Despite an around 4 percent decline just in the 5 sessions of August so far, brokerage house Axis Securities has selected DCB Bank as its 'pick of the week'. This is on the back of robust credit and deposit growth outlook, improvement in asset quality, healthy return ratios and attractive valuations.
The brokerage has a ‘buy’ call on the stock with a target price of ₹131, indicating an upside of over 10 percent from its current market price of ₹118, as on August 7.
DCB Bank (DCB) is a retail-focused bank that offers a diversified suite of products, primarily catering to self-employed borrowers (80-90 percent of the customer base). The bank’s portfolio is spread across segments such as mortgage, SME/MSME loans, agri, and inclusive banking, gold loans, CV loans, and corporate loans. DCB has a pan-India network of 436 branches with 56 percent of the branches in metro and urban cities.
The stock has jumped over 40 percent in the last 1 year but has lost around 7 percent in 2023 YTD, giving negative returns in 5 of the 8 months so far in this current calendar year.
Investment Rationale
Balance sheet size likely to double over the medium term: "Owing to seasonal weakness in Q1, disbursements moderated by 16 percent QoQ, with muted disbursements in the SME/MSME Segment. However, the management expects the disbursement growth momentum to pick up in the coming quarters and remains confident of doubling the bank’s balance sheet over the next 3-4 years," said the brokerage. It also believes that the lender's credit growth hereon will be driven primarily by Mortgages, SME/MSME, and AIB segments. Similarly, the bank remains focused on building a retail-led deposit franchise. DCB will look to improve its CASA ratio to over 30 percent over time and Axis expects DCB to deliver healthy credit/deposit growth of 18/17 percent CAGR over FY23-25E.
Asset quality improvement likely to continue: The brokerage pointed out that in Q1FY24, DCB Bank's GNPA inched up by 7bps QoQ owing to higher slippages and a slower pace of recoveries. While gold slippages will continue to remain elevated owing to daily NPA tagging guidelines by the RBI, the management believes that it does not seem to be a cause of concern. The management remains confident in improving the pace of recoveries in the coming quarters and expects no major stress for the balance restructured pool, said Axis.
RoA delivery of 1 percent likely to continue despite margin pressures: The brokerage noted that net interest margins (NIMs) contracted by 35bps in Q1FY24 owing to a sharp rise in the cost of funds (CoF) and a slight contraction in yields due to a shift in the portfolio mix.
"The management has indicated that the yields should normalize as the growth in the core segments picks up. Additionally, the pace of increase in CoF in the coming quarters should decelerate, thereby arresting the pace of margin contraction. Thus, NIMs are expected to range between 3.7-3.75 percent, with efforts to maintain margins at the upper end of the band. Even as the bank continues to make investments towards the franchise and capacity building, the management remains confident that improving productivity will support cost ratio improvement," stated the brokerage.
Even as margins compress, Axis believes that moderating opex ratios and steady credit costs should enable DCB to deliver RoA and RoE of 0.9-1 percent and 11-13 percent over FY24-25E.
Earnings
In the June quarter, DCB Bank posted a 31 percent rise in its consolidated net profit at ₹127 crore as compared to ₹97 crore in the corresponding period last year. The bank's net interest income (NII) also jumped around 25 percent to ₹470.7 crore in Q1FY24 versus ₹374 crore in the year-ago period. The total income in the June quarter was up 24 percent to ₹578 crore as against ₹466 crore in the same quarter last year.
The gross non-performing assets (GNPA) of the lender rose to 3.26 percent in Q1 versus 3.19 percent in the preceding March quarter of FY23. However, on a YoY basis, the gross NPA declined from 4.21 percent in the same quarter last year. Similarly, the net non-performing assets (NNPA) increased sequentially to 1.19 percent from 1.04 percent in the previous March quarter. But on a YoY basis, net NPA declined from 1.82 percent in Q1FY23.
