BUY. DCB Bank. Improving Capital Consumption to Aid Returns; Maintain BUY. Target Price: Rs202. Institutional Equity Research

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1 3QFY19 Result Update January 17, 219 Market Cap. (Rs bn) 56 Free Float 85 Shares O/S (mn) 39 Improving Capital Consumption to Aid Returns; Maintain continued to deliver a stable set of numbers in 3QFY19 with 26% YoY growth in non corporate advances, stable sequential margins, continued QoQ improvement in C/I ratio and better capital consumption. The bank also increased floating provisions further to Rs73mn, after providing additional Rs55mn during the quarter. Increased focus on better capital usage resulted in sharp improvement in risk weighted assets to total assets ratio, which declined by 4 bps since the end of FY18 to 65%. Marginally higher slippages during the quarter were supported by elevated upgrades and recoveries, resulting in marginal sequential increase in GNPA ratio to 1.92% from 1.84%. Key Quarterly Highlights Small ticket loans helped higher recoveries with Rs2bn in recovery and upgrades during 9MFY19 vs. Rs1.4bn in 9MFY18. Slippages at 2.2%(annualised) of advances were marginally higher over previous quarter owing to a Rs124mn fraud in AIB book, for which 77% provisioning has been made, while the rest is to be amortised over the next three quarters. The same was a commodity funding exposure in Gujarat. NIM remained sequentially stable with high yields on advances being compensated by increased cost of funds. The Management expects NIM to remain in % range on sustainable basis. The Management reiterated its intent to double the Bank s book every 3 years or so and plans to add 15-2 branches next fiscal. DCB entered the personal loans segment recently, where current book stands at ~Rs1bn, mainly catering to its existing customers. The segment s share expected to be capped at 3-4% of advances. Outlook & Valuation We believe that continued focus on low-ticket granular loans, eorts towards cost rationalization, comeback of pricing power amidst decline in NBFC disbursements, low corporate stress and improved capital consumption should hold DCB in good stead and support its return ratios. Additionally, impeccable asset quality in the last down cycle helped the Bank to garner above industry average valuations despite the weak return ratios. Though the positives are largely factored in, we believe the stock will continue to be a favored conservative play amidst any volatility in markets. The Management s ability to strengthen its non fund based core income should be the next trigger for a re-rating in our view. With FY2E RoA/RoE at 1.1% and 13%, the stock trades at 1.8x FY2E. Factoring in lower overall advances growth for FY19 and improved capital consumption, our earnings estimates have been revised marginally. We maintain our recommendation on the stock with a Target Price of Rs22 (based on 2.x FY2E adjusted book value, marginally above its 4-year average P/ABV of 1.8X). Quarterly Performance Particulars % yoy / bps % qoq / bps Net Interest Income 2,936 2, , NIM Other Income - Total Net Operating Revenue 3,881 3, , Total Opex 2,143 2, , Pre Provision Profits 1,738 1, , Provisions & Contingencies - Total Profit Before Tax 1, , Reported Profits Share price 1 mth 3 mth 12 mth Absolute performance (6.1) Relative to Nifty (7.8) Shareholding Pattern Sep-18 Dec-18 Promoters Institutions NBFC & Bodies Corporate Retail Total 1 1 Key Financials FY18 FY19E FY2E Loan & Adv 23, , ,219 NII 9,954 11,958 14,57 PPP ex Except.item 5,25 6,688 8,215 RPAT 2,453 3,335 4,314 P/E (x) Adj. BV P/ABV (x) Change of Estimates (% Change) FY19E FY2E Net Operating Revenue (3.7) (7.3) Pre Provision Profits (2.4) (1.6) PAT 1.7 (1.8) Target Price (2.) 1 Year Stock Price Performance Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Note: * CMP as on January 16, 219 Research Analyst : Mona Khetan Contact : (22) mona.p.khetan@relianceada.com D. Vijiya Rao Contact : (22) vijiya.rao@relianceada.com 1

