Q2FY21 Result Review TP Rs88 Key Stock Data DCB Bank ACCUMULATE CMP Rs77 Bloomberg / Reuters DCBB IN / DCBA.BO Potential upside / downside 14% Sector Banking Asset quality stable; Collection efficiency at 87.5% for LAP Previous Rating HOLD Shares o/s (mn) 310 Summary V/s Consensus Market cap. (Rs mn) 23,938 DCB Bank’s asset quality remains stable on proforma basis with GNPA at 2.39% vs EPS (Rs) FY21E FY22E FY23E Market cap. (US$ mn) 323 2.44% QoQ led by better recoveries. Bank’s credit growth further slowed down to 0.3% IDBI Capital 6.1 7.7 9.9 3-m daily avg Trd value (Rs mn) 143.4 vs 4% (Q1FY21). NII grew by 7% YoY while PAT de-grew by 10% YoY led by higher provisions Consensus 7.3 10.4 14.1 52-week high / low Rs205/58 (up 161% YoY; Rs.480mn for Covid-19 provisions). Cost-to-income ratio on a QoQ basis has % difference (16.9) (26.3) (29.6) Sensex / Nifty 39,614 / 11,642 declined by 300bps to 47.3% on account of decline in staff expenses sequentially. Bank reported collection efficiency for key portfolios – LAP/Home loans/CV loans at 87.5%/91.3%/ Shareholding Pattern (%) Relative to Sensex (%) 77.1% (Sept data) from low of 51.6%/56.9%/30.1% (April data) respectively which is the quite Promoters 14.9 115.0 encouraging. Also, collection efficiency improved further in October month. We introduce FII 14.4 100.0 FY23 estimates in this report. We roll-over to FY23E and change our rating to DII 27.0 85.0 ACCUMULATE (earlier HOLD) with new TP of Rs.88 (earlier Rs.85) valuing it at 0.7x Public 43.7 70.0 P/ABV FY23. 55.0 40.0 Price Performance (%) Key Highlights and Investment Rationale 25.0 Credit growth slowdown further; Deposits de-grew sequentially: Loan growth on -1m -3m -12m Jul-19 Jul-20 Jan-20 Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Aug-19 Aug-20 Nov-19 Absolute (3.3) (0.3) (57.2) Mar-20 the overall book stands at 0.3% YoY vs 8% FY20 which has been lowest in the last May-20 decade. While growth ex-corporate segment is at 3% YoY. Its core segment Mortgage has Rel to Sensex (5.7) (5.7) (55.9) DCB Bank Ltd. Sensex grown by 3% while SME segment declined by 8% YoY due to cautious approach. AIB book Financial snapshot (Rs mn) grew at 5% YoY; however Corporate segment continuous to de-grow (down 16%YoY). Year FY2019 FY2020 FY2021E FY2022E FY2023E Deposits declined by 3% QoQ led by declined in inter-bank term deposits. NII 11,493 12,649 12,178 11,887 13,239 Surprisingly Margins improved sequentially: Margins improved by 32bps QoQ to Net Profit 3,253 3,380 1,894 2,400 3,087 3.74% led by decline in cost of funds although liquidity remains high on the balance EPS (Rs) 10.5 10.9 6.1 7.7 9.9 sheet. Yield on advances improved by 15bps QoQ. Cost to income ratio continues to ABV (Rs) 98.2 103.9 109.8 122.3 135.9 decline from highs of 57% in FY19 to 47% in Q2FY21 as operating expenses declined PER (x) 7.3 7.1 12.6 10.0 7.7 12% YoY. P/ABV (x) 0.8 0.7 0.7 0.6 