KEY FINANCIAL/VALUATIONS DEEPAK KUMAR BV

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1 17 July 2018 RATING CMP Price Target Previous Target Potential Upside Stock Info 52wk Range H/L Mkt Capital (Rs Cr) Free float (%) Avg. Vol 1M (000) No. of Shares (Crore) Promoters Pledged % ACCUMULATE % 207/155 4,989 85% Key Highlights Among the small size private banks, DCB bank has the highest C/I ratio of 60% as on Q1 FY19. It has added 166 branches in last 3 years and has ended with 323 branches in the current quarter. Now slowing the pace of expansion will lead to lower opex growth and moreover with the maturity of older branches C/I ratio could improve significantly over FY20. Empolyee count during the quarter was approx IEA Report Industry Bloomberg BSE Code NSE Code NIM declines, advances growth picked-up BANKING DCBB IN DCBBANK DCB Bank is the fastest growing bank among the small size of banks. Its loan book has registered CAGR of 25% in last 5 years. The bank's target is mainly to focus on small business owners and small business segment i.e traders, shopkeepers, MSMEs and SMEs. On the other hand the bank have limited presence in the salaried segment. NIM is likely to remain under pressure due to high competitive pressure and increase in bond yield rates. Assets quality has remained stable with GNPA at sub 2% level since last 18 quarters. Well diversified loan book with focus of management on low ticket size gives comfort on assets quality front. However we remain cautious on agri loan book. 1Q FY19 Result: NII was in line with our expectation, but PAT estimate missed due to higher opex. Net interest income grew by 17% YoY which is the lowest since 12 quarters, led by increase in the cost of fund and lower NIM. Other income declined by 3% yoy due to lower treasury gain on account of rise in the bond yield. Operating profit grew by 4% only due to higher opex (+18% yoy). Operating expenses grew by 18% yoy driven by increase in the employee cost, which led rise of 5bps in C/I ratio to 60.3% as compared to 57.2% a year back. PAT increased by 7% YoY. Loan book grew by 31% YoY. Provisions declined by 6% on yoy basis. NIM declined by 33bps YoY to 3.90%. View and Valuation Rising bond yield and pricing pressure on loan assets have led to NIM under pressure. Cost of fund has started to rise for DCB bank whereas yield has also fallen. 40% of the loan book is mortgage loan which is highly competitive and hence facing pricing pressure from the peers. C/I ratio is still not showing any sign of improvement despite slow in branch addition. However assets quality remained stable with one of the best PCR (76%) in the industry. Loan book growth has remained healthy at 31%. We reduce our PAT estimate by 5% in both FY19 as well as in FY20 owing to NIM pressure and no improvement in C/I ratio. We cut our target multiple to 1.6x P/BV and reduce target price to Rs 180. Thus we change our recommendation from BUY to ACCUMULATE. Key Risks to our rating and target Slower pace of C/I reduction rate. Rising bond yield & aggressive competition from existing player will hurt the margins. FY16 FY17 FY18 FY19E FY20E NII PPP PAT NIM % EPS (Rs) EPS growth (%) ROE (%) Research Analyst ROA (%) DEEPAK KUMAR BV Deepak.kumar@narnolia.com P/B (X) P/E (x) The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Narnolia Financial Advisors Ltd and other Narnolia group companies does and seeks to do business with companies covered in its research reports. As a result investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. KEY FINANCIAL/VALUATIONS

