DCB Bank. More hits, fewer misses BUY RESULTS REVIEW 3QFY17 17 JAN Highlights of the quarter. CMP (as on 16 Jan 2017) Rs 121 Target Price Rs 143

Transcription

1 INDUSTRY BANKS CMP (as on 16 Jan 2017) Rs 121 Target Price Rs 143 Nifty 8,413 Sensex 27,288 KEY STOCK DATA Bloomberg DCBB IN No. of Shares (mn) 285 MCap (Rs bn) / ($ mn) 35/506 6m avg traded value (Rs mn) 187 STOCK PERFORMANCE (%) 52 Week high / low Rs 133/68 3M 6M 12M Absolute (%) (0.9) Relative (%) SHAREHOLDING PATTERN (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE Darpin Shah darpin.shah@hdfcsec.com Parul Gulati parul.gulati@hdfcsec.com More hits, fewer misses DCBB sprung a pleasant surprise with a healthy performance across parameters. Led by (1) Strong growth (+24% YoY), (2) Superior NIM of 3.95% and (3) A stable core CI ratio of ~63%, DCBB s core (+31% YoY) and net (+25% YoY) earnings beat estimates. CASA ratio stood at 26%, up ~400bps QoQ (though not sustainable, we believe) with a sharp 58% rise in SA. CRAR improved by ~140bps QoQ due to the revaluation of premises and issue of Tier II bonds. The only hitch was a rise in slippages (Rs 793mn, 2.2% ann.) with visible stress in the mortgage and CV portfolios. However, we note that the bank has not utilised any RBI dispensation for asset classification which would have lowered slippages by Rs 330mn. While NIM and efficiency ratios are impressive as of now, stiff competition in the mortgage portfolio, falling interest rates and costs related to aggressive expansion are key monitorables. We continue to like DCBB for its healthy business growth, granular book, tight leash on asset quality and conservative RESULTS REVIEW 17 JAN 2017 DCB Bank BUY management. Maintain BUY with revised TP of Rs 143 (1.8x Dec18E ABV of Rs 79.2). Highlights of the quarter While slippages (Rs 793mn, 2.2% ann.) were higher QoQ, headline GNPA (Rs 2.3bn, 1.55%) was lower ~11% QoQ with ARC sale of Rs 868mn (incl. recoveries and WOs). As expected, mortgage and CV reported relatively higher stress. We note the bank has not utilised any RBI dispensation for asset classification. Given the reasons of granular loans and conservative management, we are less skeptical about asset quality. Despite a drop in CD ratio (420bps QoQ, 920bps in 9M) and higher slippages, DCBB reported a stable NIM of 3.95% a key positive factor. While it added 20 branches (50 in 9M), the core CI ratio at ~63% was stable QoQ, cushioned by core earnings growth of 31%. However, we expect efficiencies to dip with an elevated cost structure and eventual moderation in NIM. Financial Summary (Rs mn) YoY (%) QoQ (%) FY16 FY17E FY18E FY19E Net Interest Income 2,095 1, % 1, % 6,195 7,826 9,511 11,755 PPOP 1, % 1, % 3,490 4,008 4,694 5,918 PAT % % 1,945 1,975 2,363 2,960 EPS (Rs) % % RoAE (%) RoAA (%) Adj. BVPS (Rs) P/ABV (x) P/E (x) Source: DCB Bank, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

