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Development Credit Bank Q2FY13 results update

Contributed by Nirmal Bang

Development Credit Bank (DCB)’s results were broadly in line with estimates with PAT increasing by 66.4% YoY and 17% QoQ to Rs 22.1 cr. The improvement efforts of the bank are yielding results in the form of traction in the banks fee income and controlled credit cost. DCB’s operational restructuring is expected to improve cost efficiency. We expect RoE and RoA for the bank to show a continuous improvement (RoE from 7.7% in FY12 to 11.3% in FY14E and RoA from 0.7% in FY12 to 1.0% in FY14E). At current levels the stock is trading at attractive levels (PE of 11.94x and 9.7x of FY13E and FY14E EPS & at P/ABV of 1.19x and 1.06x of FY13E and FY14E respectively) and therefore we continue to maintain BUY rating on the stock. Our target price for the stock is Rs 65 based on P/ABV multiple of 1.5x on FY14E Adj book value of Rs.43.4 per share.

- NIM’s increase aided by lower cost of funds
Net Interest Margin (NIM) improved sequentially to 3.24% vs 3.18% in Q1FY13 as the cost of funds witnessed decline. Going forward, Management expects to witness improvement in NIMs driven by strong growth in advances towards the end of the quarter and declining cost of funds. We expect NIMs to improve to 3.3% for FY13E and 3.4% for FY14E.

- Non-interest income flattish on sequential basis
Non Interest Income was flat on sequential basis but increased YoY by 17.3% to Rs 27.5 crs. The bank is witnessing traction in its core fee income which increased both QoQ and YoY. However, lower treasury gains led to flattish growth on sequential basis. We expect non-interest income to grow 17.1% and 13.8% in FY13E and FY14E respectively.

- Improvement in cost to income ratio
The cost to income ratio of the bank stood at 71.9% as compared to 74.6% in Q2FY12 and 72.8% in Q1FY13. We expect cost to income ratio to come down to 68.5% in FY13E and 65.3% in FY14E driven by cost efficiencies.

- Asset quality continues to show improvement
The asset quality showed a significant improvement with Gross NPA in absolute terms declining by 13.3% YoY and 4.3% QoQ. Gross NPA ratio and Net NPA ratio were at 3.86% and 0.68% respectively in Q2FY13. Fresh slippages stood at Rs 11 cr vs Rs 20 cr in Q1FY13. The slippages during the quarter pertain to 4 accounts in the SME and MSME loan book. Going forward, the bank does not expect any major stress on its asset quality in its retail and SME book. We expect the bank’s GNPAs to come down to 3.7% in FY13E and 3.23% in FY14E.

- Loan book grows both sequentially and YoY
DCB reported growth both on QoQ and YoY basis (+ 31.4% YoY and 4.1% QoQ) at Rs 5,671 cr driven by all the segment of the banks be it corporate banking, mortgage and SME book. The bank has recently forayed in gold loan portfolio which constituted 1% of the loan book. Management has mentioned that the pipeline for the SME book continues to remain strong. We have factored in 23.0% growth in advances in FY13E and 21.9% growth in FY14E.