2 1Q FY 19 Results In line Mixed Performance Financials Interest Inc. Interest Exp. NII Other Income Total Income Ope Exp. PPP Provisions PBT Tax Net Profit 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY % QoQ% FY17 FY18 YoY % % 8.0% 2,076 2, % % 11.1% 1,279 1, % % 3.5% % % -2.4% % % 2.1% 1,047 1, % % 3.6% % % -0.1% % % -14.4% % % 5.3% % % 0.3% % % 8.2% % NIM under pressure, C/I ratio increased. NIM dropped by 26 bps qoq to 3.90% due to decline in the yield on advances by 20 bps QoQ and rise in cost of fund. Yield on advances declined because its major segments mortgage and MSME has faced pricing pressure due to intensive competition in the market. However due to rise in G-sec bond yield by 150 bps, cost of fund has also increased by 7 bps QoQ during the quarter. We expect NIM to remain under little pressure due to increasing cost. C/I ratio increased by 87 bps during the quarter to 60% due to increase in operating expenses and increase in net income at a slower growth rate of 11% yoy (in 4FY18 it was 23%) driven by the higher interest expense growth of 29% yoy as against 17% a quarter back. Robust growth in advances as well as deposit. Advances grew by a healthy rate of 31% YoY and 5% QoQ. The growth was basically from the entire portfolio. Corporate book grew by 48% YoY. DCB bank largely focuses on mortgage finance which contributes 40% of the portfolio. This portfolio grew by 19% YoY during the quarter. AIB grew by 38% whereas commercial vehicle grew by 57% YoY led by healthy CV sales. SME portfolio grew by 42% YoY. Deposits also grew by 31% YoY in line with the advances. CASA growth was impacted sequentially and came down to 20% (from 25% a quarter back) due to lower saving deposit growth. However the CASA ratio improved by 30bps to 24.6% as against 24.3% on qoq basis supported by strong qoq growth in current deposits of 10% as against 3% in Q4FY18. Total retail deposits of the bank stood at 75% against 74% a quarter back. Slippages increased, but NNPA remained stable. Slippages ratio increased by 9 bps sequentially to 0.53%. GNPA ratio stood at 1.86% vs 1.79% a quarter back where as NNPA remained stable at 0.72%. The gross NPA in the AIB and MSME sector increased sequentially by 16% and 10% respectively. PCR remained stable at 76%. GNPA in AIB portfolio is a cause of concern which grew by 16% sequentially in absolute terms whereas MSME portfolio grew by 10%. On the other hand mortgages and corporate book NPA also grew by 6% and 7% respectively. Security receipt came down from 70 cr to 52 cr as management has been able to recover the amount and it largely represents MSE and mortgage loan. The restructured book was at Rs 231 cr in Q1FY19. Other highlights: CAR ratio during the quarter declined by 9 bps to 15.6%. Tier I ratio stood at 12% (as against 12.7% in Q4FY18), while tier II ratio stood at 3.5% (3.8% a quarter back). Concall Highlights : As per RBI if the overall exposure is not more than Rs 25 cr the bank may not recognize it as NPA, but the bank have let cr as NPA instead of giving time to the customer and it is included in the 400 cr of NPA. MTM losses of Rs 2.6 Cr fully have been provided during 1Q FY19. Restructured assets was at Rs 231 Cr. SR book has declined from Rs 70 Cr to Rs 52 Cr as management has been able to recover the amount. Most of the SR are in SME and mortgage loan. Yield declined due to competitive pressure in mortgage, SME and vehicle loan book. Management guided for NIM of 3.7%-3.8%. Most of the book is linked to 3 months MCLR whereas CV, tractor etc is linked with fixed rate.

3 Profitability Matrix C/I Ratio % Empl. Cost/ Tot. Exp. % Other Exp/Tot. Exp.% Provision/PPP % Tax Rate % Int Exp./Int Inc. (%) Other Inc./Net Inc. % PAT/ Net Income % RoE % RoA % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) Margin Performance Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) Yield on Advances Cost Of Funds NIM Exhibit: Yield and Cost Yield decreased, whereas Cost of fund expanded during the quarter. Exhibit: Net Interest Margin NIM declined sequentially and remained under pressure. Avg. Yield on Advances Avg. Cost of Funds Avg. NIM Other Income Break Up- Decline in fee income. 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Commission, exchange and brokerage Profit on Exchange Transactions Total Fee Income Profit on Sale of Investment Miscellaneous Income Other Income

4 13,337 14,436 14,584 15,818 16,266 17,395 18,595 20,337 21,243 15,680 17,685 18,840 19,289 19,155 20,567 21,296 24,007 25, Exhibit: Fee Income/Advances % Exhibit: Other Income/ Total Income % Fee based income declined sequentially Growth in other income shrunk Fee Income/Advances % Other Income/Total Net Income % Exhibit: Opex Trend Elevated C/I Ratio Exhibit: Profitability trend Growth increase Empl. Cost/ Tot. Exp. % Other Exp/Tot. Exp. C/I Ratio % PAT/ Net Income % Operating Profit Growth YoY % Exhibit: Advances performance Healthy growth continues Exhibit: Deposits trend Spike in deposits Net Advances (Rs in Cr) Adv. Growth YoY % Deposits (Rs in Cr) Growth YoY %

