Continues to reclaim its great growth legacy. Set to deliver improving returns.
DCB had a remarkably strong quarter with 3Q net profit of Rs 1,514m +20% YoY, +3%/+10% above SMIFS/Consensus estimates. This is amidst a very tough industry environment of decelerating loan growth, liquidity challenges, and contracting margins. DCB put on a strong show with loans growth at 23% YoY, double the system growth. NIMs expanded 3bps QoQ as lending yields surged driven by improved business mix towards higher yielding business loans. Deposit growth was also sound at +20% YoY while CASA ratio came off only marginally to 25.1%. Core fee income continued to remain robust. Opex line exhibited a QoQ decline after years of escalation, driven by improved productivity and reduction in headcount. However, credit cost was higher at 38bps driven by MFI slippages as the segment remains stressed. We maintain our rating (Buy) and view that 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 particularly attractive to own with superior growth profile
Robust loan growth of ~2x industry. DCB printed a very strong loans growth of +23% YoY/ +7%QoQ driven by its focus segments: co-lending, gold loans, mortgage and AIB. Notably, Co-lending had a remarkable growth of 52% QoQ as one of DCB’s key co-lending partners has resumed gold loans disbursements (after the RBI ban was lifted last quarter). Further, as Microfinance segment remains stressed, a lot of rural demand is now being shifted to gold loans. MFI+BC book continued to decline, similar to the last two quarters. We view DCB is likely to continue clocking robust loans growth of ~20%+ for next 3 years, even as industry slows down. Solid deposit growth of 20% YoY provides it enough funding firepower to sustain its superior growth.
Margin expanded as management continued re-calibrating towards higher yielding business mix. NIMs inched up +3bps QoQ to 3.30% driven by higher advances yield of +5bps QoQ offsetting +3bps uptick in cost of funds. We view NIMs are likely to still improve countercyclically as management continues to move towards higher yielding business loans, which is likely to offset the impact on anticipated rate cuts
Strong non-II as higher engagement strategy delivers. Other income increased +49% YoY/-10% QoQ. While core fee remained robust, DCB also had elevated treasury gains. We view DCB is likely to have continued core fee uplift from higher engagement strategy as well as strong treasury income (as rate cycle turns), which could help non-II maintain 1% of assets level near term.
Opex declined on QoQ basis after 13 quarters of escalation. After years of capacity building, the productivity benefits have started seeping in with costs down -1% QoQ. Aside from productivity benefits, the other key reason was headcount reduction of 571 employees. DCB has raised costs targets to ≤ 60% CTI (earlier ≤ 55%) and 2.5% -2.6% costs % avg assets (earlier 2.4% -2.5%) in near term. Management said this is just to break the earlier long-term target to piecemeal near term targets. Long term ambition and goals on CTI remains intact. Overall, we expect cost growth to be lower than the operating income growth.
But, asset quality continues to normalise upwards. Credit costs were higher at 38 bps (vs 27 bps in 2Q) driven by higher slippages from microfinance. Also, there was uptick in NPA ratio from mortgage, which management attributed to sourcing quality in prior quarter.
Improving Returns Profile. Maintain Buy and TP at Rs 169. We view DCB is set to deliver returns and could possibly become a 1% ROA/14% ROE bank by FY27 with sustainable earnings drivers (link to our recent initiation report: DCB is set to reclaim its great growth legacy). As investors digest the consistent improvement in DCB’s return over the next few result cycles, it’s likely to be re-rated. We view it’s quite attractive at 0.5x book for a potential 1% ROA/ 14% ROE bank. We view DCB will continue to serve as a ‘beacon of growth’ amidst industry slowdown, translating into a better than index performance. We have made very minor changes to earnings.
DCB Bank Ltd – Q3FY25 Result Update – SMIFS Instituional Research
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