dcb bank ltd - india...

Sector: Financials

Sector view: Positive

Sensex: 26,221

52 Week h/l (Rs): 150.9/80.1

Market cap (Rscr) : 3,987

6m Avg vol (‘000Nos): 1,662

Bloomberg code: DCBB IN

BSE code: 532772

NSE code: DCBBANK

FV (Rs): 10

Prices as on Oct 1, 2015

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

60

100

140

180

Sep‐14 Jan‐15 May‐15 Sep‐15

DCB NIFTY

Share holding pattern Dec‐14 Mar‐15 June‐15

Promoters 16.4 16.4 16.3

Institutions 39.8 38.2 39.2

Others 43.8 45.5 44.5

Rating: Reduce Target (12months): Rs128

CMP: Rs141

Downside: 9.2%

Research Analyst: Franklin Moraes

Rajiv Mehta [email protected]

DCB Bank Ltd

Company Report

October 5, 2015

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.

Banking on history, valuations stretched

Impressive turnaround since FY10 Since FY10, DCB Bank has staged a remarkable turnaround under the leadership of Mr. Murali Natrajan who was appointed as the MD & CEO in April 2009. He put his rich experience to work, attracted key talents and stitched a growth story with focus on building a healthy and productive banking franchise. As credit environment turned hostile over the past 3‐4 years, the bank drove growth through mortgages complimenting it with retail TD growth. Over FY12‐15, DCB witnessed a significant expansion in balance sheet and profitability.

But, a repeat of history may not be easy While the management is upbeat about scripting a similar success in the coming years, we feel there are potential impediments, which can dilute the progress: Growth in mortgages (45% of advances) could moderate amid unsupportive

property market trends and increasing competition. DCB’s mortgage portfolio is concentrated in metros/large cities where real estate prices are exhibiting sluggishness and competition amongst financiers is hyper.

Further, the bank has lesser headroom to withstand pricing competition due to higher cost of deposits. Efforts towards pushing growth through distribution expansion may come in the way of improving cost/income ratio.

In the corporate segment (21% of advances), off‐late DCB was unable to retain a couple of large loans due to inability to offer competitive rates. This may act as a drag till the credit environment recovers significantly.

NIM is expected to correct materially on account of swift softening of yields and slower liability re‐pricing. CASA franchise is sub‐par due to constraints around offering higher savings rate and weak corporate banking business.

Without any help from the credit cost, DCB’s RoA is unlikely to improve beyond 1.2% by FY18.

If this turns out to be, isn’t valuation expensive? The substantial re‐rating in DCB’s valuation over the past 18‐24 months had two legs, impressive delivery on growth/profitability and strengthening expectation about the pace and intensity of progress continuing. The latter poses valuation risk for the stock, which is already trading at premium to some larger, robust and profitable private banking franchises. DCB’s valuation is also at a historical high of at 2.4x 1‐yr forward P/ABV. It is likely that current situation could correct either through a time correction or a price correction in the stock.

Financial summary Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Total operating income 675 820 974 1,199

yoy growth (%) 33.2 21.4 18.8 23.1

Operating profit (pre‐provisions) 279 353 427 543

Net profit 193 187 235 300

yoy growth (%) 27.6 (2.8) 25.4 27.5

Adj.BVPS (Rs) 50.6 55.7 63.6 73.8

P/E (x) 20.6 21.2 16.9 13.3

P/BV (x) 2.8 2.5 2.2 1.9

ROE (%) 14.6 11.5 12.8 14.2

ROA (%) 1.3 1.0 1.0 1.1 Source: Company, India Infoline Research

DCB Bank Ltd

2

About DCB Bank DCB Bank is predominantly an SME focused bank promoted by the Aga Khan Fund for Economic Development (AKFED; holds 15.5% stake in DCB Bank) with loan products of Loan Against Property (LAP), SME and MSME Working Capital Finance, Corporate Banking, Agri & Inclusive Banking, Home Loan, Commercial Vehicle and Gold Loan. AKFED is a well renowned international development agency dedicated to promoting entrepreneurship and building economically sound enterprises in the developing world. It operates under a broad network with 90+ separate project companies having generated revenues of $3.5bn in 2013. The fund is presently active in 17 countries across Asia and Africa.

