3QFY19 Result Update Institutional Equities DCB Bank 17 January 2019 Reuters: DCBA.NS; Bloomberg: DCBB IN Decisive Move Into Higher RoE Trajectory DCB Bank (DBL) reported 3QFY19 results with the key pointers being: (1) DBL displayed long-awaited opex control with total opex rising just 5.6% YoY (2) Declining trend in NIM stalled in 3QFY19 with NIM at 3.83%, flat QoQ (3) There was a fraud amounting to Rs 124mn in the AIB business but, overall, there were no major concerns on asset quality (4) Loan growth at 23% was somewhat lower than recent trend growth on account of slower corporate lending. (See detailed conference call takeaways on page 2 for significant incremental colour). Per se, on the key P&L items, DBL posted NII growth of 17% YoY to Rs2,936mn, PPOP growth of 42% YoY to Rs1,738 and PAT growth of 51% YoY to Rs861mn. We have revised our estimates for FY19/FY20/FY21 and retained Buy rating on DBL, revising our target price to Rs221 (from Rs207 earlier) and valuing the stock at 1.6x 1HFY21E P/BV. DBL displayed long-awaited opex control with total opex rising just 5.6% YoY: There was a Rs 45mn benefit in other opex due to the change in useful life of fixed assets. Even adjusted for this, total opex would have growth at 7.8%, which is significantly slower than total income growth of 19.3%. DBL registered a cost to income ratio of 55.2%, thereby achieving its cost to income ratio target ahead of schedule (55% by exit quarter FY19). Non-interest income grew 26.1% YoY to Rs 945mn, within which core fee income grew 17.8% YoY to Rs 776mn. So, while market-related income (trading gains, exchange gains) jumped 85.7% YoY, this was from depressed levels when market-related income was impacted by the yield environment. There was some benefit to fee income due to PSL certificates but the quantum will be disclosed in the annual report. Declining trend in NIM stalled in 3QFY19 with NIM at 3.83%, flat QoQ: Flat NIM QoQ is indicative of improved pricing power due to (a) a change in yield environment and (b) decreased competitive intensity from NBFCs, with whom DBL is a direct competitor. DBL raised Rs 6bn of refinance in 3QFY19 from NHB and NABARD which, overall, was beneficial when factoring in the lack of CRR/SLR requirement. Share of interbank term deposits (wholesale deposits) also trended lower ~300 bps QoQ to 17%, displaying some traction for strategy to retailise deposit base. There was a fraud amounting to Rs 124mn in the AIB business but, overall, there were no major concerns on asset quality: The fraud amounting to Rs 124mn took place in the commodity funding business, which is a de-focused sub-segment within the AIB business. Commodity funding has already degrown to an outstanding book worth ~Rs 300-400mn. Rise in overall GNPA ratio to 1.92%, up 8 bps QoQ, is not concerning. Restructured assets has historically been single digits basis points of loan book. Expected recovery on security receipts is 98-100%. Loan growth at 23% was somewhat lower than recent trend growth on account of slower corporate lending: Corporate loan growth was 8.6% YoY and is now 15% of overall loan book. This means that the strategy of adding branches and personnel is still working well on the ground from a small-ticket lending perspective. Management re-iterated their broad guidance of doubling loan book is 3-3.5 years. CV lending continued high-growth trajectory at 72.3% YoY and now forms 7% of overall loan book. Valuation and outlook: We have retained our