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Buy DCB Bank with a target price of Rs... -
Buy DCB Bank with a target price of Rs...
Equirus Securities | Published: 12 Sep, 2017  | Source :

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:

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.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.


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