DCB Bank was formed by a series of mergers and amalgamations of various co‐operative banks. The Ismailia Co‐operative Bank and Masalawala Co‐operative Bank came into being in 1930. Later, Diamond Jubilee Co‐operative Bank merged with Ismailia Co‐operative Bank. Further, in 1981, Ismailia Co‐operative Bank was amalgamated with Masalawala Co‐operative Bank to form Development Co‐operative Bank. Eventually, Citi Co‐operative Bank was merged with Development Co‐operative Bank, which was later converted into a joint stock banking company in 1995, the Development Credit Bank. In 2013, the name of the bank was changed from Development Credit Bank to DCB Bank. Risky lending raised NPAs in FY08-09 DCB Bank suffered a big setback in FY08‐09 after it ran into severe asset quality problems due to risky lending and a large unsecured book. Gross NPAs shot up to 9% in FY09 from just 1.5% in FY08 with slippage ratios extremely high at 8%. The consequent jump in credit costs led to the bank reporting losses in FY09 and FY10. Thus, the bank faced restrictions from RBI on adding branches.

SME focused bank promoted by AKFED

Historical transition of the bank

Ran into severe asset quality problems due to high risk lending

A high unsecured book in FY08… ...led to high NPA levels in subsequent years

46%

18%

16%

5%

4%

4%7% Corporate Banking

Personal Loans

CV/CE

Agri & Inclusive Banking

Mortgages

SME + MSME

Others

1.5

8.8 8.7

0.7

3.93.1

0.0

2.0

4.0

6.0

8.0

10.0

FY08 FY09 FY10

(%)

Gross NPA (%) Net NPA (%)

Source: Company, India Infoline Research

DCB Bank Ltd

3

Strategic turnaround post the fiasco Since FY10, DCB Bank has staged a remarkable turnaround under the leadership of Mr. Murali Natrajan who was appointed as the MD & CEO in April 2009. When he joined DCB Bank, Mr Natrajan had a vast experience of more than 25 years. Prior to joining DCB, he served as the Global Head for SME banking in Standard Chartered Bank and this experience was instrumental in shaping up DCB Bank as an SME focused bank.

DCB Bank made a series of strategic changes to address the multiple concerns that plagued the performance of the bank. It hired a number of senior level employees having vast experience in the field of banking and having worked in important positions earlier. They bank embarked on a long term journey of shifting focus from unsecured lending to secured lending. Rebalancing of the entire loan portfolio was initiated and serious efforts were made to prevent any fresh lending towards Personal Loans, Commercial Vehicle and Construction Equipment loans and the existing book was allowed to run off. Customer focus was shifted to MSME and Retail Mortgages, Mid‐Corporate in urban areas and Agri, Microfinance and Rural Banking in the rural areas. In the MSME segment, the tickets sizes were reduced substantially in order to lower concentration risk. Effective changes were initiated on the liability front as well with high‐cost deposits being repaid and focus shifting towards garnering CASA and Retail Term Deposits. The consolidation phase led to balance sheet contraction in FY09; however, the quality improved and the benefits were reaped in the subsequent years.

Remarkable turnaround under the leadership of Mr. Murali Natrajan

Revamped the entire business model

Embarked on a long term policy to shift focus on secured lending

Customer segments refined, ticket sizes reduced to minimize concentration risk

Cost/income ratio reached alarming levels DCB Bank reported net loss in FY09 & FY10

68.6

76.3

80.6

60.0

65.0

70.0

75.0

80.0

85.0

FY08 FY09 FY10

(%)

38

(88) (78)

(100)

(75)

(50)

(25)

‐

25

50

75

100

FY08 FY09 FY10

(Rs. Cr)


DCB Bank Ltd

4

Loan mix has changed over the years

0

20

40

60

80

100

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)

Mortgages

Corporate Banking


SME + MSME

Gold Loan

CV/CE

Personal Loans

Others

Source: Company, India Infoline Research Clear focus towards secured lending

46

12

25

29

3638

43

28.9 29.5

23.7

8.8

13.1

4.7 4.5 4.4

0

10

20

30

40

50


(%)

Mortgages (%) Unsecured Advances (%)


Consolidation phase led to balance sheet contraction

7,578

5,943 6,137

‐

2,000

4,000

6,000

8,000

10,000

FY08 FY09 FY10

(Rs. Cr)


DCB Bank Ltd

5

Well‐experienced Management Team in place Name Designation Experience Mr. Murali Natrajan

MD & CEO Prior to joining DCB Bank in April ‘09, had more than 25 years experience in banking. Served as the Global Head for SME banking in Standard Chartered Bank. Also served Citibank for 14 years in various disciplines such as Operations, Credit, Finance, Product Management and Business Management of Consumer Banking.

