Development Credit Bank (Q3 FY12)

India Infoline News Service | Mumbai |

DCB’s marginal loan de-growth of 0.2% was disappointing, as we were expecting a 5-6% growth.

CMP Rs39, Target Rs40, Upside 2.6%

  • DCB’s marginal loan de-growth of 0.2% was disappointing, as we were expecting a 5-6% growth. Weak credit growth was mainly driven by a 4.7% decline in corporate advances (21% of Advances) and 2.6% drop in Retail advances (40% of advances). The shrinkage in corporate book was a deliberate effort on the part of the management to bring down the combined level of corporate, personal loans and CV/CE/STVL and also due to the exit of few corporate accounts. As indicated previously, the management maintained its focus towards SME+MSME and Agricultural lending, which sequentially grew by 6.9% and 10.9%, respectively. The sharp rise in Agricultural advances was due to seasonality and will remain elevated in Q4 FY12 as well, in order to meet the Priority Sector Lending (PSL) target. Retail mortgages remained flat sequentially. Management has guided to grow the loan book by 14-15% in FY12. The growth will be driven by Agricultural lending (expected minimum disbursal of Rs2.5-2.6bn in Q4 FY12), SME & MSME and Retail Mortgages.
  • After growing aggressively in first two quarters of FY12, deposits de-grew by 1.1% sequentially as against our expectation of 2-3% growth. This led to a miniscule rise in C/D ratio, from 69% in Q2 FY12 to 70% in Q3 FY12. DCB has strong liability franchise, given its lower reliance on wholesale deposits (10% of deposits). Despite maintaining the interest rate of 4% on Savings account and the high interest rate environment, DCB has been able to sustain its CASA at 33%+. It is confident of maintaining it at 30%+ going forward. Retail deposits rose by 4% qoq, accounting for 51.6% of total deposits as against 49.1% in previous quarter, as it offers a higher rate than market. Bank has started Non-Resident business from Q3 FY12 and will continue to focus on it in months to come.
  • NIM declined by 4bps as compared to our expectation of a 10bps drop. YoA improved by 20bps due to impact of past rate hikes and favorable shift in the loan mix (towards high-yielding SME/MSME segments). YoA would come under pressure in ensuing quarters on account of structural shift in the portfolio towards lower yielding PSL book. On the other hand, CoF would continue to inch up in the next quarter with lagged impact of deposit rate hike kicking in and Retail TDs offering higher interest rates than market. Management expects the CoF to decline post April’2012 as the total Term Deposits will be re-priced by then. Keeping these factors in view, NIM is likely to correct by 15-20bps over the next quarter. Management’s outlook on NIM for FY12 is 3.30-3.35%.
  • Asset quality has improved over the past few quarters owing to a shift towards better quality assets and declining exposure to personal loans, CV/CE/STVL and corporate loans. Fresh additions to NPAs stood at Rs160mn in the current quarter as against Rs110mn in previous quarter, reflecting an increase in delinquency ratio from 1% to 1.5%. These slippages are primarily attributable to the corporate book. As per management, there are no major concerns in the Mortgage and SME/MSME segments. Total Deductions (Recovery, up-gradation and write off-cum-settlement) were Rs200mn, majorly from the Retail portfolio. 
  • Cost/Income ratio declined from 74.6% to 73.8% sequentially due to continued efforts to increase productivity with the existing cost (Retail TD/Branch increased to Rs390mn as compared to Rs375mn in previous quarter). Currently, the bank operates through 82 branches and will add 10 more branches by March 2012. Over the next two years, DCB plans to bring down the C/I ratio to 60%.  
  • Other Income witnessed strong sequential growth of 13.4% owing to healthy growth of 17% in CEB. Also the Bancassurance issues, earlier faced by the bank, have now been settled and started generating income. DCB has appointed a special team to focus on four core areas – Trade income, Bancassurance, Transaction fees and Treasury income. Therefore, management is confident of sustaining the upswing in other income.
  • With Tier-1 capital at 11.15%, DCB is well-capitalized for the planned balance sheet expansion in the medium term. It intends to raise funds but is restricted due to adverse market conditions. The bank has got approvals in place from shareholders for raising Rs3bn via QIP and Rs2.5bn through a rights issue.
  • Factoring in the muted credit growth, increasing proportion of high cost retail deposits and expectation of margin compression in Q4 FY12 (structural shift in lower yielding PSL book), we reduce our target multiple to 1.3x FY13E P/Adj.BV and target price to Rs40. We downgrade the stock to MP. 
Result table
(Rs m) Q3 FY12 Q2 FY12 % qoq Q3 FY11 % yoy
Total Interest Inc   1,835   1,785   2.8   1,402    30.9
Interest expended   (1,238)   (1,194)   3.7   (909)   36.2
Net Interest Inc   597   591   1.0   493   21.0
Other income   262   231   13.4   260   0.9
Total Income   859   822   4.5   753   14.1
Operating exp.   (634)   (614)   3.3   (547)   16.0
Provisions   (69)   (75)   (8.9)   (94)   (26.7)
PBT   156   133   17.4   113   38.8
Tax   -    -   -   (31)   (100.0)
Reported PAT   156   133   17.4   82   91.5
EPS   3.1   2.7   17.3   1.6   91.3
Key  Ratios Q3 FY12 Q2 FY12 % qoq Q3 FY11 % yoy
NIM (%) 3.4 3.4 (0.0) 3.1 0.2
Yield on Advances (%) 12.9 12.7 0.3 11.3 1.7
Cost of Funds (%) 7.2 7.0 0.2 5.8 1.3
CASA (%) 33.1 33.2 (0.1) 33.1 -
C/D (x) 69.6 68.9 0.6 70.0 (0.4)
Non-interest income (%) 44.0 39.1 4.8 52.8 (8.8)
Non-int inc/Int exp (%) 21.2 19.4 1.8 28.6 (7.4)
Cost to Income (%) 73.8 74.6 (0.8) 72.6 1.2
Provisions/Income (%) 0.6 0.7 (0.1) 1.0 (0.3)
CAR (%) 13.0 13.1 (0.1) 13.4 (0.4)
Gross NPA (%) 5.7 5.8 (0.1) 7.1 (1.4)
Net NPA (%) 1.0 1.0 0.1 1.3 (0.3)
Source: Company, India Infoline Research

Financial summary
Y/e 31 Mar (Rs m) FY11 FY12E FY13E FY14E
Total operating income 3,012 3,408 4,018 4,835
yoy growth (%) 20.9 13.1 17.9 20.3
BSE 178.65 [2.35] ([1.30]%)
NSE 178.20 [3.20] ([1.76]%)

***Note: This is a NSE Chart



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