Financials I Equities Company Update Change in Estimates Target Reco 

30 May 2021

Rating: Buy DCB Target Price: Rs130

Share Price: Rs104 DCB came out of FY21 largely unscathed; upgrading to a Buy

With DCB bank’s target portfolio (50%+ mortgages/SME) and most Key data DCBB IN / DCBA.BO customers being self-employed, FY21 was anticipated to be a very 52-week high / low Rs127 / 61 Sensex / Nifty 51423 / 15436 tough year for the bank, given the underlying stress in small businesses 3-m average volume $3.1m at the macro level. With a slippage rate for FY21 in line with FY20 and a Market cap Rs32bn / $446.5m net restructured book contained below 4%, the bank has done a Shares outstanding 311m commendable job, given the trying economic environment. We expect business activities and recoveries to pick up once pandemic-related Shareholding pattern (%) Mar ’21 Dec ’20 Sep ’20 restrictions are lifted, and earnings to normalise in the medium term. Promoters 14.9 14.9 14.9 We upgrade our rating to a Buy, with a TP of Rs130. - of which, Pledged - - - Free float 85.1 85.1 85.1 - Foreign institutions 13.0 13.8 14.4 Asset quality over FY21, better than anticipated. Collection efficiency in - Domestic institutions 40.5 39.0 37.7 the bank’s key portfolio for Mar’21 (detail in Fig. 7) was way better than - Public 31.5 32.4 33.0 envisaged earlier. For FY21, overall slippages were Rs6.8bn (2.6% of loans), similar to FY20. Net restructured was 3.7% of loans. Slippages and Estimates revision (%) FY22e FY23e restructured was surprisingly better than anticipated given that most NII (4.1) (4.9) customers are self-employed and 50%+ of bank’s overall loans are in the Pre-provisioning profit (7.5) (3.6) RoE (11.3) 1.1 mortgage/SME book. Although current restrictions could lead to lower collections and delayed recoveries, given the bank’s strong underwriting and Relative price performance its mostly secured book, eventual LGDs would be lower. 150 130

Earnings to pick up. Given the bank’s strong liability franchise, capitalisation, 110 coverage and liquidity, it is comfortably placed to withstand Covid’19-related 90 stresses. With lower stress than earlier expected, lower credit cost would lead to 70 a sharp recovery in earnings. We estimate a 1.1% RoA in FY23. 50 `

Valuation. Our May’22 target of Rs130 is based on the two-stage DDM Jul-20 Apr-20 Oct-20 Apr-21 Jun-20 Jan-21 Feb-21 Mar-21 Aug-20 Sep-20 Dec-20 May-20 model. This implies a ~1x P/ABV multiple on its FY23e book. Risks: Less- May-21 DCBB Sensex than-expected loan-book growth; large slippages from the mortgage book. Source: Bloomberg Key financials (YE Mar) FY19 FY20 FY21 FY22e FY23e Net interest income (Rs m) 11,493 12,649 12,866 14,423 16,798 Pre-provisioning profit (Rs m) 6,466 7,531 8,985 9,737 11,186 Provisions (Rs m) 1,401 2,611 4,457 4,291 3,872 PAT (Rs m) 3,254 3,379 3,358 4,030 5,412 EPS (Rs) 10.5 10.9 10.8 13.0 17.4 NIM (%) 3.7 3.6 3.5 3.6 3.7 Cost-income (%) 56.9 54.5 48.5 49.8 49.6 RoE (%) 11.0 10.3 9.4 10.2 12.2 RoA (%) 1.0 0.9 0.9 1.0 1.1 Advances growth (%) 15.9 7.5 2.4 12.0 16.0 GNPA (%) 1.8 2.5 4.1 4.4 3.8 CAR (%) 16.8 17.8 19.7 19.3 18.7 P / E (x) 9.9 9.6 9.6 8.0 6.0 Yuvraj Choudhary, CFA P / BV (x) 1.0 0.9 0.9 0.8 0.7 Research Analyst

P / ABV (x) 1.1 1.0 1.0 0.9 0.8 Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix.

