Hold DCB Bank; target of Rs 184: Edelweiss

Edelweiss' research report on DCB Bank

DCB Bank’s (DCB) Q2FY18 PAT at INR589mn (up 21.5% YoY) belied our estimate on lower-than-expected non-interest income (lower investment profit). Key highlights: a) yet another quarter of >30% NII growth; b) slippages were contained at 1.9% (~2.0% past 8 quarters’ run rate), with credit cost curtailed at sub-80bps; and c) opex continued to be elevated on sustained branch expansion (cost-to-income ratio at >60%), restricting core profitability. DCB is at the fag end of its branch expansion exercise and operating leverage benefits are now likely to be apparent. We believe, despite strong revenue momentum, RoE will be sub-par (at 11-12%) due to high cost ratios and recent capital raising, entailing limited upside from current level. Maintain ‘HOLD’.

Outlook

While revenue traction has been softer than we would prefer, asset quality lends comfort. Estimating >28% plus earnings CAGR over FY17-19 with operating leverage benefits, we value DCB at 2.2x FY19E ABV for an RoE potential of 11-12%. This yields   target price of INR200. Monitorables are: 1) blip in productivity could mar revenue traction; b) adverse impact of GST on MSME segment; and c) rising NPLs in the LAP segment.

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