
provides comfort on asset quality while NNPA may 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 (| 4028 crore).
As on Q3FY15, agri constituted 13%, SME+MSME– 14%, corporate- 24%
and retail– 49% 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 250 in three years. 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 | 12790 crore (| 9491 crore now)
by FY16E implying 25% 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 25% NII CAGR from | 368 crore in
FY14 to | 578 crore in FY16E. Its C/I ratio is high at 63% but is estimated
to improve to 55% in FY16E owing to healthy NII growth.
Earning visibility provides comfort; raise estimates and target price
Visibility of earnings growth is strong on the back of i) steady NII growth &
ii) stringent lending mechanism to maintain stable asset quality and low
provisioning. It is adequately capitalised with tier 1 ratio of 12.6%. Return
ratios are decent with 1.3% RoA and 14% RoE. We have raised our
earning estimates to 20% CAGR over FY14-16E from 15% earlier as we
factor in higher credit traction & rise in NIMs. We roll over to FY17E and
raise our TP to | 140 valuing at 2.2x FY17E ABV. We recommend BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_DCB_Q3FY15.pdf