2 Risks to the View Higher credit loss from core client group of SME/MSME. Lower-than-anticipated performance of new branches may increase C/I ratio. Any major deterioration in macroeconomic environment may impact the Bank s growth plan and asset quality as well. Exhibit 1: Income Statement Analysis % yoy / bps % qoq / bps 9M FY19 9M FY18 % yoy / bps Interest Inc. / Oper. Revenue 7,773 6, , ,144 17, Yield on Advances (7) Interest Expenses 4,219 3, ,538 (7.) 13,42 1, Cost of Fund Net Interest Income 2,936 2, , ,12 7, NII to Net Operative Income (131) 79.3 (366) NIM (29) (34) Adjusted NII 2,864 2, , ,93 7, Commi., exchange and brokerage ,752 1, Exchange transactions Sale of investments (28.3) Sale of land, buildings & other assets Other Income - Total ,58 2, Other Income to Net Operative Income (2) Net Operating Revenue 3,881 3, , ,61 9,577 2 Employee Expenses 1, ,12.1 3,291 2, Empl. Cost/Oper. Exps (139) 31. (259) (84) Other Opex 1,4 1,59 (1.7) ,88 2, Other Opex/ Assets.3.4 (9) (2) Total Opex 2,143 2, , ,379 5, Cost to Income Ratio (712) 58.9 (366) (52) Pre Provision Profits 1,738 1, , ,231 3, Provisions & Contingencies - Total ,53 1, 5.3 NPA Provisions as % Operating Income (485) (595) Profit Before Tax 1, , ,178 2, Tax ,292 1, Eective Tax Rate (13.) (516) Reported Profits ,886 1, RoA () RoE Basic EPS Diluted EPS

3 Exhibit 2: NII Trend Exhibit 3: Other Income Trend 3,5 3, 2,5 2, 1,5 1, , Net Interest Income NIM Other Income - Total Other Income / Assets Exhibit 4: Total OPEX Trend Exhibit 5: Pre Provision Profit Trend 2,5 2, 1,5 1, , 1,6 1, Total Opex Cost to Income Ratio Pre Provision Profits Operating Profits / Assets Exhibit 6: Provision Exp Trend Exhibit 7: PAT Trend , Provisions & Contingencies - Total NPA Provisions as % Operating Income Reported Profits RoA 3

4 Exhibit 8: Balance Sheet Analysis QoQ % / bps YoY % / bps Net Worth 26,835 27,426 28,64 28,536 29,295 3, RoE Tier 1 % (1) (5) Total CAR % (1) (2) RWA - Total 187,17 192,553 27, ,952 22, , Advances - Total 173,95 185,952 23, ,434 22, , Investments 57,112 57,136 62,19 7,528 7,26 75, Total Assets 259,81 271,513 32, , ,12 343, RoA Deposits 25, ,959 24,69 25, , , CASA Deposits 53,234 55,369 58,43 61,659 63,587 66, CASA Ratio () (6) Term Deposits 152, ,59 181, , ,1 28, Interest Bearing Liabilities - Total 219,88 231, ,336 27, ,798 3, Exhibit 9: Earning Assets Mix & Incremental Contribution As on As % of Working YoY/ YTD growth ( % / bps) Incremental Contribution in Working Assets FY16 FY17 FY18 1H FY19 Assets FY17 FY18 2QFY19 FY17 FY18 2QFY19 Mortgages 55,562 68,16 81,347 91, Commercial Vehicle 5,169 6,327 12,22 16, SME + Micro SME 15,56 18,981 24,44 27, Agri & Inclusive Banking 21,966 28,472 36,66 43, Corporate Banking 19,382 25,38 34,572 34, (.7) (.6) Other 11,629 11,72 14,236 16, (4.8) () Advances - Total 129, ,176 23, , Yield on Advances (49) (62) (15) SLR 39,855 47,711 49,91 58, Non SLR 3,478 1,468 13,99 16, Investments 43,333 58,179 62,19 75, Cash & Cash Equivalent 8,916 11,925 23,72 24, Working Assets 181, ,28 289, ,

5 Exhibit 1: Funding Mix & Incremental Contribution As on YoY/ YTD growth Incremental Contribution YoY/ As % of Total YTD Growth Working Fund FY16 FY17 FY18 1H FY19 FY17 FY18 FY17 FY18 Deposits 149,26 192,892 24,69 275, CASA Deposits 34,899 46,892 58,43 66, Term Deposits 114, , 181,665 28, Borrowings 11,479 12,758 19,267 24, Interest Bearing Liabilities 16,739 25,65 259,336 3, Cost of Fund (54) (49) 23 Exhibit 11: Assets Quality Analysis (Rs bn) QoQ % / bps YTD % / bps YoY % / bps Total Slippages 779 1, , , Slippages Ratio (9) Gross NPA 3,158 3,545 3,69 4,6 4,1 4, Gross NPAs Ratio PCR - Calculated PCR - Inc. Tech w/o Net NPA 1,57 1,615 1,467 1,539 1,553 1, Net NPAs Ratio (1) (16) 5