0.6 ROE (%) 11.0 10.3 5.4 6.5 7.8 Asset quality stable; Collections efficiency improved further in October: GNPA ROA (%) 1.0 0.9 0.5 0.6 0.8 declined to 2.39% vs 2.44% QoQ on proforma basis due to better recoveries. We GNPA (%) 1.9 2.5 3.9 3.6 3.6 need to watch out for slippages from CV loans, home loans and business loans as NNPA (%) 0.7 1.2 1.3 0.6 0.1 11%, 5% & 7% respectively have not paid any installments as of October’20. Also, CAR (%) 16.8 17.8 15.8 15.2 14.8 recoveries seem to be difficult under current scenario. Source: Company; IDBI Capital Research Bunty Chawla | [email protected] | +91-22-2217 1814 Nikhil Vaishnav | [email protected] | +91-22-2217 1819 November 1, 2020 DCB Bank | Q2FY21 Result Review Conference Call Highlights Moratorium- As on Sept’20, moratorium deferment extended to SMA/ overdue categories stood at Rs3,560mn and this further decline to Rs3,130mn (26th Oct. 20). Collection efficiency- Home loan cross to 91% and expect in next 3-4 month will increase further. ECLGS- Sanctions Rs20,000mn (38,371 customers) and disbursed Rs30,10mn and will be going to disburse Rs160- 170mn in Nov’20 and will complete it by Dec’20. Gold loans- Shifted focus of branches to gold loans (May’20-April’20 end) and able to disburse Rs1,800-2,000mn gold loan/month but have to look for sustainability in next 3-6 months. Top 20 depositors- expect in a 1.5-2 years will be 5% against 7.9% (currently). Expect in 1.5-2 years to be in pure retail SME book and targeting 2015 and 2020 bps cost. Headcount- expects to increase to 6,400 from 6,100 (current) by Mar’21. Exposure- has net exposure of Rs60mn in sambandh finserv and provided Rs20mn (Q2FY21) and is part of AIB. Customers who have not paid single EMI have come down to 3-5% from earlier 26.5% Expects restructuring to be at 3-5% (both for business and home loans. LAP portfolio- customer who have not paid single EMI stands at 7.4% (Oct’20) while started doing disbursement of Rs1,500-1,600mn against normal disbursement of Rs 2,750-2.800mn and expect to be normal by Mar’21. Expects to add 15-17 or 20 branches every year. Expect Fee incomes to come back to normal level by Mar’21- April’21 as volumes pick ups Outlook- expects NIMs to be at 370bps, Cost to average assets 220-250bps, credit cost to be 55bps and fees to average assets to be 1%. In CV business will start to relook in the business post Jan’21. 2 DCB Bank | Q2FY21 Result Review Exhibit 1: Quarterly Snapshot (Rs mn) Year-end: March Q2FY21 Q2FY20 Q1FY21 YoY (%) QoQ (%) Interest Income 8,785 8,791 8,731 (0.1) 0.6 Interest Expenses 5,445 5,658 5,664 (3.8) (3.9) Net Interest Income 3,340 3,133 3,067 6.6 8.9 NIM (%) 3.7 3.7 3.4 7 bps 32 bps Non-Interest Income 925 1,014 776 (8.8) 19.2 Operating Income 4,265 4,147 3,843 2.8 11.0 Staff Cost 1,050 1,147 1,087 (8.4) (3.4) Other Op Exp 967 1,156 845 (16.3) 14.4 Total Operating Expenses 2,017 2,302 1,932 (12.4) 