2 Five Quarters At A Glance Rs mn YoY Growth QoQ Growth Net Interest Income 1, , , , , % 10.1% Noninterest Income % 4.0% Treasury Income % 7.8% Operating Income 2, , , , , % 8.6% Operating Expenses 1, , , , , % 8.8% Pre Provision Profits , , % 8.3% Other Provisions % 15.3% PBT % 5.8% Provision For Tax % 5.8% PAT % 5.8% Balance Sheet Items/Ratios Deposits Rs bn % 6.5% CASA Deposits Rs bn % 25.7% Advances Rs bn % 1.0% CD Ratio (%) bps 422 bps CAR (%) bps 143 bps Tier I (%) bps 63 bps Profitability Yield On Advances (%) bps 0 bps Cost Of Deposits (%) bps 26 bps NIM (%) bps 1 bps CostIncome Ratio (%) bps 11 bps Tax Rate (%) bps 1 bps Asset quality Gross NPA (Rs mn) 2,349 1,974 2,313 2,554 2, % 10.8% Net NPA (Rs mn) 1, ,157 1,209 1, % 9.9% Gross NPAs (%) bps 20 bps Net NPAs (%) bps 10 bps Delinquency Ratio (%) bps 74 bps Coverage Ratio Calc. (%) bps 45 bps Coverage Ratio Reported (%) bps 24 bps Change In Estimates (Rs mn) FY17E FY18E Old New Change Old New Change NII 7,384 7, % 9,338 9, % PPOP 3,761 4, % 4,687 4, % PAT 1,837 1, % 2,272 2, % Adj. BVPS (Rs) % % Source: HDFC sec Inst Research Adj. for interest on tax refund of Rs 45mn, NII grew ~28%; 4.5% ahead of estimates Core fees declined ~5% QoQ to Rs 403mn DCBB added 20 branches in 3Q and 50 in 9M SA grew ~58%; retail deposits share stood at ~79%; CASA ratio jumped ~400bps QoQ Mortgages (+22%), Agri (+ 24%) and CVs (+66%), Corporate (+17%) and SME (14%) Stable despite a drop in CD ratio and higher slippages Led by higher reductions of Rs 641mn (inc. sale to ARC of Rs 520mn) and W/Os of Rs 349mn (incl. ARC sale of Rs 348mn) Slippages were higher QoQ at Rs 793mn Segmental GNPA: SME Rs 368 (flat QoQ), Mortgage Rs 669mn (10% QoQ), Agri Rs 324mn (14% QoQ), corporate Rs 652mn (24% QoQ) and CV Rs 176mn (+31% QoQ) Page 2

3 Healthy growth in focus segments like Mortgages (+22%) and Agri (+24%) Healthy SA growth of ~58% led by CASA growth of 51/26% YoY/QoQ CASA ratio jumped ~400bps QoQ to ~26% Loan momentum sustains, CASA jumps QoQ DCBB s business momentum was sustained with a loan growth of 24/1% YoY/QoQ, led by steady growth across segments except SME (14% YoY; 11% of loans). Management hinted for higher prepayments in the SME segment. Excorporate (Rs 23.3bn, +17/1% YoY/QoQ; 16% of total), loans grew ~26/1% YoY/QoQ. The bank continued with higher growth in its chosen segments Mortgages (22/3% YoY/QoQ; ~44% of total) and Agri (+24/1% YoY/QoQ; 17% of total AUM). On a small base, CV loans (4% share) reported high growth of 66/1% YoY/QoQ. We have marginally lowered our loan CAGR to ~24.5% vs. 26% over FY16 19E which can provide an upside to our earnings estimates. Led by 58% growth in SA (vs. previous trend of ~20 22% growth), low cost deposits grew ~51/26% YoY/QoQ to form ~26% (+400bps QoQ, though not sustainable we believe). The share of retail deposits rose ~200bps QoQ to 79%. With a relatively faster growth in deposits, the CD ratio fell further by 420bps (920bps drop in 9M). Loan mix remains stable sequentially Loan Growth Healthy At 24% YoY Advances growth (YoY, RHS) Rs bn % Loan Mix: Mortgages Form ~44% Of The Book Mortgages AIB Corporate SME+MSME Others Source: DCB Bank, HDFC sec Inst Research Source: DCB Bank, HDFC sec Inst Research Page 3

4 NIM was flat at 3.95%, despite further drop in CD ratio and higher slippages Adj. for interest on tax refund of Rs 45.3mn, core earnings grew ~28/8% YoY/QoQ NIM flat QoQ positive surprise Despite a sharp drop in CD ratio (420bps QoQ and 920bps FYTD) and higher slippages, DCBB s NIM was stable QoQ at 3.95% a key positive factor. NIM was cushioned with a sharp 26bps drop in CoF with a surge in CASA. DCCB has yet again surprised in its NIM performance, despite a higher proportion of LAP portfolio (intense competition) and a relatively lower CASA portion. Adj. NII +28% YoY, ~4.5% Higher Than Estimates 2,500 2,000 1,500 1, Rs mn NII Rs mn Source: DCB Bank, HDFC sec Inst Research growth (YoY, RHS) % While we continue to like DCBB s focus on high yielding nonsalaried segments, we believe pricing pressure in the mortgage business (44% of the book) and the downward revision in MCLR rate will lead to a NIM compression from current levels. We have conservatively factored NIMs of 3.7% over FY1619E, a metric assumption that faces significant upside risk. NIM At 3.95%, Flat QoQ NIM (RHS) YoA CoF % % Source: DCB Bank, HDFC sec Inst Research As expected, core fees declined ~5% QoQ. Noninterest Income Rs mn Fees % Loans Treasury Forex 22.0 (5.0) Others Total (%, YoY) 64.0 (0.9) (23.5) (1.6) 32.8 (4.7) Source: DCB Bank Page 4