6 Profit & Loss Statement Y/E Mar FY17 FY18 FY19E FY2E Int. Income / Opr. Revenue 2,761 24,13 29,953 36,771 Interest Expenses 12,791 14,176 17,995 22,21 Net Interest Income 7,971 9,954 11,958 14,57 NIM One-time Int Inc/ Exp Adj Adjusted NII 7,682 9,615 11,958 14,57 Core Fee Income 1,657 2,192 2,543 3,51 Exchange Income Sale of Investments Other Misc. Income Other Income - Total 2,495 3,13 3,655 4,341 Net Operating Revenue 1,465 13,57 15,614 18,91 Employee Exp. 3,8 3,812 4,651 5,651 Other Opex 3,23 3,995 4,275 5,44 Total Opex 6,283 7,87 8,926 1,695 C/I Ratio Pre Provision Profits 4,182 5,25 6,688 8,215 PPP Growth (yoy %) Core PPP 3,893 4,911 6,688 8,215 Provisions & Contingencies - Total 1,115 1,388 1,477 1,476 Credit Cost (As % of Op. AUM) Profit Before Tax 3,67 3,862 5,211 6,74 Tax 1,7 1,48 1,876 2,426 Eective Tax Rate Reported Profits 1,997 2,453 3,335 4,314 PAT Growth (yoy %)

7 Balance Sheet Y/E March FY17 FY18 FY19E FY2E Equity Share Capital 2,854 3,81 3,81 3,81 Reserves (ex Revel. Reserve) 16,614 22,479 25,536 29,478 Net Worth - Ex Revaluation 19,468 25,56 28,616 32,559 Revaluation Reserve 2,565 2,54 2,294 2,138 Equity Warrant & Other Deposits 192,892 24,69 32,29 373,881 Borrowings 12,758 19,267 24,51 3,752 Interest Bearing Liabilities 25,65 259, ,8 44,633 Other Lia. & Prov. 12,765 14,87 9,75 11,79 Total Liabilities 24,464 32, ,475 45,425 Assets Cash & Cash Equivalent 11,925 23,72 27,696 33,187 Investments 58,179 62,19 73,657 87,52 Loan & Advances 158,176 23, , ,219 Growth (yoy %) Fixed Assets 4,886 4,94 5,142 5,326 Other Assets 7,298 8,4 8,85 9,641 Total Assets 24,464 32, ,475 45,425 Per Share Data Y/E Mar FY17 FY18 FY19E FY2E Face Value Adjusted Share O/S - For Calculation Earnings Per Share EPS (% YoY) P/E (x) Book Value BVPS (% YoY) P/BV (x) Adj. BV Adj. BV (% YoY) P/ABV (x) Dividend / Share Dividend Yield

8 Detail RoA Tree Analysis Y/E Mar FY17 FY18 FY19E FY2E Yields / Margins Yield on Advance Yield on Funds Cost of Funds (CoF) Interest Spread NIM's Interest Income / Assets Interest Exp. / Assets NII / Assets Fee Income / Assets Other Non Core Inc. / Assets Other Income / Assets Net Operating Income / Assets Operating Ratios NII to Net Operative Income Other Inc. to Net Operative Inc Empl. Cost/Oper. Exps Other Op. Exps./Oper. Exps C/I Ratio Provisions as % PPP Credit Cost (As % of Op. AUM) Eective Tax Rate Employee Exp. / Assets Other Opex/ Assets Total Opex / Assets Operating Profits / Assets Provisions / Assets Profit Before Tax / Assets Tax Expenses / Assets RoA Leverage (x) RoE Adj. RoA Adj. RoE Balance Sheet Ratio Y/E Mar FY17 FY18 FY19E FY2E Credit / Deposit Ratio Incremental C/D Ratio Investment Deposit Ratio Dom. SLR Investment / Deposits CASA Ratio

9 Credit Quality Y/E Mar FY17 FY18 FY19E FY2E Slippage Ratio Gross NPA (Cl Bal) 2,542 3,69 4,538 5,537 Gross NPAs Ratio PCR PCR - Inc. Tech w/o Net NPA (Cl. Bal.) 1,244 1,467 1,679 1,993 Net NPAs Ratio Capital and Asset-Liability Profile Y/E Mar FY17 FY18 FY19E FY2E Risk Weighted Assets 172,832 27, , ,483 RWA as % of Total Assets Total Shareholders Equity to Assets CET 1 Ratio Tier 1 Ratio Tier 2 Ratio Total CRAR Ratio

10 Rating History Date Reco CMP TP 22-Oct July Apr Jan Oct Jul Apr Jan Source: RSec Research PLEASE CLICK HERE FOR DETAILED REPORTS Rating Guides Rating Expected absolute returns over 12 months >1% HOLD -5% to 1% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. 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