Following DCB Bank's June quarter performance, domestic brokerage firms maintained their positive outlook on the stock despite the bank's Q1 numbers falling short of their estimates. The bank on Friday reported a lower than estimated Q1FY24 PAT at ₹127 crore (up 31% YoY, down 11% QoQ).
In Q1, disbursements witnessed a 16% sequential and a 6% YoY decline. Corporate disbursements were up 46% QoQ, followed by a rise in gold loans by 13% QoQ, while the rest of the segments saw a sequential decline in disbursements.
SME disbursements were lower by 54% QoQ, which can be attributed to weak disbursements in TreDs (platform for Trade Receivables and Invoice Discounting). The share of corporate disbursements in total was higher at 19% vs. 11% QoQ, impacting overall yields, said ICICI Securities.
Loan book growth was reasonable at 3% QoQ and 19% YoY, driven by more than 5% QoQ growth in the mortgage segment. Yields, after rising 68 bps QoQ in Q4FY23, moderated 13 bps QoQ to 11.55%. A part of the moderation in yields can be attributed to a higher QoQ share of corporate disbursements, said the brokerage.
On the contrary, given the rising cost of deposits across the banks, DCB also reported a 28 bps QoQ rise in the cost of deposits and a 29 bps QoQ rise in the cost of funds as a result, margins compressed 35 bps QoQ to 3.83%.
DCB expects further pressure on the cost of deposits going forward, though the magnitude of the rise would be slower. Due to lower margins, NII was down 3% QoQ. The bank reiterated its range of sustainable NIMs at 3.65–3.75%, while ICICI Securities anticipattes a 20 bps YoY decline in calculated NIMs for FY24E.
The bank witnessed a 13% decrease in non-interest income compared to the previous quarter but a 15% increase year-on-year. The bank's fee income performance has been volatile, with the management attributing it to a substantial drop in PSL (priority sector lending) certificate rates, which exerted pressure on non-interest income.
Operating expenses (Opex) rose by 1% compared to the previous quarter and 23% compared to the same period last year as it added 9 branches during the quarter, in line with its strategy of adding 25–30 branches throughout the year.
Overall, the cost-to-income ratio stood at 63.9%, an increase from 59.9% in the previous quarter. The cost-to-average-assets ratio remained flat compared to the previous quarter at 2.83% but increased from 2.67% YoY. ICICI Securities expects the cost-to-income ratio to remain in the range of 62–64% for FY24E and FY25E, as higher Opex is expected to continue affecting the overall ratio.
The Gross Non-Performing Assets (GNPA) increased by 5% QoQ, resulting in a 7-bps rise in the ratio to 3.26%. The Net Non-Performing Assets (NNPA) ratio also increased by 15 basis points QoQ to 1.19%, while the coverage ratio moderated to 64.1% from 68.2% in the previous quarter.
"This is one of the few banks where there has been a rise in the NNPA ratio during Q1 FY24. We are building in GNPA ratio of 2.6% and 2.1% for FY24E and FY25E, respectively," the brokerage said.
The bank has invested significantly in capacity, including headcount and branches. While there is room for improvement in cost efficiency in the medium term, achieving this improvement largely depends on DCB Bank's ability to deliver a superlative of over 20% loan growth, it highlighted.
ICICI Securities anticipates a slower improvement in cost efficiency due to heightened competition and projects a 15–16% CAGR in loans. The brokerage expects RoAs to capped at <1.0% for FY24E–FY25E (compared to 1.0% in FY23), with RoEs (Return on Equity) in the 11–12% range.
Additionally, DCB Bank is likely to witness a change in MD & CEO succession within the next nine months. The brokerage valued the stock at 0.9x FY25E ABV (previously 0.8x) and sets a target price of ₹140 (previously ₹120), maintaining a 'add' rating.
Similarly, Axis Securities remains optimistic about DCB's prospects, citing a healthy core fee income profile, moderating Opex ratios, and steady credit costs.
It projected a RoA/RoE of 0.9–1%/11–13% over FY24–25E. The brokerage reiterates its 'buy' rating on the stock, setting a target price of ₹150 per share. Similarly, Prabhudas Lilladher also maintains a 'buy' recommendation with a target price of ₹150 apiece.
"DCB Bank intends to double its balance sheet in the next 4-5 years and hence, continues to beef up investments in franchise-building activities. We believe that while the management has been able to deliver growth on both sides of the balance sheet, incrementally higher funding costs and credit costs are likely to cap RoA reflation," said HDFC Securities.
The brokerage has adjusted its earnings forecast for FY24/25 to reflect slightly better growth. It continued with its "add" rating on the stock with a price target of ₹145.
20 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
