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Development Credit Bank (Q2 FY12)

India Infoline News Service | Mumbai |

Growth in deposits was higher than advances reporting 4.7% qoq growth, ahead of our expectation of 4%, resulting into a decline in C/D ratio from 71% to 69%.

CMP Rs43, Target Rs50, Upside 16.3%

  • DCBs loan book grew by 1.9% in Q2 FY12 sequentially as against our expectation of 5%. A large part of this growth was driven by higher yielding SME+MSME (28% of Advances) and Retail segments (41% of Advances) which grew by 14% and 23% qoq, respectively. The robust growth in Retail segment was mainly led by mortgages (19% qoq). With continued focus to reduce its exposure to corporate, personal loans and CV/CE/STVL, DCB has been successful in pulling down their total contribution from 28% of the loan book as on 31st Mar2011 to 23% as on 30th Sep2011. Management has guided to grow by 16-17% in FY12 with the main growth drivers being SME, Mortgage and Agri. The loan book will shift towards Agricultural lending in H2 FY12 (to grow by Rs3-4bn) in order to meet the PSL target. Bank is not too keen to grow aggressively given the current macro situation. 
  • Growth in deposits was higher than advances reporting 4.7% qoq growth, ahead of our expectation of 4%, resulting into a decline in C/D ratio from 71% to 69%. Wholesale deposits (10% of deposits) have witnessed a decline both in absolute terms and as proportion of total deposits which is key positive for the bank. Although CASA declined marginally by 10bps qoq, it grew by 4.2% in absolute terms. Despite higher interest rates, bank is confident of sustaining CASA above 30%.
  • NIM improved significantly by 30bps sequentially from 3.1% to 3.4% owing to sharp increase in YoA (80bps qoq), the impact of which was partially offset by 30bps increase in CoF. The improvement in YoA was supported by lending rate hikes and favorable shift in the loan mix (towards high-yielding retail and SME/MSME segments). However, YoA is expected to stabilize in ensuing quarters due to structural shift in portfolio towards lower yielding PSL book and increasing difficulty in passing-on the rate hikes to customers in subdued credit environment. On the other hand, CoF would continue to inch up in the next couple of quarters with lagged impact of deposit rate hike kicking in. Management expects re-pricing of Retail TDs to turn favorable post March 2012. Keeping these factors in view, NIM is likely to correct by 25-30bps over the next two quarters. Managements outlook on NIM for FY12 is 3.1-3.2%.
  • Asset quality has improved over past few quarters owing to shift towards better quality assets and declining exposure to personal loans, CV/CE/STVL and corporate loans. Fresh additions stood at Rs110mn in the current quarter as against Rs350mn in previous quarter, thereby reporting a steep decline in delinquency ratio from 3.3% to 1%. As per management, there are no major concerns in the Mortgage and SME/MSME segments. However, a couple of accounts in the corporate segment are looking vulnerable.
  • Cost/Income ratio has declined from 78.1% to 74.6% sequentially as a result of banks efforts to increase productivity with the existing cost. Currently the bank operates through 82 branches and will add 10 more branches by March 2012. Branch expansion would be funded through plough backs. Over the next two years, DCB plans to bring down the C/I ratio to 60%.
  • Other Income has been weak in the past few quarters mainly due to margin compression witnessed in Bancassurance business. Although the volume has increased, new regulations and competition have eroded the margin. Also forex income has been quite volatile in past few months. However, management expects other income to be better in H2 FY12 as compared to H1 FY12. 
  • With Tier-1 capital at 11.2%, DCB is well-capitalized for the planned balance sheet expansion in the medium term. The bank has in place approval from shareholders for raising Rs3bn via QIP and Rs2.5bn through a rights issue. The management intends to raise Rs1.5-2bn at an opportune time during the year.
  • We raise FY12 PAT estimate by 20% factoring the strong operational performance in Q2 FY12 and zero tax liability (as against earlier budgeted 18%). Retain recommendation as BUY with a lowered price target of Rs50. 
Result table
(Rs m)Q2 FY12Q1 FY12% qoqQ2 FY11% yoy
Total Interest Inc   1,785   1,616   10.4   1,278   39.7
Interest expended  (1,194)  (1,098)  8.8   (815)  46.6
Net Interest Inc  591   519   13.9    463   27.6
Other income  231   234   (1.3)  269   (14.0)
Total Income  822   753   9.2   732   12.3
Operating exp.  (614)   (588)  4.3   (525)  16.9
Provisions  (75)  (77)  (2.0)  (149)  (49.5)
PBT  133   88   50.9   58   129.1
Tax   -    -   -   (11)  (100.0)
Reported PAT  133   88   50.9   48   180.2
EPS  2.7   1.8   50.9   1.0   179.9
Key  RatiosQ2 FY12Q1 FY12chg qoqQ2 FY11chg yoy
NIM (%)
Yield on Advances (%)12.711.90.811.01.7
Cost of Funds (%)
CASA (%)33.233.3(0.2)34.6(1.4)
C/D (x)68.970.8(1.9)69.9(1.0)
Non-interest income (%)39.145.2(6.0)58.1(18.9)
Non-int inc/Int exp (%)19.421.4(2.0)33.0(13.6)
Cost to Income (%)74.678.1(3.4)71.73.0
Provisions/Income (%)0.70.7(0.0)1.6(0.9)
CAR (%)
Gross NPA (%)5.85.9(0.2)7.6(1.9)
Net NPA (%)1.01.2(0.2)1.9(0.9)
Source: Company, India Infoline Research

Financial summary
Y/e 31 Mar (Rs m)FY10FY11FY12EFY13E
Total operating income2,491 3,012 3,383 4,002
yoy growth (%)(21.5)20.9 12.3 18.3
Operating profit (pre-provisions)483 861 876 1,169
Net profit(785)214 484 564
Yoy growth (%)(10.9)(127.3)125.9 16.6

EPS (Rs)(3.9)1.1 2.4 2.8
BVPS (Rs)21.7 26.2 28.2 30.5
P/E (x)(11.1)40.6 18.0 15.4
P/BV (x)2.0 1.7 1.5 1.4
ROE (%)(13.9)3.9 8.2 8.8
ROA (%)(1.3)0.3 0.6 0.6
CAR (%)14.9 13.3 12.7 11.6
Source: Company, India Infoline Research
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