Anand Rathi Research India Equities

30 May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Quick Glance – Financials and Valuations

Fig 1 – Income statement (Rs m) Fig 4 – Price-to-Book band Year-end: Mar FY19 FY20 FY21 FY22e FY23e Net interest income 11,493 12,649 12,866 14,423 16,798 360 NII growth (%) 15.5 10.1 1.7 12.1 16.5 Non-interest income 3,502 3,911 4,585 4,958 5,374 2.4x 300 Income 14,995 16,560 17,451 19,381 22,172 Income growth (%) 14.8 10.4 5.4 11.1 14.4 1.8x 240 Operating expenses 8,529 9,029 8,466 9,644 10,986 PPOP 6,466 7,531 8,985 9,737 11,186 180 1.3x PPOP growth (%) 23.2 16.5 19.3 8.4 14.9

Provisions 1,401 2,611 4,457 4,291 3,872 120 PBT 5,065 4,919 4,528 5,446 7,314 0.7x Tax 1,812 1,540 1,170 1,416 1,902 60 PAT 3,254 3,379 3,358 4,030 5,412 PAT growth (%) 32.6 3.9 -0.6 20.0 34.3 0 FDEPS (Rs / sh) 10.5 10.9 10.8 13.0 17.4 Jul-12 Jul-13 Apr-19 Oct-19 Apr-20 Oct-20 Jan-13 Jan-14 Feb-15 Feb-16 Mar-17 Mar-18 Aug-14 Aug-15 Aug-16 Sep-17 Sep-18 DPS (Rs / sh) 0.9 0.0 0.0 0.0 0.0 May-21 Source: Company, Anand Rathi Research Source: Bloomberg

Fig 2 – Balance sheet (Rs m) Fig 5 – One-year-forward price-to-book value Year-end: Mar FY19 FY20 FY21 FY22e FY23e Share capital 3,095 3,104 3,105 3,105 3,105 Reserves & surplus 28,049 31,108 34,481 38,510 43,923 2.5 +2SD Deposits 284,351 303,699 297,039 332,683 385,913 Borrowings 27,232 34,080 44,823 47,064 49,417 2.0 +1SD 0 0 0 0 0 Total liabilities 357,918 385,051 396,021 442,120 505,388 1.5 Mean

Advances 235,680 253,453 259,592 290,743 337,262 1.0 -1SD Investments 78,441 77,415 84,137 94,233 105,541 Cash & bank bal 13,172 10,298 11,829 13,899 16,331 0.5 -2SD Fixed & other assets 5,260 5,459 5,685 5,799 5,915 Total assets 357,918 385,051 396,021 442,120 505,388 No. of shares (m) 310 310 311 311 311 0.0 Deposits growth (%) 18.4 6.8 -2.2 12.0 16.0 Jul-12 Jul-13 Apr-19 Oct-19 Apr-20 Oct-20 Jan-13 Jan-14 Feb-15 Feb-16 Mar-17 Mar-18 Aug-14 Aug-15 Aug-16 Sep-17 Sep-18 Advances growth (%) 15.9 7.5 2.4 12.0 16.0 May-21 Source: Company, AnandRathi Research Source: Company

Fig 3 – Ratio analysis % Fig 6 – Price movement Year-end: Mar FY19 FY20 FY21 FY22e FY23e NIM 3.7 3.6 3.5 3.6 3.7 Other inc. / total inc. 23.4 23.6 26.3 25.6 24.2 (Rs) 300 Cost-income 56.9 54.5 48.5 49.8 49.6 Provision coverage 65.0 53.4 45.2 42.9 44.2 250 Dividend payout 8.6 0.0 0.0 0.0 0.0 Credit-deposit 82.9 83.5 87.4 87.4 87.4 200 Investment-deposit 27.6 25.5 28.3 28.3 27.3 150 Gross NPA 1.8 2.5 4.1 4.4 3.8 Net NPA 0.7 1.2 2.3 2.6 2.2 100 BV (Rs) 100.6 110.2 121.0 134.0 151.4 Adj. BV (Rs) 97.1 103.6 107.6 117.2 135.0 50

