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MOSL: DCB BANK (Buy)-ANNUAL REPORT UPDATE- Improving granularity; Expanding profitability

DCB Bank (Annual Report Update): Improving granularity; Expanding profitability; Operating leverage to drive further expansion in return ratios

(DCBB IN, Mkt Cap USD1.1b, CMP INR238, TP INR275, 16% Upside, Buy)

 

• DCBB has been witnessing steady improvement in return ratios, led by its strategy of branch consolidation and improvement of business/employee productivity.
• The bank remains focused on secured granular lending to self-employed customers and consistent growth in retail liabilities. It has maintained margins in the guided range despite elevated cost of funds.
• DCBB's exposure to top-20 borrowers has declined to industry best levels of ~6% while focus on the RoE matrix has helped enable strong control in RWA growth.
• With incremental branch expansion moderating, we expect C/I ratio to also moderate to ~53.6%/~50.5% by FY20/FY21E. This will aid RoE expansion to 14.1%/16.2% over FY20/21E, thereby scaling a new peak. We value DCBB at INR275 (2.2x FY21E ABV) and maintain BUY rating.

Granularity redefined – as good as it gets!

DCBB is continuing its strong progress in improving concentration ratios, especially at a time when majority of the lenders are dealing with lumpy corporate exposures. It’s exposure to top-20 borrowers has steadily declined — currently at 6% from 10% in FY15 – this, despite the bank delivering 23% CAGR in loan growth over the same period. Further, DCBB is focused on improving the quality of its loan book through secured granular lending; the same is reflected through the RWA density, which improved 992bp over the past two years to 62% currently. Even on the liability side, concentration of top-20 depositors has decreased from 15% in FY18 to 12% in FY19.