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DCB Bank Ltd. 4

Recommendation BUY

Inline Performance DCB Bank reported another healthy quarter witnessing growth both on Balance sheet and profitability. As on Q4FY17 advances stood at Rs. 15,818 Cr vs Rs. 12,921 Cr in Q4FY16 a growth of 22.4% YoY. NII grew at Rs. 220.3 Cr in Q4FY17 vs Rs. 168.7 Cr in Q4FY16 (+30.6%) and Rs. 209.5 Cr in Q3FY17 (+5.1%). Total Income grew 23.3% YoY from Rs. 230.1 Cr to Rs. 283.9 Cr led by flattish growth in other income of 3.5% (Rs. 63.6 Cr vs Rs. 61.5 Cr last year). Pre-provisioning profit was at Rs. 115.3 Cr vs Rs. 97 Cr (+19% YoY) due to higher operating expenses on account of branch expansion. Cost to income ratio went up 152 bps YoY to 59.4%. The bank reported a Net Profit of Rs. 52.9 Cr for Q4FY17 vs Rs. 69.5 Cr in Q4FY16 (-24% YoY on account of moving to full tax regime), Rs. 51.3 Cr in Q2FY17 (+3% QoQ). For FY17, NII came at Rs. 797.1 Cr a growth of 28.7%, PBP at Rs. 418.2 Cr vs Rs. 349 Cr (+19.8%) and flattish PAT at Rs. 199.7 Cr as bank moved to full tax regime. On Asset quality front, Gross NPA went up 4 bps at 1.59% and Net NPA at 0.79% vs 1.55%/0.74% in Q3FY17 and 1.51%/0.75% in Q4FY16 resp. Slippages for the quarter were Rs. 74.2 Cr.

Other Highlights: Bank continues to report one of the highest NIMs in the industry of 4.04%

for Q4FY17 (3.95% in Q3FY17). However, due to intense competition in the industry, management expects the NIM to stabilize between 3.70% - 3.75% in the long run.

Cost to income ratio was up by 152bps YoY at 59.4% in Q4FY17 against 57.8% in Q4FY16 as operating costs went up by 26.6% YoY. In the near term it is likely to remain under pressure due to branch expansion strategy post which the Cost to income ratio is expected to fall below ~55%.

CASA grew 34.4% YoY with CASA ratio 24.3% as on March 2017 vs 23.4% in Q4FY16 but de-grew sequentially as deposits on account of demonitisation were withdrawn. We have projected CASA ratio to be at 25.5%/26% by FY18E/FY19E.

Advances growth was healthy for the quarter at 22.4% YoY with mortgages, Agri, Corporate and SME+MSME contributing 43%, 18%, 16% and 12% resp. We expect loan growth to be at 25.2% and 26% for FY18E and FY19E.

Valuation and Outlook We believe that after first half of FY18, post the completion of branch expansion plan the cost to income ratio will fall and return ratios will improve as the benefit of all these new branches will be visible. This investment of the bank will lead to healthy returns in the long run. We remain positive on the stock given the strong growth in earnings and well capitalized and healthy balance sheet. At CMP of Rs. 176, DCB Bank is trading at 2.2x/1.8x FY18E/FY19E Adj. BV and 19.7x/14.9x FY18E/FY19E EPS respectively. We maintain BUY on the stock for a revised target price of Rs 220(2.3x of FY19E Adj. BV) indicating an upside of 25% from current levels.

CMP Rs. 176

Target Price Rs. 220

Sector Banking

Stock Details

BSE Code 532772

NSE Code DCBBANK

Bloomberg Code DCBB IN

Market Cap (Rs cr) 5028

Free Float (%) 83.81%

52- week H/L (Rs) 185/87

Avg. volume (BSE+NSE) 2816860

Face Value (Rs) 10

Dividend (FY 17) 0%

Shares o/s (Crs) 28.54

Relative Performance 1Mth 3Mth 1Yr

DCB 7.8% 49.8% 81.5%

Sensex -0.6% 8.5% 13.5%

Shareholding Pattern 31

st March 17

Promoters Holding 16.19%

Institutional (Incl. FII) 40.61%

Corporate Bodies 9.18%

Public & others 34.02%

Anupam Bafna (+91 22 3926 8186) Research Analyst aupam.bafna@nirmalbang.com

Year NII

(Rs cr) Growth

(%) PBP

(Rs cr) PAT

(Rs cr) EPS (Rs) PE (x) Adj BVPS (Rs) P/ABV (x) RoE (%)

FY16 619 21.9% 349 195 6.84 25.79 60.1 2.93 11.51%

FY17 797 28.7% 418 200 7.00 25.21 73.6 2.40 9.99%

FY18E 962 20.7% 517 256 8.98 19.65 81.7 2.16 10.98%

FY19E 1,195 24.3% 685 353 11.82 14.93 95.9 1.84 12.89%

6080

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DCB Bank Ltd.

Quarterly Comparison

Other highlights

NII registered a healthy growth of 30.6% YoY on account of lower interest expense and for FY17 it grew by 28.7%.

NIMs stood at 4.04% vs 3.94% in Q3FY17and 3.95% in Q4FY16. Opened 14 new branches during the quarter totaling to 262 branches as on FY17. Provision coverage ratio stood at 73.8%. CAR stood at 13.8% as on March 2017 of which Tier I Ratio stood at 11.9%. For FY17, Ex corporate loan book grew by 21% YoY. Bank has got approval to raise Rs. 400 Cr via QIP.

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DCB Bank Ltd. On Oct 13, 2015, Bank had given guidance that it will add 150 new branches, from 160 Branches as on that date to double

its branch network. And, as a result management indicated that the Cost to Income ratio will move to 63% and ROE may

continue to be below 10% by FY17 end. But, in past six quarters with addition of 102 branches, the below data seems to

indicate that it is outperforming its guidance. Management has further guided at that time that post this branch expansion

exercise, Cost to income ratio will improve to 55% and ROE to14% by FY19 end.

Particulars Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17

Cost to Income Ratio (%) 60.7% 59.4% 57.8% 60.9% 60.0% 60.1% 59.4% Trailing ROE (%) 10.9% 10.6% 10.9% 10.6% 10.9% 11.5% 10.3% No. of Branches Added 3 16 22 7 23 20 14

Total No. of Branches 160 176 198 205 228 248 262

Source: Company data, Nirmal Bang Research

Source: Company data, Nirmal Bang Research

Source: Company data, Nirmal Bang Research

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DCB Bank Ltd.

Source: Company data, Nirmal Bang Research

Source: Company data, Nirmal Bang Research

Source: Company data, Nirmal Bang Research

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DCB Bank Ltd.

Financials

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DCB Bank Ltd.

Disclaimer:

Nirmal Bang Securities Private Limited (hereinafter referred to as “NBSPL”)is a registered Member of National Stock Exchange of

India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of

Registration as a Research Analyst with SEBI, Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020 .NBSPL

or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the

company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not

received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served

as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the

company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true.

Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park

Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001

Fax. : 022 3926 8010