NII estimates, changed our PPOP estimates by 1%/0.3%/0.3% and PAT estimates by 1.4%/0.4%/0.3% for FY19/FY20/FY21, respectively. We have retained Buy rating on DBL, valuing the stock at 1.6x 1HFY21E P/BV and revising our target price to Rs221 (from Rs207 earlier). BUY Sector: Banking CMP: Rs182 Target Price: Rs221 Upside: 21% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Raghav Garg Research Analyst raghav.garg@nirmalbang.com +91-22-6273 8192 Key Data Current Shares O/S (mn) 309.3 Mkt Cap (Rsbn/US$mn) 56.1/787.4 52 Wk H / L (Rs) 205/140 Daily Vol. (3M NSE Avg.) 1,779,617 Price Performance (%) 1 M 6 M 1 Yr DCB Bank 14.2 11.2 (6.2) Nifty Index 0.0 (1.1) 0.9 Source: Bloomberg, Y/E March (Rsmn) 3QFY19 3QFY18 2QFY19 YoY (%) QoQ (%) Interest income 7,773 6,108 7,357 27.3 5.7 Interest expenses 4,837 3,603 4,538 34.2 6.6 Net interest income 2,936 2,505 2,818 17.2 4.2 NIM (%) 3.8 4.1 3.8-29 bps 0 bps Non-interest income 945 749 735 26.1 28.6 Operating income 3,881 3,254 3,553 19.3 9.2 Staff costs 1,103 970 1,102 13.7 0.1 Other operating expenses 1,040 1,059 990 (1.8) 5.0 Total operating expenses 2,143 2,029 2,092 5.6 2.4 Cost- to-income (%) 55.2 62.4 58.9-713 bps -366 bps Pre-provision profit 1,738 1,225 1,461 41.9 18.9 Provisions 401 343 319 17.2 25.8 PBT 1,336 883 1,142 51.4 17.0 Tax 475 313 408 51.9 16.6 -Effective tax rate 35.6 35.5 35.7 11 bps -13 bps PAT 861 570 734 51.2 17.2 EPS (Rs) 2.8 1.8 2.4 50.5 17.2 BV (Rs) 97.5 89.1 94.8 9.5 2.9 Deposits 275,090 212,959 261,687 29.2 5.1 Advances 228,884 185,952 220,688 23.1 3.7
Comprehensive Conference Call Takeaways Asset Quality In terms of the fraud (Rs 124.4 mn, classified under AIB portfolio) that took place during the quarter, it was related to the commodity funding book which is a business that the bank is winding down. The fraud happened in Gujarat and as per the bank, around 6-7 banks maybe affected. The bank has seen some recovery, while a portion of the remaining exposure has been provided for. On a net basis, the bank has only Rs. 28.7 mn more to provide for. As of now, the bank has only Rs. 300-400 mn outstanding in the commodity funding book. As per the bank, smaller SME loans have been challenging due to cash flow issues being faced by them. Though the bank remains confident about their recoverability since they are backed by good property (hard collateral). As per the bank, most of these are in the Rs. 20-30 mn ticket range. Overall, Q3 was a challenging quarter for the AIB portfolio from an asset quality perspective, as per the bank. The MFI portfolio (under AIB) did not see any stress build up. Small ticket lending recovery rates continue to be strong. The bank had sold some smaller ticket loans to ARCs earlier which are also showing steady recovery as SR balance is coming down. Rating agencies estimate recoveries at 98-100%. Provisioning break-up: Rs. 350 mn credit provisions Rs. 55 mn floating provisions Rs 20 mn releasing provisions on investments Rs. 20 mn standard asset provisions Floating provision balance stands at Rs 730 mn. Business and Loan Growth Though RWA density has been steadily improving, the bank remarked that the ratio will not improve indefinitely. The bank would be targeting lower risk-weight segments such as SME, LAP, home loans, commercial vehicles where risk weight is not more than 75%. Further, the bank stressed that in some cases, where risk-weights are 100% or more, the pricing is not adequate. All in all, the bank guided that it would be focusing