Mr. Bharat Sampat

CFO Mr. Sampat has over 25 years of experience in senior positions with reputed organizations such as ABN Amro Bank, ANZ Grindlays Bank, Standard Chartered Bank, Hoechst India and Larsen & Toubro. He is working with DCB since Sep ’08.

Mr. Abhijit Bose

Head ‐ Retail Assets & Strategic Alliances

Mr. Bose has over 23 years of experience in Retail and SME Banking, Housing Finance and the Real Estate Sector. He has managed Sales and Distribution, Products, Credit Risk Management and Audit in markets such as India, Asia Pacific, Middle East and Africa. Joined DCB in June ’08.

Mr. J. K. Vishwanath

Chief Credit Officer

Mr. Vishwanath has over 19 years of experience in all aspects of Credit Risk Management. Prior to joining DCB Bank in July ‘10, he has worked with Fullerton India Credit Company Ltd. and Citigroup. He began his professional career with Eicher Ltd.

Mr. H. V. Barve

Company Secretary

Mr. H. V. Barve joined DCB in August 1984. Mr. Barve, post graduate in commerce, is an Associate of the Institute of Company Secretaries of India and a Certified Associate of the Indian Institute of Bankers. He has over 40 years of working experience.

Ms Anuradha

Chief Internal Auditor

Has more than 15 years of experience in Audit and Compliance holds ACA, CS and CISA degrees to her credit. Joined DCB in FY15, prior to which she was working with ING Vysya Bank since 2003. She has delivered on many senior roles and some of her key achievements are setting up Risk based Branch Audit Methodology, Implementation of offsite audit workflow process and designing Risk Monitoring Model.

Mr. Praveen Kutty

Head – Retail & SME Banking

He has worked with Citibank’s Indian and international operations where he successfully managed multiple consumer banking businesses including Credit Cards, Personal Loans, Home Loans, Branch Banking and Wealth Management. He has cumulative 19 years of banking experience. He joined DCB Bank in July ’07.

Mr. R. Venkattesh

Head ‐ HR, Technology and Operations

Prior to joining DCB in Dec ’05, he was with Standard Chartered Bank as Head, Human Resources – Countries. He has over 20 years of experience in the areas of Human Resource Management and Mergers and Acquisitions.

Mr. Rajesh Verma

Head ‐ Treasury, Trade Finance and Cash Management

He joined DCB in June ’09. Has a cumulative experience of 31 years within Banking and Investment Banking in SBI. His experience spans across the various functions of Treasury, Credit, Loan Syndications, Project Finance, Investment Banking, General Administrations and IT Project Management in India and UK.

Mr. Ravi Kumar

Chief Operating Officer

Prior to joining DCB Bank in Nov ’09, he spent seven years with the Samba Financial Group (previously Citibank) in Riyadh and Qatar as Chief Financial Officer and Program Director in Audit; and four years in Ernst & Young auditing large banks, mutual fund and multinational companies.

DCB Bank Ltd

6

Impressive progress on all operating parameters over FY10-15 DCB has witnessed a dream run over the past five years. The advances book has scaled up quite well, clocking a robust CAGR of 25% over FY10‐15. The overall advances book has been supported by strong growth in Mortgages portfolio (61% CAGR over FY10‐15), manifesting management’s strategy and focus towards growing the secured lending piece of the business. The discipline was also observed when the unsecured Personal Loans book was allowed to run‐off completely. Gold loan as a segment was started in FY13; however, it still contributes a small portion of the advances book. Strong growth in advances book over FY10‐15

3,460 4,271

5,284

6,586

8,140

10,465

‐

2,000

4,000

6,000

8,000

10,000

12,000

FY10 FY11 FY12 FY13 FY14 FY15

(Rs. Cr)

25% CAGR


FY10‐15 CAGR for various loan segments

(5)

13

17

18

61

‐25 0 25 50 75

CV/CE


Corporate Banking

SME + MSME

Mortgages

(%)


DCB has also been able to improve its retail deposit franchise; its share currently stands at 81% of total deposits as compared to 52% as of FY08. The biggest set‐back that bank faced during FY08‐09 was in the asset quality, which has improved substantially since then. Gross NPAs have come down to just 2% in FY15 from extremely high levels of ~9% in FY09 underpinned by slippages being contained at sub‐2% level in each year during FY10‐15. There has also been material NIM expansion during this period, which along with improving cost productivity and benign credit costs drove a sharp expansion in RoA.

