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MOSL: DCB BANK (Downgrade to Neutral)-Weak operating performance; growth outlook uncertain

DCB Bank: Weak operating performance; growth outlook uncertain

(DCBB IN, Mkt Cap USD1.1b, CMP INR239, TP INR225, 6% Downside, Downgrade to Neutral)

 

• 1QFY20 PAT came in at INR811m (+17% YoY), significantly below our estimate of INR973m due to lower fee income, margin pressure and muted loan growth.
• NII grew 11.6% YoY (v/s +14.1% YoY in 4QFY19) as margins further compressed by 10bp QoQ to 3.7%. This, coupled with weak fee income (-9% YoY), drove modest 10% YoY growth in total revenue. Opex increased 4.7% QoQ to INR2.3b due to salary hikes to employees. Thus, the C/I ratio rose 380bp QoQ to 57.5% (500bp increase in the core C/I ratio).
• Loan growth moderated to 13.2%/2.0% YoY/QoQ (v/s +15.9%/3.0% in 4QFY19) to INR240.4b. Growth was primarily led by the AIB segment (+26% YoY), while corporate advances declined 13% YoY. Deposits grew 15.0%/1.2% YoY/QoQ to INR287.9b, with retail term deposits plus CASA forming ~81% of total deposits v/s 79% in FY19.
• Fresh slippages increased to INR1.5b (2.8% v/s 2.0% in 4Q), resulting in an 8.4% QoQ increase in GNPA to INR4.8b, despite higher write-offs (INR433m). NNPA increased 27.4% QoQ to INR1.9b, while the calculated PCR declined to 59% (65% in 4Q). Thus, the GNPA/NNPA ratio increased 10bp/15bp QoQ to 2%/0.8%. SR book stood at INR359m, while standard restructured advances were at INR380m.
• Concall highlights: (a) DCBB guided for continued pressure on margins over the next two quarters. (b) The bank remains cautious on the new CV portfolio and is witnessing elevated stress here. (c) It maintained floating provision buffer of INR840m.
• Valuation view: The operating environment appears tough over the near term, which will likely exert pressure on growth and asset quality. The increase in funding cost arising from fixed rate refinancing taken in the past will continue exerting pressure on margins, while the fee income outlook remains muted. We expect loan growth to decelerate to 17% in FY20 v/s average 22% over FY15-19. We cut our FY20/21 PAT estimate by 12%/15%. RoA/RoE is expected to improve to 1.1%/13.9% in FY21, supported by better cost-ratios. We, thus, revise our TP to INR225 (1.9x FY21E ABV) and downgrade our rating to Neutral.