on using capital more efficiently. NBFCs are exiting standard home loans, which the bank anyway isn t doing (these loans, as per the bank, are done at close to 9%). The bank is more into home loans to the self-employed segment where it can charge 50-60 bps extra. The standard home loans market has largely gone to the large banks (like Axis, ICICI). In the LAP segment, the bank has witnessed lower pricing pressure in November while December was even better. Overall, the bank has witnessed some benefit on pricing and volume in the LAP segment but believes Q4 could still be better. The bank has been actively letting go of large ticket LAP loans as they don t fit the risk profile. Though online channel is not contributing significantly to the volume but it is still picking up. The bank believes it needs to spend on marketing of the product and carry out other product specific work (like processes) now since Aadhar authentication is no longer allowed. NBFC space is slowly picking up with some NBFCs having approached the bank for co-lending. Though they may not have great pricing power anymore but the bank has seen them becoming more confident in the last 30 days. The bank sources mortgages through various channels like cold calling by RMs, branch-generated leads and through DSAs in metros. 90% of AIB loans are originated through branches. Every month, the bank is witnessing branch contribution improving. The bank emphasized that the choice of channel depends on the scorecard, wherein even liability parameters such as CASA are also factored in. The bank continues to guide for doubling the loan book every 3-3.5 years. The bank further emphasized that it would aim to pursue profitable growth. 2 DCB Bank
The bank would keep corporate book at 14-15% of the total book. The bank has a personal loan book of Rs. 1,000 mn. Currently, the bank is in the process of convincing the board about the product. As per the bank, it would take some time to establish this product. At the most, the bank will keep this book at 3-5% of the total book. The bank is working towards Rs. 100-110 mn business per employee range from an efficiency perspective. Margin, Liabilities and Liquidity The bank hasn t received any communication from the RBI regarding linking retail loans (including personal loans) to an external benchmark. The bank has guided that it will continue to work towards improving its deposits profile. The bank availed of Rs. 6,000 mn worth of refinance from NABARD and NHB during the quarter. Although, this may come at a slightly higher rate but the bank is benefitted by way of no CRR/SLR requirement on these funds. Plus, they also help in improving the ALM profile. Deposit rates have been steep in October and November but they seem to be cooling down now. While pricing loans, the bank is guided by an internally set-up RoE cut-off/floor. Each loan has to meet this cut-off. Operating Expenses The bank is confident of delivering a lower cost/income ratio in coming years (guidance is for 50% in due course of time). As per the bank, an internal plan has been drawn up for this. The bank has also guided for better RoA/RoE than as on date. The bank stated that eventually it would like to bring opex/avg assets to 2.3-2.5% mark. Overall, the bank sees immense opportunity for increasing efficiency, increasing fee momentum and improving risk weight assets consumption. Employee count stands at 5,934. Guidance is for addition of 300-400 employees every year. The bank