A disciplined effort ensured the advances book scaling up quite well

GNPAs down to just 2% in FY15 from ~9% in FY09 supported by slippages which were below 2%, for each of the years over FY10‐15

DCB Bank Ltd

7

Gross NPA brought down to pretty manageable levels

0.0

1.5

3.0

4.5

6.0

7.5

0.0

2.0

4.0

6.0

8.0

10.0


(%) Gross NPA Slippage Ratio (%) ‐RHS

Source: Company, India Infoline Research External agencies instill faith in DCB’s improved business model The RBI permission to allow DCB to open 10 new branches in May 2011 gave a major boost to asset growth as it was the single biggest branch addition approval received in recent years. There had been no addition to branch network over FY09‐11 owing to the restrictions. Moreover, in FY13, RBI completely eliminated the RBI approval process for opening of branches by DCB owing to their consistently robust performance. Confidence was also shown by Ratings agency CRISIL in Feb 2013, when they upgraded the rating on DCB’s Lower Tier – II bonds to ‘CRISIL A‐/Stable’ from ‘CRISIL BBB+/Positive’ and the rating on DCB’s certificate of deposits, from ‘CRISIL A1’ to 'CRISIL A1+’. The rating upgrade was on account of the improvement in asset quality over FY10‐13 and an expected improvement in earnings going forward driven by operational efficiency.

RBI and CRISIL acknowledge the improvement in DCB’s performance

Healthy NIM expansion Overall improvement in profitability well reflected in RoAs

2.8

3.1 3.3

3.3

3.6

3.7

2.0

2.4

2.8

3.2

3.6

4.0


(%)

0.3

0.7

1.0

1.2 1.3

‐

0.2

0.4

0.6

0.8

1.0

1.2

1.4


(%)


DCB Bank Ltd

8

Branch addition accelerates post the removal of RBI approval process

‐

30

60

90

120

150

180


RBI removes approval process for opening branches


Branch network skewed towards West India

Distribution more focused in urban areas

38

24

141312

56

Maharashtra

Gujarat

Odisha

MP

Telangana

Others

33%

15%29%

23%

Metro

Urban

Semi Urban

Rural


DCB Bank Ltd

9

Mortgages – the main growth segment Mortgages form the largest product segment for DCB, contributing 45% of the total portfolio as of June 2015. Of this, ~70% is LAP and the rest being Home Loans. The LAP segment is dominated by SME‐LAP which contributes ~70% of the portfolio. The SME‐LAP product has two variants: the first is basically an overdraft facility provided by taking a Self Owned Residential Property or Self Owned Commercial Property as a collateral whose limits are revised annually and the second variant is a plain vanilla LAP having 8‐10 year tenure with monthly repayment schedule. The average ticket size of the Mortgage portfolio stands at Rs. 40‐50 lakhs with LTVs of 75‐80%. DCB Bank provides lower LTVs while financing higher value properties owing to difficulties faced in case of liquidation. The Mortgage product is being offered at 30 locations in India with Delhi and Mumbai comprising 40‐45% of the total book and Bangalore, Hyderabad, Chennai, Delhi and Pune being some of the other locations. The Mortgage segment has been the fastest growing piece, growing at a CAGR of 60% over the past five years in line with the management’s focus on secured lending. Other segments have also grown at reasonable pace The MSME segment has witnessed a healthy growth of 18% over FY10‐15 despite the efforts taken to lower the portfolio concentration. The key differentiating factor between SME‐LAP and the MSME segment is the type of collateral being offered. MSME segment would have a mix of assets including commercial property as collateral whereas SME‐LAP would purely take a property as collateral. Also, the average ticket size in SME‐LAP is much lower than MSME segment. The Agri & Inclusive Banking (AIB) loan portfolio includes Tractor Finance, Micro Finance, Warehouse Finance, Commodity Funding and loans to shopkeepers, all of which have done well in the past couple of years.

