The Indian banking sector is in midst of a perfect storm, grappling with multiple earnings headwinds. Loan growth is decelerating (courtesy elevated CD ratio), margins are set to contract further (with anticipated policy rate cuts) and asset quality is likely to normalise (delayed impact of rate hike cycle; stress in unsecured segment). However, DCB is well-positioned to bravely surmount these challenges. We view DCB will likely serve as a ‘beacon’ of growth, delivering stronger-than-system loans growth and continuing its legacy of doubling the loan book in 3-4 years. Further, its margins are set to expand despite rate cuts, as management tactfully re-calibrates to higher yielding business mix. DCB would also benefit from better fees (higher customer engagement) and improving costs (productivity benefits). While asset quality is likely to normalise, its largely secured book is protecting it from contemporary stress in unsecured loans. Consequently, we think DCB is likely to achieve its target of 1% ROA and 14% ROE by FY27. As sector braces for deceleration in earnings growth, investors would find DCB attractive to own with superior growth profile. Rate Buy with TP of Rs 169.
DCB Bank Ltd – Initiating Coverage – SMIFS Institutional Research
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