PL Stock Report: DCB Bank (DCBB IN) - Q1FY24 Result Update - Quarterly blip but medium term story intact - BUY

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

Rating: BUY | CMP: Rs129 | TP: Rs150

Q1FY24 Result Update - Quarterly blip but medium term story intact

Quick Pointers:

§ PPoP miss of 8.5% due to lower NIM and fees; asset quality was a drag.

§ Share of granular deposits increasing; recoveries are expected to improve.

DCB reported weak results as core PPoP missed PLe by 8.5%, mainly led by weaker NIM and fees. Asset quality too slightly worsened QoQ. However, a key positive was improving RTD share which inched by 3.1% YoY to 58.6%. While higher slippages are likely in SME lending, recoveries were softer (65% of opening GNPA) than normal (85-90%) leading to GNPA miss. Bank expects recoveries to bounce back in FY24. Net stress declined by 30bps QoQ to 5.7%. Factoring in Q1’24 NIM and faster deposit cost rise, we trim NIM for FY24/25E by 5/11bps that would be offset by 16/6bps reduction in provisions, as PCR is optimal at ~65% and credit costs would be mainly led by slippages. Net impact on FY24/25E PAT is not material. Bank witnessed a quarterly aberration and with valuation at 0.8x on FY25E ABV, we continue to remain positive on DCB. We maintain multiple at 1.0x and TP at Rs150. Retain ‘BUY’.

§ Lower on NII/NIM drove miss on PPoP by 8.5%; miss on asset quality: NII was a miss at Rs4.71bn (PLe Rs4.9bn) due to lower NIM at 4.0% (PLe 4.19%) as loan growth was largely in-line at 19.0% YoY (PLe 19.4%). Deposit growth was a bit higher at 22.6% (PLe 20.8%). Other income at Rs1.07bn was lower due to muted fees led by weak PSLC income. Opex was tad better at Rs3.69bn (PLe Rs3.75bn) due to other opex. PPoP was 8.5% below PLe at Rs2.09bn. Asset quality disappointed; gross slippages were tad higher at Rs3.4bn, while recoveries were lower. GNPA/NNPA rose QoQ by 7/16bps to 3.26%/1.19%. Provisions were Rs377mn (PLe Rs400mn) while PCR declined by 4% QoQ to 64%. PAT was a miss at Rs1.27bn (PLe Rs1.4bn).

§ Credit flow to lower yielding segments; deposit mix improving: Lower NIM was partly driven by QoQ loan growth in favor of co-lending (+11.8%) and corporate (+5.8%) while mortgage grew by 5.3%. Higher yielding SME (-18%) and AIB (2.7%) saw softer growth. SME disbursals were down 54% QoQ as TReDS was affected due to 1) unfavorable interest rates and 2) clarification on assigned risk weights. Bank is unwilling to continue at current yields if 100% risk weight is continued. DCBB sees healthy demand in other MSME. Sizeable portion of QoQ deposit accretion was led by RTD (+5.5%) which was a positive. RTD share at 58.6% is consistently enhancing (55.5% a year ago).

§ NIM fall to be offset by lower provisions; asset quality saw a blip: NIM miss was led by 1) strong QoQ growth in lower yielding segments 2) focus on RTD and softer CASA growth and 3) decrease in LDR QoQ owing to higher deposit growth. We trim our calc. NIM for FY24/25E by 5/11bps to 3.6/3.5% since average reported NIM for FY23 was 3.93% while bank maintained its NIM guidance of 3.65-3.75% for FY24. While miss on slippages is possible given SME based lending, recoveries were lower than 8-qtr average due to lesser business days in Apr’23 and weak collections in North India owing to floods. Bank expects recoveries to bounce back in coming quarters. Due to benign credit environment, we reduce provisions by 16/6bps for FY24/25E.

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