Delhi and Mumbai ‐ 40‐45% of the total Mortgage portfolio; Bangalore, Hyderabad, Chennai, Delhi and Pune among other locations

SME segment provides Commercial Property or Bonds as collateral with about 2‐5% of unsecured portion also being part of the overall loan

Breakup of overall Mortgages portfolio

Breakup of LAP portfolio

30%

70%

Home Loan

LAP

70%

30%

SME ‐ LAP

Non SME ‐ LAP


DCB Bank Ltd

10

Credit appraisal and monitoring is the key Being in the self employed and SME segment, it is imperative to have a strong credit rating process and understand the customer very closely. DCB has a strong team in place to understand the businesses of the customer. It provides loans primarily to existing businesses having an established track record. The credit team and the sales team have independent roles with the sales team being in charge of getting files from through collectors, DSAs and the credit team’s job is only assessment, doing reference checks, physical visits to plants, CIBIL scores etc. The sales team reports directly to the retail banking team. Also in particular cases, the borrowers are asked to open up an account with DCB so as to monitor their cash flows. DCB also maintains caution accounts and alert accounts based on the probability of default, which depends on how the economy is performing and how the businesses are doing. Bank targets to sustain growth with incremental efficiency DCB has outlined a strategy of doubling its balance sheet over the next 3‐3.5 years targeting a loan CAGR of 25% pa. The bank plans to add 25‐30 branches every year by penetrating into Tier 2 to Tier 6 cities. However, the pace of network expansion would be contingent on the bank achieving 55% cost/income ratio within two years. Aided by branch addition, the bank is reasonably confident about witnessing 20% pa growth in the savings deposits. CASA/branch is targeted to go up to Rs. 25cr from the current level of Rs. 19cr as the newly added branches attain maturity. Fee income is estimated to grow by 14‐16% yoy. Doubling balance sheet in the next three years could be challenging this time around DCB was able to successfully execute on its strategy of doubling the balance sheet over FY12‐15 and is targeting a similar outcome over the next three years as well. As mentioned before, the brisk loan book expansion in the previous three years was largely driven by robust growth in Mortgages, which in turn was underpinned by expanding distribution and appreciating property prices. Now, with a higher base and stable to moderating property prices, the mortgage portfolio growth is likely to come‐off in spite of increasing distribution. Further, to push growth in a highly competitive environment, DCB may not have any material room to reduce pricing given its high‐cost deposit base. Real Estate prices have lost significant strength and are displaying signs of an impending correction in the wake of weakening demand. Anecdotal evidences suggest that prices have started to decline in some pockets of large cities and newer launches are coming at lower price points.

It provides loans primarily to existing businesses having an established track record

DCB also maintains caution accounts and alert accounts based on the probability of default

Business strategy includes doubling balance sheet over next 3 years, controlling costs and increasing distribution network

Doubling of balance sheet would be difficult this time with a higher base and stable to moderating property prices

DCB Bank Ltd

11

Ratings Agency Moody’s has indicated that India’s Real Estate Market will face a challenging operating environment over the next 12 months on account of weak developer cash flows, flat sales and stagnant prices. They also believe that sales in Delhi and Mumbai will face the most pressure as prices are the highest here. As of June 2015, unsold housing stock across top eight property markets in India is up 18% yoy to more than 1.1bn sq ft. All cities except Hyderabad have seen rise in inventory levels with Bangalore topping the charts at 55% yoy. Developers are finding it mighty difficult to push sales and the launch of innovative schemes like the 80:20 scheme, 10:90:10 scheme, free interiors/free car/free parking with every flat and such are on the rise, indicating the desperation of the developers to push sales.

The bank could continue to find it challenging to grow its corporate book also (13% p.a. in FY15) due to difficulty in retaining clients owing to the higher yields. DCB’s corporate loan yields are currently 50‐75 bps higher than most of the other banks due to relatively higher cost of funds. During Q1 FY16, the bank witnessed corporate loans worth Rs. 300‐400cr (~15% of the portfolio) shifting to other banks on account of lower pricing offered by them. The corporate loans market has traditionally been very sensitive to rates due to larger sums involved. As Mortgage and Corporate loan segment contribute roughly two‐thirds of DCB’s loan book, a tighter growth environment in these segments may well arrest the strong growth momentum of the bank.

