PL Stock Report: DCB Bank (DCBB IN) - Q2FY24 Result Update - Good core numbers but blip in asset quality - BUY

DCB Bank (DCBB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs115 | TP: Rs160

Q2FY24 Result Update - Good core numbers but blip in asset quality

Quick Pointers:

♦ Core PAT beat of 23% due to higher fees and lower provisions.

♦ Asser quality blip but banks expects recoveries to improve in H2FY24.

DCBB a mixed quarter; while core PPoP was a 14% beat due to higher fees, asset quality saw a blip due to higher slippages resulting in GNPA rising by 10bps QoQ (vs decline for peers). Loan growth was bit better and bank would like to increase its risk appetite. Hence focus is back on bolstering LAP. While CoF could increase in H2FY24 albeit at a slower pace vs H1FY24, incremental focus on LAP, MFI and SME could partly support NIMs. Gross slippages emanated from OTR pool that has entirely come out of moratorium; bank expects recoveries to enhance in H2FY24. While valuation is attractive at 0.75x/0.65x key levers for re-rating are (1) consistent decline opex/assets led by sustained credit momentum (2) higher recoveries resulting in lower GNPA and (3) increase in RTD share. We maintain multiple at 1.0x but increase TP to Rs160 from Rs150 as we roll forward to Sep’25 ABV. Retain ‘BUY’.

♦ Core PPoP beat led by higher fees; miss on asset quality: NII was in-line at Rs4.75bn; NIM was a slight miss while credit growth was a bit higher. Loan growth was 19.1% YoY (PLe 18.5%) while deposit growth was 23.1% (PLe 20.8%). NIM was a slight miss at 3.85% (PLe 3.88%) led by lower yields. Other income was lower Rs1.07bn (PLe 1.12bn); while fees was higher at Rs970mn (PLe Rs800mn). Opex was slightly better at Rs3.72bn (PLe Rs3.8bn) due to both lower staff cost. PPoP was 1.2% below PLe at Rs2.1bn while core PPoP beat PLe by 14%. Asset quality disappointed as GNPA/NNPA increased QoQ by 10bps/8bps to 3.4%/1.2% due to higher gross slippages. Provisions were Rs397mn (PLe Rs450mn) while PCR was 62.8%. PAT was higher at Rs1.27bn (PLe Rs1.21bn) while core PAT was 23% higher to PLe.

♦ Focus back on LAP; RTD trending well: Tad lower NIM was driven by QoQ loan growth in favor of agri (6.4%), mortgage (+4.4%) and corporate (+9.0%). With market conditions improving and majority of OTR pool out of moratorium, bank would like to increase its risk appetite. Hence it would like to enhance LAP share in mortgage that had declined during covid (pre-covid share was 85%); this should cushion NIM in a rising funding cost environment. AIB is another focus area that is growing well. Bank has also signed up with BC-partners to bolster the MFI business. On deposits, retail TD is tending well (grew by 7.3% QoQ). Bank endeavors to strengthen deposit franchise (CASA and RTD) with the help of additional capacity mobilization.

♦ Opex intensity could gradually reduce; blip in asset quality: Operating leverage has started to play out with credit growth back in reckoning and opex to assets reducing from 3.05% in Q3’23 to 2.85% in Q2’24. Employee addition would continue to support business growth and bank plans to add 25-30 branches in FY24. We expect cost to assets to decline over FY23-26E from 2.8% to 2.3%. Gross slippages rose to Rs3.9bn (PLe Rs3.3bn) as entire OTR book came out of moratorium in Q2FY24. Management expects slippages to reduce in H2FY24 as customers would start repaying.

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