5 Core CI ratio was stable QoQ at ~63%, despite adding 20 branches in 3Q and 50 in 9M The aggressive strategy and NIM decline will impact core operating efficiencies in the future Stable core CI ratio After adding 50 branches and 86 ATMs in 9M (72 branches and 99 ATMs in last 12 months), the bank s opex jumped ~33/9% YoY/QoQ. However, with 30% growth in core earnings and a steady noninterest income, the QoQ core CI ratio was flat at ~63% a key positive. However, with the branch expansion on track, the management is looking at higher opex growth in the coming quarters. We have built in an opex CAGR of 26% over FY1619E. Further, with some moderation Core CI Stable QoQ Opex /Non interest Income x Source: DCB Bank, HDFC Sec Inst Research Core C/I Ratio (RHS) % in NIM and aggressive expansion, we expect deterioration in efficiencies in the nearterm. We expect the core CI ratio to rise to ~67% in FY18E vs. ~61.5% in FY16. The overall provisioning cost was higher at Rs 305mn (+46/15% YoY/QoQ), due to higher W/Os and sale to ARC provisions of ~Rs 38mn. We have revised our provision cost assumptions higher to 66bps over FY1619E. Overall Nontax Provisions Cost Increased QoQ Provision Rs mn Provisons % OP RHS Rs mn % Source: DCB Bank, HDFC Sec Inst Research Page 5

6 Slippages were higher QoQ with visible stress in mortgage and CV portfolio No slippages in corporate book ARC sale details : Gross value of Rs 868mn, net value of Rs 520mn and sale value of Rs 520 mn GNPAs in the mortgage and corp segments declined ~10% and 24% QoQ due to ARC sale Agri GNPA further declined ~14% QoQ to Rs 324mn DCBB hasn t used any RBI dispensation for NPA classification The restructured book stood at a mere Rs 300mn (0.2% of loans) i.e. flat QoQ O/S SR : Rs 700mn vs. Rs 290mn in 2Q Visible stress in Mortgage Sequentially, slippages were higher at Rs 793mn (2.2% vs. 1.44% QoQ and 1.92% YoY) led by visible stress in the mortgage and CV portfolios. Corporate slippages continue to remain near nil. We note that DCBB has not utilised any RBI dispensation for NPA classification. The utilisation of dispensation would have lowered slippages by Rs 330mn. However, higher reductions of Rs 641mn (incl. ARC sale of Rs 520mn) and W/Os of Rs 349mn (incl. ARC sale of Rs 348mn) led to a GNPA decline of 11% QoQ (3% YoY) to Rs 2.28bn (1.55%). Slippages Higher QoQ AT 2.2% Ann. 1, Source : DCB Bank Slippages (Rs mn) Rs mn Segmentwise GNPAs Slippages (%, ann) RHS % 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% With a flattish coverage ratio (75.6%), NNPAs fell 10% QoQ to Rs 1.09bn (0.74%). The restructured book was stable QoQ at a mere Rs 300mn (0.2% of loans). We have revised our slippages assumption upwards to 1.7% over FY1619E factoring in higher delinquencies in 3Q and general stress in the LAP portfolio. However, we remain constructive on DCBB s asset quality given its astute approach, granular book, lower exposure to stressed sectors and nearly nil restructured pool. GNPAs Down 11% QoQ Led By Sale To ARC Source : DCB Bank (Rs mn) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q FY14 FY14 FY14 FY14 FY15 FY15 FY15 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 PL CV/CE Corp SME Mortgages Others Agri Source: DCB Bank GNPA (LHS) NNPA (LHS) GNPA (%) NNPA (%) Rs bn % Page 6

7 Sequentially Stable RoAA at 0.9% NII Other income Opex Other provisons Tax RoAA (RHS) (2.5) (5.0) Source: Bank, HDFC sec Inst Research P/ABV Band Chart 2.5 P/ABV avg +SD SD x x x x Jan09 Jan10 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan09 Jan10 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Source: Bank, HDFC sec Inst Research Page 7

8 Peer Valuations Mcap BANK (Rs bn) CMP (Rs) Rating TP (Rs) ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E ICICIBC # 1, BUY KMB # 1, BUY AXSB 1, NEU IIB 728 1,223 BUY 1, FB BUY CUB BUY DCBB BUY SBIN # 1, BUY BOB BUY Ujjivan BUY Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value Page 8