would be opening 15-20 branches next year (in FY20). Most of the new branches would come up in existing locations. Call for further branch expansion post FY20 would be taken thereafter. There was Rs. 45 mn positive impact on opex due to change in useful life of fixed assets. The bank believes in actively reallocating headcount from under-performing branches to the outperforming ones. Every year, the bank does a purge of ATMs that do not make business sense. Further, as per RBI rules regarding ATM upgradation, it is cheaper to close down certain ATMs. Fee and Other Income This quarter s non-interest income benefitted from PSLC income. The bank is usually ahead of the PSL requirement (at 55-60% of ANBC). As per the bank, if conditions remain favourable, PSLC income is a good business to pursue. The bank faced immense competition from NBFCs in the LAP segment earlier, which impacted fee revenues. Now since the competition from NBFCs has reduced, the bank believes fee income traction could be better. The bank guided for a 15% fee income growth going forward with the aim of taking it even higher. Fee income is largely dependent on how well the branches are delivering and what kind of customers they attract. Capital Adequacy The bank does not see any reason to raise capital in the next 6-8 months. 3 DCB Bank
Exhibit 1: Key metrics 3QFY19 3QFY18 2QFY19 YoY (%) QoQ (%) Loan book break-up (Rsmn) Corporate banking 34,333 31,612 33,103 8.6 3.7 AIB 43,488 31,612 41,931 37.6 3.7 CV loans 16,022 9,298 15,448 72.3 3.7 Construction finance 6,867 5,579 6,621 23.1 3.7 Gold loans 4,578 3,719 4,414 23.1 3.7 Others 4,578 3,719 4,414 23.1 3.7 Mortgage loans 91,554 78,100 88,275 17.2 3.7 SME and MSME loans 27,466 22,314 26,483 23.1 3.7 Net loans 228,884 185,952 220,688 23.1 3.7 Other metrics (%) Gross NPAs 1.92 1.89 1.84 3 bps 8 bps Net NPAs 0.71 0.87 0.7-16 bps 1 bps Provision coverage ratio 76.99 73.36 76.82 363 bps 17 bps Yield on advances 11.26 11.25 11.07 1 bps 19 bps Cost of funds 6.74 6.42 6.59 32 bps 15 bps RoA 1.03 0.86 0.92 17 bps 11 bps RoE 12.64 9.29 11.13 335 bps 151 bps Exhibit 2: Financial summary Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net interest income 7,971 9,954 11,858 15,333 19,895 Pre-provision profit 4,176 5,250 6,685 9,381 13,595 PAT 1,991 2,453 3,225 4,712 7,193 EPS (Rs) 7.0 8.0 10.5 13.9 21.2 BV (Rs) 77.3 91.1 100.4 128.0 148.0 P/E (x) 26.0 22.8 17.3 13.0 8.5 P/BV (x) 2.3 2.0 1.8 1.4 1.2 Gross NPAs (%) 1.6 1.8 1.7 1.5 1.2 Net NPAs (%) 0.8 0.7 0.8 0.7 0.5 RoA (%) 0.9 0.9 1.0 1.1 1.4 RoE (%) 10.0 9.8 10.9 12.7 15.4 Exhibit 3: Actual performance versus our estimates (Rsmn) 3QFY19 3QFY18 2QFY19 YoY (%) QoQ (%) 3QFY19E Devi. (%) Net interest income 2,936 2,505 2,818 17.2 4.2 3,003 (2.2) Pre-provision profit 1,738 1,225 1,461 41.9 18.9 1,605 8.3 PAT 861 570 734 51.2 17.2 805 7.0 Exhibit 4: Change in our estimates Revised estimate Earlier estimate % Revision FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Net interest income (Rsmn) 11,858 15,333 19,895 11,858 15,333 19,895 0.0 0.0 0.0 NIM (%) 3.8 4.0 4.2 3.8 4.0 4.2 0 bps 0 bps 0 bps Operating profit (Rsmn) 6,685 9,381 13,595 6,616 9,352 13,559 1.0 0.3 0.3 Profit after tax (Rsmn) 3,225 4,712 7,193 3,181 4,694 7,170 1.4 0.4 0.3 4 DCB Bank
Jan-14 May-14 Sep-14 Feb-15 Jun-15 Oct-15 Mar-16 Jul-16 Institutional Equities Nov-16 Mar-17 Aug-17 Dec-17 Apr-18 Aug-18 Jan-19 Exhibit 5: One-year forward P/BV (x) 2.50 2.00 1.50 1.00 0.50 - P/BVPS Mean +1 SD -1 SD +2 SD -2 SD 5 DCB Bank