Ratings Agency Moody’s expects a challenging environment for India’s Real Estate over the next 12 months

DCB’s corporate loan yields are currently 50‐75 bps higher than most of the other banks due to relatively higher cost of funds

The Residential Property Price Index (RPPI) calculated by RBI indicate sluggish trends in property prices of late

Source: RBI

DCB Bank Ltd

12

Advances to scale up over FY15‐18E

8,140

10,465

12,977

16,221

20,438

‐

4,000

8,000

12,000

16,000

20,000

24,000

FY14 FY15 FY16E FY17E FY18E

(Rs. Cr)

Source: Company, India Infoline Research NIMs currently at peak levels, expect contraction going forward A combination of the below mentioned factors is likely to exert downward pressure on NIMs going forward thereby constraining NII growth. DCB’s blended loan yield is likely to witness downward pressure as the mortgage space is witnessing hyper‐competition which is impacting both LAP and Home Loan pricing (banks and NBFCs are looking at mortgages as safe haven amid tough credit conditions in most other segments). Secondly, a softening interest rate scenario is likely to impact DCB more due to the increase in liability duration during recent years (the bank has complimented its growth drive in mortgages by increasing the share of longer duration retail term deposits). Further, it is likely that CASA ratio improvement could be difficult to come by due to a) bank’s inability to offer higher savings rate like peers b) current account traction may not improve substantially on account of modest growth in corporate loan portfolio and c) bank could continue to witness strong retail TD growth if the rates are not cut materially. We expect NIMs to correct 30 bps from FY15 levels to 3.3% by FY18E. Longer deposit maturity profile

1

2

43

22

13

9

2

3

2

3

0 25 50

Above 5 years

3 to 5 years

1 to 3 years

6 months to 1 year

3 to 6 months

29 days to 3 months

15 to 28 days

8 to 14 days

2 to 7 days

Day 1

(% of total deposits)


NIM’s could contract with increased competition in Mortgage space and lower interest rate environment While most of the assets re‐price quickly, cost of funds will come off at a much slower pace as DCB has a longer deposit maturity profile

DCB Bank Ltd

13

C/I Ratio of 55% may not be achieved in two years DCB’s cost/income ratio has declined substantially to 59% in FY15 from 81% in FY10. Apart from brisk growth in assets, significant NIM expansion and durable improvement in cost structure have been the key drivers. With headroom for further improvement, the management expects to achieve a level of 55% by FY17. We, however, think that the progress could be more gradual with increasing need to invest for generating loan growth in wake of the potential challenges in Mortgages and Corporate loan segment. Additional expenses may need to incurred in the form of incentives to sales teams or higher commissions to DSAs for achieving loan growth in a slowing market So, the target cost/income ratio of 55% is most likely to be achieved by FY18. C/I to moderate, however, at a slower pace

81

7174

6963

59 57 56 55

15.0

30.0

45.0

60.0

75.0

90.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(%)


Sustained need to invest for generating loan growth and higher expenses to cap improvement in C/I ratio

Yields to drop at a faster pace than cost of funds...

...leading to NIM contraction

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.5

10.0

10.5

11.0

11.5

12.0

12.5

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

(%)

Yield on Advances (%) Cost of funds (%)

3.6

3.53.3 3.3

2.00

2.40

2.80

3.20

3.60

4.00

FY15 FY16E FY17E FY18E

(%)


DCB Bank Ltd

14

Pressure on asset quality may stay Concerns on the asset quality front have surfaced in the recent past with slippage ratios >2% in the last 3 out of 4 quarters. A break up of the Gross NPA reveals that NPA levels have risen in each of the segments over the past one year. Corporate NPA levels jumped on account of two large corporate accounts slipping into NPA. NPA levels in the MSME segment have optically reduced as DCB sold MSME NPA accounts worth Rs. 62cr to Arcil. Moreover, a significant correction in property prices poses risk to asset quality and credit costs. Gross NPA rises in each of segments over the past one year

27

90

15

412

3528

102

7

34

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Mortgages MSME Corporate CV/CE/STVL Others