4.4 Cost to Income (%) 47.3 55.5 50.3 (821 bps) (298 bps) Operating Profit 2,248 1,845 1,911 21.8 17.6 Provisions 1,131 433 836 161.4 35.3 PBT 1,117 1,413 1,075 (20.9) 3.9 Tax 294 499 281 (41.0) 4.6 -effective tax rate 26.3 35.3 26.1 (897 bps) 18 bps PAT 823 914 794 (10.0) 3.7 EPS (Rs) 2.7 2.9 2.6 (10.1) 3.6 BV (Rs) 115.4 104.9 112.8 10.0 2.3 Deposits 287,747 293,633 294,321 (2.0) (2.2) Advances 248,786 247,976 250,578 0.3 (0.7) Source: Company; IDBI Capital Research 3 DCB Bank | Q2FY21 Result Review Exhibit 2: ROE Decomposition (%) FY19 FY20 FY21E FY22E FY23E NII 3.48 3.40 3.29 3.20 3.25 Fees 0.94 0.88 0.67 0.68 0.68 Other Income 0.12 0.17 0.14 0.10 0.10 Net Revenue 4.54 4.46 4.10 3.97 4.03 Op.Exp 2.58 2.43 2.32 2.40 2.31 Op.Profit 1.96 2.03 1.78 1.57 1.72 Provisions 0.42 0.70 1.10 0.71 0.71 PBT 1.53 1.32 0.68 0.86 1.01 Tax 0.55 0.41 0.17 0.22 0.25 ROA 0.99 0.91 0.51 0.64 0.76 Leverage (x) 11.15 11.37 10.53 10.02 10.33 ROE 10.99 10.34 5.39 6.46 7.83 Source: Company; IDBI Capital Research Exhibit 3: One-year forward P/ABV 5 4 3 2 1 0 Jul-09 Jul-14 Jul-18 Jan-10 Jan-14 Jun-13 Oct-11 Oct-07 Oct-16 Oct-20 Apr-12 Apr-16 Feb-15 Sep-15 Feb-19 Dec-17 Dec-08 Aug-10 Aug-19 Nov-12 Mar-07 Mar-11 Mar-20 May-08 May-17 1 yr fwd P/BV -SD 1.0 Avg 1.5 +SD 2.2 Source: Company; IDBI Capital Research 4 DCB Bank | Q2FY21 Result Review Financial Summary Profit & Loss Account (Rs mn) Growth (%) Year-end: March FY20 FY21E FY22E FY23E Year-end: March FY20 FY21E FY22E FY23E Net interest income 12,649 12,178 11,887 13,239 Growth Fee Income 3,265 2,471 2,528 2,781 Deposits 6.8 (4.8) 9.6 9.6 Treasury Gains 646 521 371 400 Advances 7.5 (5.0) 10.0 10.0 Operating Income 16,560 15,170 14,786 16,420 NII 10.1 (3.7) (2.4) 11.4 Pre-Provision Profit 16.5 (12.3) (11.4) 19.8 Operating expenses (9,029) (8,567) (8,933) (9,411) Net Profit 3.9 (44.0) 26.7 28.7 Employee expenses (4,588) (4,366) (4,761) (4,961) Spreads Other expenses (4,441) (4,201) (4,172) (4,450) Yield on Assets 10.4 10.2 9.9 9.9 Pre-Provision Profit 7,531 6,603 5,853 7,010 Cost of Funds 7.0 6.9 6.8 6.7 Provision (2,611) (4,071) (2,647) (2,884) NIM 3.7 3.6 3.5 3.6 Loan loss Provisions (1,770) (3,798) (2,372) (2,609) CASA 21.5 25.0 25.0 25.0 Other Provisions (841) (273) (275) (275) Operating Efficiency PBT 4,920 2,531 3,207 4,126 Cost-to-Income 54.5 56.5 60.4 57.3 Taxes (1,540) (637) (807) (1,038) Cost-to-Assets 2.4 2.3 2.4 2.3 Asset Quality Net profit 3,380 1,894 2,400 3,087 GNPA 2.5 3.9 3.6 3.6 Balance Sheet (Rs mn) NNPA 1.2 1.3 0.6 0.1 Provision Coverage 53.5 65.5 82.8 96.8 Year-end: March FY20 FY21E FY22E FY23E Credit Cost 0.7 1.6 0.9 0.9 Capital 3,104 3,104 3,104 3,104 Capital Adequacy Reserves 31,109 33,003 35,029 37,649 CAR 17.8 15.8 15.2 14.8 Networth 34,213 36,107 38,133 40,753 Tier I 13.9 14.2 13.7 13.3 Deposits 303,699 289,125 316,815 347,274 Valuation Borrowings 34,079 15,245 16,162 17,188 EPS 10.9 6.1 7.7 9.9 Total Liab.