DCB Bank - Scaling Up; Result Update Q3FY15 :: Edelweiss report

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DCB Bank’s (DCB) Q3FY15 PAT at INR425mn (up 17% YoY) was in line with estimates. The quarter was characterised by 47% YoY growth in operating profit on healthy revenue growth and lower cost/income (down ~150bps QoQ). Key highlights: 1) loan growth healthy at 29% YoY, aided by mortgage and agri growth; 2) NIMs were steady despite capital raising of INR2.5bn, due to lower lending yields which restricted NII growth to 29% YoY; and 3) asset quality remained benign with slippages curtailed at ~1% (pace of addition in SME segment has reduced). With DCB investing towards building its branch franchise, we expect it to sustain above-industry growth over sustained time frame and providing consistent earnings visibility. We introduce FY17 estimates and roll forward our valuations to 2.0x FY17E P/BV with TP of INR140.

Healthy revenue traction negates tax impact

DCB reported healthy 47% YoY growth in operating profit, largely supported by continued traction in loan book, stable NIMs (marginally down QoQ, but still healthy) and higher treasury profit. This, to an extent, was curtailed by higher opex growth (up 26% YoY) as the bank is focusing on building branch franchise. Taking into account that full tax provisions are likely to emerge in FY16, PAT growth will be slower at 13-15% though operating profitability will remain steady.

Improving cost efficiencies, key focus area

One of the major impediments to DCB delivering higher return ratios has been its high cost structure. The bank has been focusing on the same and in Q3FY15, cost-income ratio improved marginally to 59.8% (versus 61.3% in Q2FY15) on healthy revenue traction despite higher opex growth. Given emphasis on building strong franchise, we expect opex to run at elevated levels even as higher revenue growth will keep cost/income under check - expects 2-3% improvement in cost/income per year.

LINK
https://www.edelweiss.in/research/DCB-Bank--Scaling-Up;-Result-Update-Q3FY15/28025.html