(Rs. Cr)Q1 FY15 Q1 FY16

Sold MSME GNPAs worth Rs. 62cr

Source: Company, India Infoline Research Transition to full tax will depress FY16 RoA; significant improvement in following years unlikely DCB was having accumulated losses on its books since FY05 and hence did not incur any significant tax liability till FY15. However, with all accumulated losses being fully utilized, DCB will have to provide for full taxes from FY16. This will hurt RoAs optically, which may drop to 1% in the current fiscal. With credit cost unlikely to decline materially in coming years and NIM expected to contract, any significant RoA tailwind from higher fee income growth and operating leverage is likely to get largely offset. We therefore believe that DCB would find it challenging to improve RoAs beyond 1.2% by FY18. The bank has been focused on improving its fee income franchise through cross selling of products and increasing trade finance and forex income. Currently, the bank has less than two products/customer, indicating a good scope for deeper product penetration. DCB successfully completed its QIP issue in Oct 2014 by raising Rs. 250cr at a price of Rs. 82.15, adding 150bps to Tier I capital then. The current capital position (Tier‐1 capital at 13.6%) is strong and should be sufficient for funding a brisk balance sheet growth over the next 2‐3 years. Also substantial room exists for DCB to raise Tier‐II bonds as additional capital. A combination of gradual improvement in RoA and optimization of balance sheet leverage would push RoE to a respectable level of 14‐15% by FY18.

A break up of the Gross NPA reveals that NPA levels have risen in each of the segments over the past one year

With all accumulated losses being fully utilized and DCB moving to full tax rate from FY16 onwards, RoAs are likely to drop in the near term

DCB Bank Ltd

15

RoAs and RoEs to optically drop before picking up

10.0

11.0

12.0

13.0

14.0

15.0

0.5

0.7

0.9

1.1

1.3

1.5

FY13 FY14 FY15 FY16E FY17E FY18E

(%) RoA RoE


Unpalatable valuation; initiate with Reduce rating The impressive delivery of strong balance sheet growth over FY12‐15 along with improving mix has been well appreciated by the street as manifested in DCB’s valuation re‐rating from 1x in Sep 2013 to 2.4x currently on 1‐year rolling forward P/ABV basis. In our view, the present elevated valuation assumes that bank would deliver a significant incremental improvement in RoA over FY15‐18 as is targeted by the management. As highlighted earlier, a downturn in the property market (sluggish trends in large cities where DCB has significant presence), trade‐off between growth/margin (particularly in mortgages and corporate segment), sustained requirement to drive growth (as volumes and ticket size moderate in mortgages) and risks to asset quality may impede on the envisaged RoA expansion.

DCB is also trading at a higher valuation than Axis Bank and Yes Bank who are much larger and established franchises with superior asset‐liability profile and a track‐record of delivering best‐in‐class growth and profitability. The valuation gap increases further when compared to small and regional private banks that have similar profitability. Overall, we believe that DCB is a reasonably healthy franchise but current valuation is unpalatable to own it. We thus expect better entry points to come in the coming 6‐9 months for long term investors. Initiate coverage on DCB Bank with a REDUCE rating and a 12‐month target price of Rs. 128. Relative comparison highlights the unfavourable risk‐reward Bank M‐Cap

(Rs. Cr) Advances (Rs. Cr)

Advances CAGR

FY15‐17 (%)

RoA FY17

RoE FY17

P/ABV FY17 (X)

P/E FY17 (X)

Tier I (%)

DCB 3,987 10,426 25.0 1.0 12.8 2.2 16.9 13.6

Axis 1,17,826 2,84,649 22.0 1.7 18.3 2.0 11.5 12.2

Yes 30,499 79,666 28.0 1.7 21.0 1.9 9.7 10.9

ICICI* 1,55,268 3,03,011 19.0 1.9 16.5 1.2 7.1 10.9

CUB 5,503 17,900 16.1 1.7 16.6 1.6 9.8 15.3

Federal 11,236 49,551 18.3 1.2 14.2 1.2 8.8 14.4

KVB 4,738 37,220 16.9 1.2 15.7 1.0 7.5 12.3

Source: Company, India Infoline Research, *on a standalone basis

The current valuations reflect the optimism in business prospects with very supportive external and internal operating environment

However, we believe headwinds exist on account of a slowing property market in key cities

DCB is trading at premium valuation compared to its own historical valuation and compared to peers