CAR (%) 16.8 17.8 19.7 19.3 18.7 0 - Tier 1 13.1 13.9 15.5 15.7 15.5 Jul-19 Apr-19 Oct-19 Apr-20 Jun-18 Jan-20 Feb-17 Mar-18 Feb-21 Aug-16 Nov-16 Aug-17 Dec-17 Sep-18 Dec-18 Aug-20 Nov-20 May-16 May-17 RoE 11.0 10.3 9.4 10.2 12.2 May-21

RoA 1.0 0.9 0.9 1.0 1.1 Source: Company, Anand Rathi Research Source: Bloomberg

Anand Rathi Research 2

30May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Key Highlights

Conference-call takeaways

Guidance for medium term  NIM: 3.65-3.75%  Fee income: 1% of average assets  Cost to average assets: 215-220bps  CASA: 10-22%  Credit cost: 55bps  Top-20 deposits: 5% (in two years)  Branches: 15-20/year

Loans  During the quarter, the bank disbursed Rs27.43bn (Rs27.46bn in Q3). o Corporate banking: Rs5.23bn (Rs7.79bn in Q3) o Agri: Rs6.22bn (Rs4.46bn in Q3) o Gold: Rs4.08bn (Rs6.03bn in Q3) o Mortgage: Rs7.83bn (Rs6.31bn in Q3) o CV: Rs0.31bn (Rs0.31bn in Q3) o SME: Rs1.80bn (Rs1.11bn in Q3) o Construction Finance: Rs1.96bn o Others: Rs1.75bn  Under ECLGS, the bank had sanctioned Rs21.45bn (38,469 customers). Rs.9bn has been disbursed.  Restructuring. The current restructured book is Rs9.68bn, largely from the mortgage, CV and MSME portfolios.  Business loans. Customers (incl. delinquent & restructured) who have not paid any instalment in FY21 were 0.9%. The percentage of the portfolio that has paid three EMIs or more in FY21 was 97.4%.  Home loans. Customers (incl. delinquent & restructured) who have not paid any instalment in FY21 were 1.43%. The percentage of the portfolio that has paid three EMIs or more in FY21 was 95.0%.  Commercial vehicles. Customers (incl. delinquent & restructured) who have not paid any instalment in FY21 were 2.74%. The percentage of the portfolio that has paid three EMIs or more in FY21 was 94.6%.  MSME. 98.5% of the customers (incl. delinquent & restructured) had some credit churning in their accounts in FY21.  MFI. 94% of customers (incl. delinquent) have paid at least one instalment in FY21.

Anand Rathi Research 3

30May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Fig 7 – Collection efficiency (%) Jan'20 Feb'20 Mar'20 Apr'20 Jun'20 Jul'20 Aug'20 Sep’20 Oct’20 Nov’20 Dec’20 Mar’21 Business loans 97.5 97.7 90.6 51.6 58.8 59.4 61.2 87.5 85.3 91.5 89.8 95.2 Home loans 98.5 98.0 93.2 56.9 63.8 67.3 70.7 91.3 90.5 93.2 94.1 96.8 CVs 92.1 89.4 81.3 30.1 37.4 39.3 40.1 77.1 75.9 77.5 80.4 86.0 Source: Company, Anand Rathi Research

Fig 8 – Segment-wise results Break-up of GNPA (Rs m) Q3 FY20 Q4 FY20 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Opening balance 5,227 5,515 6,315 6,218 5,737 5,023 Slippages 2,032 1,509 84 98 5 6,673 Gross-slippage ratio (%) 3.3 2.4 0.1 0.2 0.0 10.6 Reductions 1,744 714 181 579 719 862 Upgrades 513 387 18 80 118 116 Recoveries 815 326 98 215 207 227 Write-offs 416 1 65 284 394 519 Closing balance 5,515 6,310 6,218 5,737 5,023 10,834 CV / CE 1002 1163 1134 1082 831 1669 Corporate 481 515 515 418 418 496 SME 662 733 725 531 474 1184 Mortgages 1814 2283 2288 2207 1971 4106 Others 1561 1621 1556 1499 1329 3379 GNPA 5,520 6,315 6,218 5,737 5,023 10,834 GNPA (%) 2.2 2.5 2.4 2.3 2.0 4.1 NNPA (%) 1.0 1.2 1.0 0.8 0.6 2.3 Source: Company, Anand Rathi Research

