Buy DCB Bank; target of Rs 238: Bonanza

Bonanza's research report on DCB Bank

Recently stock price of DCB Bank Ltd. (DCB Bank) corrected by ~9% from Rs.213, despite reporting healthy quarterly numbers both on balance sheet and profitability fronts in the recent quarters.  During FY08-11, DCB bank was in consolidation phase with only ~85 branches and credit book at flat ~Rs.42,000mn. Post FY11, the credit book grew nearly 4 times from Rs.42,714mn in FY11 to Rs.158,180mn in FY17 implying 24.4% CAGR. DCB Bank has steadily shed its risky unsecured loan book in the past couple of years while loan growth is now contributed by mortgage, which now comprises ~45% of total credit. Going ahead, with aggressive branch expansion and focus on growing the loan book, the management has guided at doubling the bank’s balance sheet in three to four years. We expect all segments including agri, corporate, SME & retail to contribute towards this credit growth with major focus on mortgage/SME segment and selective lending in corporate loans. We estimate the credit book will grow at over 20% credit CAGR in FY17-19E.  Considering new bank license and small bank license, DCB Bank has announced a shift in its strategy from stable growth to aggressive expansion in Q2FY16. Consequently, it is looking to increase its branch network by ~50% to more than 300 till December 2017 from existing branch network of 262. Headcount will also be increased ~50% to 5,400- 5,800 from 3,800 in Q2FY16. The bank aspires to invest heavily in customer facing technology to tackle competition from emerging players. Consequently, the cost to income ratio started rising and increased to 60.9% in Q1FY17. However, it started cooling off and reached to 57.2% in Q1FY18 and we expect that after H1FY18, post the completion of branch expansion plan the cost to income ratio will fall and return ratios will improve as the benefit of all these new branches will be visible. This investment of the bank will lead to healthy returns in the long run.

Outlook

The management of DCB Bank has shifted its focus to secured lending across diverse segments, while maintaining a consistently large share of retail deposits during FY10-16. The strategy paid off with improved credit quality, expanded risk-adjusted NIMs and better profitability as well as capital adequacy. DCB Bank’s corporate book now forms only 16% of its total loan book of Rs.144bn, which is fallen from 20% in Q4FY15, indicates that the bank is shifting its focus from relatively low-yielding corporate book to retail funding, SME banking, and small-ticket loans. We believe with the constant focus on retail and SME banking would help DCB Bank to improve its loan book and would lend stability to asset quality.

For all recommendations report, click here

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Read More