DCB’s high Q1 growth is matched by steady asset quality, says Nomura

Moneylife Digital Team 17 July 2013

Development Credit Bank added seven new branches during the quarter, taking the total to 101 branches during the quarter, says Nomura Equity Research

Development Credit Bank (DCB) continued its impressive run, with its twelfth consecutive quarter of 50%-plus y-o-y earnings growth helped by steady asset quality, stable NIMs and improved operating leverage, according to Nomura Equity Research. While reported PAT was Rs428 million, even after excluding one-time treasury gains and bad debt recovery, PAT of Rs350 million came in 17% higher than Nomura’s estimate. The bank also added seven new branches during the quarter, taking the total to 101 branches (increase in network of 17% y-o-y).

Key highlights

• Loan growth of 19% y-o-y was driven by a 44% y-o-y increase in the mortgage/LAP portfolio and a 40% y-o-y increase in other retail loans (including gold loans). SME and corporate loans dropped sequentially while agri loans were flat q-o-q. The mix of mortgage/LAP as a percentage of total loans increased to 40% for June 2013, from 33% in 1QFY12. The proportion of SME loans on the books has been easing off gradually. The bank has managed to hold on to its loan yields q-o-q despite this shift in mix.

• CASA (credit account savings account) deposits increased 11% y-o-y, but CASA per branch (on a one year lagged basis) has been flat at Rs270 million over the past few quarters. Nomura expects the CASA ratio to pick up again in FY14F, with the addition of 10 new branches in FY13 and seven in the reporting quarter (including three Tier-1 branches).

• NIM (net interest margin) contracted by 8 basis points (bps) q-o-q despite core spreads staying flat q-o-q on marginally lower LDRs and likely lower yields on its bond portfolio. The retail deposit proportion was 80%. Nomura expects NIM to remain at 3.3%- 3.4% in FY14F.

• While core fee income was steady at Rs224 million, investment book gains of Rs160 million and bad debt recovery of Rs37 million helped to drive a strong earnings beat.

• GNPL (gross non-performing loans) increased by 5% q-o-q, mainly in its corporate book, while the legacy NPLs on the personal and CV (commercial vehicle) loan portfolio continued to decline. On its mortgage book, the GNPL ratio remained low at 85bps (or 122bps assuming a one-year lag). Nomura expects the headline GNPL ratio to decline going into March 2014.

• The quarter also highlighted the impact of operating leverage playing out with the cost-income ratio dropping to 60%, from 73% in Q1FY13.

DCB currently trades at 1.2x our FY14F ABV and 9x Nomura’s FY14F EPS forecasts. At the target price of Rs60, DCB would trade at 1.4x FY14F ABV of Rs42.6 and 10.9x FY14F EPS of INR5.5 for an ROA of 114bps, said Nomura in its concluding remark.

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