DCB Bank Ltd

16

Valuations are expensive in the context of fundamentals

DCBAxisYes

ICICI‐standalone

City Union

FederalKVB

0.5

1.0

1.5

2.0

2.5

3.0 0.5

1.0

1.5

2.0

2.5

FY17E P/ABV

FY17E RoA Source: Company, India Infoline Research

DCB ‐ At the higher end of the historical valuation band

DCB – much higher than 1‐yr forward P/ABV Mean

0

30

60

90

120

150

Apr‐09

Jan‐10

Oct‐10

Jul‐11

Apr‐12

Jan‐13

Oct‐13

Jul‐14

Apr‐15

(Rs)2.5x

2.1x

1.7x

1.3x

0.9x

‐

0.6

1.2

1.8

2.4

3.0

Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15

1‐yr rolling P/ABV Mean


DCB Bank Ltd

17

Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Interest income 1,422 1,713 2,053 2,470

Interest expense (913) (1,106) (1,324) (1,569)

Net interest income 509 607 730 901

Non‐interest income 166 213 244 298

Total op income 675 820 974 1,199

Total op expenses (396) (467) (547) (656)

Op profit (pre‐prov) 279 353 427 543

Provisions (69) (70) (73) (92)

Profit before tax 210 282 354 451

Taxes (17) (95) (119) (152)

Net profit 193 187 235 300

Balance sheet Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Total cash & equivalents 719 885 1,031 1,099

Investments 4,471 5,633 7,097 8,943

Advances 10,465 12,977 16,221 20,438

Total int‐earning assets 15,655 19,495 24,349 30,480

Fixed assets 236 249 261 274

Other assets 241 277 318 365

Total assets 16,132 20,020 24,929 31,120

Net worth 1,589 1,776 2,011 2,311

Deposits 12,609 15,887 20,018 25,223

Borrowings 1,164 1,432 1,790 2,255

Total int‐bearing liabs 13,773 17,319 21,808 27,478 Other non‐int‐bearing liabs 771 925 1,110 1,332

Total liabilities 14,544 18,244 22,918 28,810

Equity + Total liabilities 16,132 20,020 24,929 31,120

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Net interest income 38.3 19.2 20.2 23.5

Total op income 33.2 21.4 18.8 23.1 Op profit (pre‐provision) 48.6 26.3 21.1 27.2

Net profit 27.6 (2.8) 25.4 27.5

Advances 28.6 24.0 25.0 26.0

Deposits 22.1 26.0 26.0 26.0

Total assets 24.8 24.1 24.5 24.8

Profitability Ratios (%)

NIM 3.6 3.5 3.3 3.3

Non‐int inc/Total inc 24.5 25.9 25.1 24.9

Return on Avg Equity 14.6 11.5 12.8 14.2

Return on Avg Assets 1.3 1.0 1.0 1.1

Per share ratios (Rs)

EPS 6.8 6.6 8.3 10.6

Adj.BVPS 50.6 55.7 63.6 73.8

DPS 0.0 0.0 0.0 0.0

Other key ratios (%)

Credit/Deposits 83.0 81.7 81.0 81.0

Cost/Income 58.7 57.0 56.1 54.7

CASA 23.4 23.9 25.1 26.4

CAR 15.0 13.9 13.2 12.9

Tier‐I capital 14.2 12.8 11.7 10.8

Gross NPLs/Loans 1.8 2.0 1.9 1.7

Total prov/Avg loans 0.4 0.6 0.5 0.5

Net NPLs/Net loans 1.0 1.2 1.0 0.9

Tax rate 8.0 33.6 33.6 33.6

Dividend yield 0.0 0.0 0.0 0.0

‘Best Broker of the Year’ – by Zee Business for contribution to brokingNirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

'Best Equity Broker of the Year' – Bloomberg UTV, 2011IIFL was awarded the 'Best Equity Broker of the Year' at the recently held Bloomberg UTV Financial Leadership Award, 2011. The award presented by the Hon'ble Finance Minister of India, Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards acknowledge the extraordinary contribution of India's financial leaders and visionaries from January 2010 to January 2011.

'Best Broker in India' – Finance Asia, 2011IIFL has been awarded the 'Best Broker in India' by Finance Asia. The award is the result of Finance Asia's annual quest for the best financial services firms across Asia, which culminated in the Country Awards 2011

Other awards

2012BEST BROKING HOUSE WITH

GLOBAL PRESENCE

2009, 2012 & 2013BEST MARKET

ANALYSTBEST BROKERAGE,

INDIAMOST IMPROVED,

INDIABEST BROKER,

INDIA

2009FASTEST GROWING

LARGE BROKING HOUSE

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

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