Fig 9 – Break-up of advances (%) Q3 FY20 Q4 FY20 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Corporate 12.0 12.0 12.0 10.0 11.0 11.0 AIB 21.0 21.0 21.0 21.0 21.0 22.0 SME + MSME 11.0 11.0 11.0 11.0 11.0 10.0 Mortgages 41.0 42.0 42.0 42.0 42.0 42.0 CV 7.0 7.0 7.0 6.0 6.0 5.0 Others 8.0 7.0 7.0 10.0 9.0 10.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, Anand Rathi Research

Anand Rathi Research 4

30May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Quarterly snapshot

Fig 10 – Income statement (Rs m) Q3 FY20 Q4 FY20 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Interest income 8,978 9,019 8,731 8,785 8,694 8,373 Interest expense 5,747 5,782 5,664 5,445 5,346 5,261 NII 3,231 3,237 3,067 3,339 3,348 3,112 Y/Y growth % 10.0 7.6 0.6 6.6 3.6 (3.9) Non-interest income 931 1,099 776 925 1,545 1,339 Trading profits 70 174 380 293 741 13 Total income 4,162 4,336 3,843 4,264 4,893 4,451 Y/Y growth % 7.2 8.3 (1.8) 2.8 17.6 2.7 Operating expenses 2,263 2,215 1,932 2,016 2,119 2,399 Of which,Staff cost 1,156 1,124 1,087 1,050 1,087 1,112 PPOP 1,899 2,121 1,911 2,248 2,773 2,052 Y/Y growth % 9.3 14.5 14.8 21.8 46.0 (3.2) Total provisions 590 1,182 837 1,131 1,477 1,012 PBT 1,309 938 1,075 1,117 1,296 1,040 Tax 342 251 281 294 334 261 PAT 967 688 794 823 962 779 Y/Y growth % 12.3 (28.6) (2.1) (10.0) (0.5) 13.3 Source: Company, Anand Rathi Research

Fig 11 – Balance Sheet (Rs m) Q3 FY20 Q4 FY20 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Equity capital 3,101 3,104 3,104 3,105 3,105 3,105 Reserves & Surplus 30,422 31,117 31,912 32,736 33,699 34,481 Shareholders’ Funds 33,523 34,222 35,016 35,841 36,804 37,586 Deposits 297,349 303,699 294,321 287,747 288,581 297,039 Borrowings 33,800 34,080 39,344 37,627 35,683 44,823 Other Liabilities 15,899 13,051 12,875 14,354 17,520 16,574 Total Equity and Liabilities 380,571 385,051 381,556 375,569 378,588 396,021 Deposits y/y growth % 8.1 6.8 2.2 (2.0) (2.9) (2.2) Deposits q/q growth % 1.3 2.1 (3.1) (2.2) 0.3 2.9 Assets Cash and cash balances 27,485 35,459 35,385 33,260 24,032 30,393 Advances 254,382 253,453 250,578 248,786 253,001 259,592 Investments 81,391 77,415 77,268 74,811 80,977 84,137 Other assets 17,313 18,725 18,325 18,711 20,578 21,899 Total Assets 380,571 385,051 381,556 375,569 378,588 396,021 Advances y/y growth % 11.1 7.5 4.2 0.3 (0.5) 2.4 Advances q/q growth % 2.6 (0.4) (1.1) (0.7) 1.7 2.6 Source: Company, Anand Rathi Research