Financials Exhibit 6: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Interest income 20,761 24,130 30,225 37,848 47,835 Interest expenses 12,791 14,176 18,367 22,514 27,940 Net interest income 7,971 9,954 11,858 15,333 19,895 Fee income 1,651 2,192 2,528 3,619 4,774 Other income 838 911 917 1,304 1,583 Net revenues 10,459 13,057 15,302 20,256 26,252 Operating expenses 6,283 7,807 8,618 10,876 12,657 -Employee expenses 3,080 3,812 4,435 4,824 4,981 -Other expenses 3,203 3,995 4,182 6,052 7,676 Operating profit 4,176 5,250 6,685 9,381 13,595 Provisions 1,115 1,388 1,646 2,018 2,356 -Loan loss provision 944 1,169 1,634 2,004 2,338 -Investment depreciation (1) 61 12 14 17 -Other provisions 172 158 0 0 0 PBT 3,061 3,862 5,039 7,363 11,240 Tax 1,070 1,408 1,814 2,651 4,046 PAT 1,991 2,453 3,225 4,712 7,193 Exhibit 8: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Equity capital 2,854 3,081 3,081 3,389 3,389 Reserves & surplus 19,195 24,997 27,851 39,992 46,777 Shareholders funds 22,049 28,078 30,932 43,381 50,166 Deposits 192,892 240,069 292,944 359,567 448,355 Borrowings 12,758 19,267 23,747 27,066 42,413 Other liabilities 12,765 14,807 20,293 26,327 32,736 Total liabilities 240,464 302,221 367,916 456,340 573,670 Cash/equivalent 11,925 23,720 19,218 24,215 30,874 Advances 158,176 203,367 256,242 322,865 411,653 Investments 58,179 62,190 78,857 94,955 116,073 Fixed Assets 4,886 4,940 5,434 5,978 6,575 Other assets 7,298 8,004 8,165 8,328 8,494 Total assets 240,464 302,221 367,916 456,340 573,670 Exhibit 7: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Growth (%) NII growth 28.7 24.9 19.1 29.3 29.7 Pre-provision profit growth 19.6 25.7 27.3 40.3 44.9 PAT growth 2.3 23.2 31.4 46.1 52.7 Business (%) Deposit growth 29.2 24.5 22.0 22.7 24.7 Advance growth 22.4 28.6 26.0 26.0 27.5 Business growth 26.1 26.3 23.8 24.3 26.0 CD 82.0 84.7 87.5 89.8 91.8 CASA 24.3 24.3 26.2 28.2 28.9 Operating efficiency (%) Cost-to-income 60.1 59.8 56.3 53.7 48.2 Cost-to-assets 2.9 2.9 2.6 2.6 2.5 Productivity (Rsmn) Business per branch 1,340.0 1,403.3 1,659.2 1,972.3 2,407.3 Business per employee 71.2 76.6 89.7 112.7 137.6 Profit per branch 7.6 7.8 9.7 13.6 20.1 Profit per employee 0.4 0.4 0.5 0.8 1.2 Spreads (%) Yield on advances 11.5 10.7 10.6 10.7 10.8 Yield on investments 7.8 7.0 7.5 7.5 7.5 Cost of deposits 6.9 6.0 6.2 6.3 6.2 Yield on assets 10.6 9.7 9.8 9.9 10.0 Cost of funds 7.0 6.1 6.4 6.4 6.4 NIMs 4.1 4.0 3.8 4.0 4.2 Capital adequacy (%) Tier I 11.9 12.7 11.1 12.4 11.2 Tier II 1.9 3.8 2.8 2.5 2.2 Total CAR 13.8 16.5 13.9 14.8 13.5 Asset quality (%) Gross NPAs 1.6 1.8 1.7 1.5 1.2 Net NPAs 0.8 0.7 0.8 0.7 0.5 Specific provision coverage 50.0 60.1 51.7 52.9 60.5 Slippage 1.8 1.9 1.8 1.5 1.2 Credit-cost 0.5 0.6 0.6 0.6 0.5 Return (%) RoE 10.0 9.8 10.9 12.7 15.4 RoA 0.9 0.9 1.0 1.1 1.4 RoRWA 1.3 1.3 1.4 1.6 2.0 Per share (Rs) EPS 7.0 8.0 10.5 13.9 21.2 BV 77.3 91.1 100.4 128.0 148.0 ABV 72.8 86.4 93.5 121.5 142.2 Valuation (x) P/E 26.0 22.8 17.3 13.0 8.5 P/BV 2.3 2.0 1.8 1.4 1.2 P/ABV 2.5 2.1 1.9 1.5 1.3 6 DCB Bank
Apr-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Oct-18 Nov-18 Dec-18 Jan-19 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 2018 Buy 160 196 17 April 2018 Buy 190 223 17 July 2018 Buy 162 205 9 October 2018 Buy 143 200 19 October 2018 Buy 160 207 17 January 2019 Buy 182 221 Rating track graph 220 210 200 190 180 170 160 150 140 Not Covered Covered 7 DCB Bank
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