Downgrade DCB Bank to ‘reduce’

Downgrade DCB Bank to reduce (earlier ‘buy’) with a revised target price of R90 per share (earlier R155) as major shift in strategy to mar return ratios. DCB Bank’s Q2FY16 PAT of R369 million was lower than our estimate owing to higher opex and credit cost. Revenue momentum sustained with NII up >27% y-o-y, above-industry loan growth and stable NIMs. Slippages stood higher at ~2.4%, led by SME segment; while cost/income (C/I) ratio inched up to 61% (57% in Q1FY16). We prune our FY16e and FY17e earnings by 21% and 45%, respectively.

DCB Bank has majorly up-fronted its branch expansion plans (150 branches will be added over next 12 months versus earlier 25-30 branches/year). At 1.7x FY17e P/ABV (post 9% cut in book value) the stock is fairly priced and given near-term subdued earnings.

Superior revenue momentum was sustained on above-industry loan growth and superior NIMs. However, a key regulatory change (switch from average to marginal funding cost to calculate base rate) may hurt NIMs by 30-40 bps over short term.

Slippages were elevated at R620 million (2.4% versus run-rate of 1.7-1.8% in past 8 quarters). The slippages were largely driven by MSME and mortgage segments. No restructuring was done during the quarter on account of which overall stressed assets remained low at <2.5%, rendering comfort.