9 Income Statement (Rs mn) FY15 FY16 FY17E FY18E FY19E Interest Earned 14,224 16,985 20,394 24,909 31,122 Interest Expended 9,142 10,790 12,568 15,398 19,367 Net Interest Income 5,082 6,195 7,826 9,511 11,755 Noninterest Income 1,657 2,205 2,579 3,191 3,968 Fee Income (CEB) 1,193 1,405 1,692 2,088 2,546 Treasury Income ,050 Total Income 6,739 8,400 10,405 12,702 15,723 Total Operating Exp 3,965 4,909 6,397 8,008 9,806 Employee Expense 1,960 2,451 3,371 4,333 5,368 PPOP 2,774 3,490 4,008 4,694 5,918 Provisions & Contingencies ,086 1,398 Prov. For NPAs (Incl. Std Prov.) ,106 1,418 PBT 2,080 2,611 3,016 3,608 4,519 Provision for Tax ,040 1,245 1,559 PAT 1,912 1,945 1,975 2,363 2,960 Source: Bank, HDFC sec Inst Research Balance Sheet (Rs mn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS Share Capital 2,852 2,860 2,860 2,860 2,860 Reserves 13,034 15,062 17,037 19,401 22,361 Shareholders' Funds 15,886 17,922 19,897 22,260 25,220 Savings 19,040 23,127 32,378 40,473 50,996 Current 10,461 11,771 12,949 14,502 16,533 Term Deposit 96, , , , ,668 Total Deposits 126, , , , ,197 Borrowings 11,638 11,479 13,312 16,375 18,862 Other Liabilities 7,708 12,525 13,777 17,033 20,307 Total Liabilities 161, , , , ,586 APPLICATION OF FUNDS Cash & Bank Balance 7,192 8,916 6,658 6,387 8,906 Investments 39,622 43,333 58,491 72,905 89,038 GSecs 34,749 39,855 54,469 68,315 83,988 Advances 104, , , , ,647 Fixed Assets 2,367 2,480 2,604 2,734 2,871 Other Assets 7,492 7,242 8,015 8,871 9,125 Total Assets 161, , , , ,586 Source: Bank, HDFC sec Inst Research Page 9

10 Key Ratios FY15 FY16 FY17E FY18E FY19E VALUATION RATIOS EPS (Rs) Earnings Growth (%) BVPS (Rs) Adj. BVPS (Rs) ROAA (%) ROAE (%) P/E (x) P/ABV (x) P/PPOP (x) Dividend Yield (%) PROFITABILITY Yield On Advances (%) Yield On Investment (%) Cost Of Deposits (%) Core Spread (%) NIM (%) OPERATING EFFICIENCY Cost/Avg. Asset Ratio (%) CostIncome Ratio (Ex. Treasury) BALANCE SHEET STRUCTURE Loan Growth (%) Deposit Growth (%) C/D Ratio (%) Equity/Assets (%) Equity/Advances (%) CASA (%) Capital Adequacy Ratio (CAR, %) W/w Tier I CAR (%) FY15 FY16 FY17E FY18E FY19E ASSET QUALITY Gross NPLs (Rs mn) 1,861 1,974 2,353 3,240 3,976 Net NPLs (Rs mn) 1, ,081 1,432 1,511 Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/Avg. Loans (%) ROAA TREE Net Interest Income 3.50% 3.51% 3.69% 3.62% 3.61% Noninterest Income 1.14% 1.25% 1.21% 1.22% 1.22% Treasury Income 0.19% 0.24% 0.26% 0.29% 0.32% Operating Cost 2.73% 2.79% 3.01% 3.05% 3.01% Provisions 0.48% 0.50% 0.47% 0.41% 0.43% Provisions For NPAs 0.29% 0.36% 0.36% 0.35% 0.36% Tax 0.12% 0.38% 0.49% 0.47% 0.48% ROAA 1.32% 1.10% 0.93% 0.90% 0.91% Leverage (x) ROAE 14.24% 11.88% 10.74% 11.79% 12.96% Source: Bank, HDFC sec Inst Research Page 10

11 RECOMMENDATION HISTORY DCB Bank TP Date CMP Reco Target 13Jan16 79 BUY Apr16 88 BUY 107 8Jul BUY Jul BUY 115 7Oct BUY Oct BUY Jan BUY Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than ()10% returns over the next 12 month period Page 11

12 Disclosure: We, Darpin Shah, MBA and Parul Gulati, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. The Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also, the Research Analyst or his relative or HDFC Securities Ltd. or its associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further the Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock No Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for the sole use of the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HDFC Securities or its associates might have managed or comanaged public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HDFC Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or comanaging public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HDFC Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai Board : Page 12