We recently met the management of DCB Bank (DCB) and key takeaways are:
(1) Despite intense competition, focus remains on maintaining healthy asset quality.
(2) The bank intends to double its balance sheet in the next 3.5 years driven by growth in small-ticket loans.
(3) Productivity improvement from newly-added branches would bring down the C/I ratio.
(4) DCB is offering SA interest rates of 6.5% on daily balance above Rs 50mn to government departments.
(5) Filings of the New York State Dept of Financial Services (DFS) to fine Habib Bank Limited have no implications on DCB.
We have an ADD rating with an ERoE-based TP of Rs 210 set at a 2.5x Sep’18 ABV of Rs 86.Competitive pressures remain elevated: Given increasing focus of FIs on small-ticket collateralized loans, competitive intensity remains high with higher leverage and/or lower rates being offered. For good customers, DCB is willing to reduce interest rates ; the bank remains focused on maintaining asset quality, often leading to a run-down of loans if higher leverage is offered by competition.
Balance transfer out of DCB’s books is ~25%. DCB has tied up with a service provider to assist its borrowers for smooth transition towards GST compliance for a monthly fee.
Valuation & view:
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Given that 86% of DCB’s mortgage borrowers are self-employed, it could see some increase in mortgage NPLs in 2QFY18 due to the GST impact. However, we believe eventually, loss given defaults would be contained. Moreover, DCB has floating provisions of ~Rs 440mn. We have an ADD rating with an ERoE-based TP of Rs 210 corresponding to a 2.5x Sep’18 ABV of Rs 86.