Anand Rathi Research 5

30May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Fig 12 – Income vs. Opex growth Fig 13 – Gross NPA and slippages 25% 20% (Rsm)

15% 4.5% 8,000 20% 4.0% 7,000 10% 3.5% 6,000 15% 5% 3.0% 5,000 10% 0% 2.5% 4,000 2.0% 3,000 -5% 5% 1.5% 2,000 -10% 1.0% 1,000 0% -15% 0.5% 0

-5% -20% 0.0% -1,000 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Income Growth Opex growth (RHS) GNPA Slippages(RHS) Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 14 – Loan break-up Fig 15 – Credit growth vs. NIM (%) Commercial 35% 4.0% vehicle Others 5.0% 4.0% 30% 3.9%

25% 3.8% 3.7% 20% AIB Mortgages 22.0% 3.6% 42.0% 15% 3.5% 10% 3.4% 5% 3.3% 0% 3.2% -5% 3.1% Corporate Banking Gold Loan

11.0% 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 SME 6.0% 10.0% Loan growth NIM (RHS) Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 16 – Restructured assets vs. GNPA Fig 17 – CASA ratio vs. Deposits growth 4.5% 4.5% 26% 35%

4.0% 4.0% 24% 30% 3.5% 3.5% 22% 25% 3.0% 3.0% 2.5% 20% 20% 2.5% 2.0% 18% 15% 2.0% 1.5% 16% 10% 1.5% 1.0% 14% 5% 1.0% 0.5% 0.5% 0.0% 12% 0%

0.0% -0.5% 10% -5% 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 GNPA Restructured (RHS) CASA Ratio Deposit growth(RHS) Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Anand Rathi Research 6

30May 2021 DCB Bank – DCB came out of FY21 largely unscathed; upgrading to a Buy

Valuation

 Our May’22 target of Rs130 is based on the two-stage DDM model. This implies a ~1x P/ABV multiple on its FY23e book.

Fig 18 – Change in estimates FY22e FY23e New Old Chg (%) New Old Chg (%) Net interest income (Rs m) 14,423 15,047 (4.1) 16,798 17,664 (4.9) Pre-provisioning profit (Rs m) 9,737 10,523 (7.5) 11,186 11,607 (3.6) RoE (%) 4,030 4,542 (11.3) 5,412 5,351 1.1 Source: Anand Rathi Research

Risks  Lower-than-anticipated loan growth could cut into our estimates.  Large slippages from the mortgage book.

Anand Rathi Research 7

Appendix

Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companies Rating and Target Price History (as of 30 May 2021) TP Share 300 DCB Date Rating (Rs) Price (Rs) 1 06-Oct-10 Buy 84 61 18 250 2 14-Dec-11 Buy 52 38 3 16-Oct-12 Buy 58 46 14 4 18-Oct-13 Buy 64 50 200 17 5 16-Jan-14 Buy 71 57 13 16 19 6 21-Apr-14 Buy 80 64 7 26-May-14 Buy 85 63 150 15 10 22 8 26-Aug-14 Buy 107 83 12 9 09-Apr-15 Buy 150 114 8 9 100 11 21 10 14-Oct-15 Sell 95 133 5 7 11 23-Nov-16 Buy 171 106 3 12 16-Jan-17 Buy 156 121 1 6 20 50 13 26-Apr-17 Hold 206 183 2 4 14 17-Apr-18 Hold 226 184 0 15 16-Jul-18 Hold 200 162 16 17-Oct-18 Buy 200 162 17 16-Jan-19 Hold 210 182 Jul-13 Apr-20 Oct-15 Jan-08 Jun-12 Jan-18 Mar-10 Feb-09 Feb-19 Dec-16 Sep-14 May-21 May-11 18 16-Jul-19 Sell 220 240 19 21-Oct-19 Buy 226 181 20 25-May-20 Hold 65 60 21 09-Aug-20 Hold 90 83 22 25-Jan-21 Hold 125 116

Anand Rathi Ratings Definitions Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (US$1bn) >15% 5-15% <5% Mid/Small Caps (25% 5-25% <5%

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