5 Exhibit: Advances breakup Diversified Exhibit: CASA CASA ratio increased CASA % CASA Growth YoY % Mortgages AIB Corporate Banking SME + MSME Gold Loans Construction Finance Commercial Vehicle Others (PL, Auto, Others) Asset Quality GNPA (Rs in Cr) GNPA % NNPA (Rs in Cr) NNPA % Slippages (Rs in Cr) Specific PCR % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (+/-) QoQ (+/-) % 9% % 5% % 32% % 0% GNPA Composition (Rs in Cr) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Mortgages AIB Corporate SME+MSME Gold Loans CV/CE/STVL Personal Loan Others Exhibit: Assets Quality Assets quality declined Exhibit: Provisions/Advances Reduction in credit cost GNPA % NNPA % PCR % Provisions/Avg. Advances % (Annualised)

6 Financial Details Balance Sheet Y/E March FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Share Capital >> Equity Capital >> Preference Capital Reserves & Surplus ,307 1,508 1,920 2,500 2,500 2,780 Networth 1,003 1,154 1,589 1,792 2,205 2,808 3,088 3,463 Deposits 8,364 10,325 12,609 14,926 19,289 24,007 30,263 37, >> CASA Deposits 2,272 2,581 2,950 3,490 4,689 5,840 7,566 9, Borrowings 1, ,164 1,148 1,276 1,927 2,330 2,913 Other Liabilities & Provisions ,252 1,276 1,481 2,181 2,726 Total Liabilities 11,279 12,923 16,132 19,119 24,046 30,222 37,582 46,555 Cash & Bank ,192 2,372 2,706 3,064 Investments 3,359 3,634 3,962 4,333 5,818 6,219 7,868 9, Advances 6,586 8,140 10,465 12,921 15,818 20,337 25,421 31, Fixed Assets Other Assets ,068 1,335 Total Assets 11,279 12,923 16,132 19,119 24,046 30,222 37,582 46,555 Income Statement Y/E March FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Interest income 916 1,128 1,422 1,698 2,076 2,413 3,081 3,905 Interest expended ,079 1,279 1,418 1,943 2,544 Net Interest Income ,137 1, Other Income >> Core Fee Income >> Treasury Income >> Others Total Net Income ,047 1,306 1,496 1,815 Operating Expenses , >> Employee Expenses Pre-provisioning Profit Provisions (16.3) PBT Tax Profit After Tax

7 Financial Details Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Balance Sheet Metrics Loan Growth (%) Deposit Growth (%) C/D Ratio (%) CASA (%) Investment/Deposit (%) CRAR (%) >> Tier 1 (%) >> Tier 2 (%) Assets Quality Metrics Gross NPA Gross NAP (%) Net NPA Net NPA (%) Slippges (%) Provision Coverage (%) Provision/Average Advances (%) Margin Metrics Yield On Advances (%) Yield On Investment (%) Yield on Earning Assets (%) Cost Of Deposits (%) Cost Of Funds (%) Spread (%) NIM (%) Profitability & Effeciency Metrics Int. Expense/Int.Income (%) Fee Income/NII (%) Cost to Income (%) Cost on Average Assets (%) Tax Rate (%) Valuation Ratio Metrics EPS (Rs) ROAE (%) ROAA (%) Dividend Payout (%) Dividend yield (%) Book Value (Rs) P/B (X) P/E (X)

8 Exhibit: DuPont Analysis Interest Income Interest expended Net Interest Income Non-Fund Based Income >> Core Fee Income >> Trading and Other Income Core Operating Income Total Income Total Operating Expenses >> Employee Expenses >> Other Expenses Operating Profit Provisions Others PBT Tax PAT/RoA >> Equity Multiplier (x) RoE Financial Details FY14 FY15 FY16 FY17 FY18 FY19E FY20E

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