Why DCB Bank Is Axis Sec’s Top Pick of The Week Despite Weaker Asset Quality?

The brokerage firm Axis Securities has picked DCB Bank with a 'Buy' rating as its top picks for the week despite the bank posted muted Q1 performance with weaker asset quality.

DCB Bank Q1 Results

In Q1FY24, DCB Bank's consolidated net profit jumped by 31% to Rs 127 crore from Rs 97 crore in the same quarter previous year. The bank's net interest income (NII) climbed by 24.7% to Rs 470.7 crore in the first quarter of the current fiscal year from Rs 374 crore in Q1FY23. The total income in Q1FY24 increased 24 per cent to Rs 578 crore, compared to Rs 466 crore recorded in the same quarter of FY23.

The bank's gross non-performing assets (GNPA) climbed sequentially from 3.19 percent in the January-March quarter of fiscal 2022-23 or Q4FY23 to 3.26 percent in Q1FY24. The bank's net non-performing assets (NNPA) climbed sequentially, from 1.04 percent in the January-March quarter of fiscal 2022-23 to 1.19 percent.

On June 30, 2023, the provision coverage ratio (PCR) was 77.07 percent, and PCR without taking into account the gold loans NPAs was 77.4 percent. According to Basel III standards, the capital adequacy ratio was 17.09%, with tier I at 14.78% and tier II at 2.31%.

DCB Bank Fundamental Analysis

"Owing to seasonal weakness in Q1, disbursements moderated by 16% QoQ, with muted disbursements in the SME/MSME Segment. However, the management expects the disbursement growth momentum to pick up in the coming quarters and remains confident of doubling the bank's balance sheet over the next 3-4 years. Credit growth hereon will be driven primarily by Mortgages, SME/MSME, and AIB segments. Similarly, the bank remains focused on building a retail-led deposit franchise. DCB will look to improve its CASA ratio to 30%+ over time. We expect DCB to deliver healthy credit/deposit growth of ~18/17% CAGR over FY23-25E," said Axis Securities in a note.

"In Q1FY24, GNPA inched up by 7bps QoQ owing to higher slippages (slippage ratio of 4%, a bulk of which were from the restructured book of the mortgage segment) and slower pace of recoveries (seasonal phenomena). While gold slippages will continue to remain elevated owing to daily NPA tagging guidelines by the RBI, the management believes that it does not seem to be a cause of concern. The management remains confident of improving the pace of recoveries in the coming quarters and expects no major stress for the balance restructured pool," said Axis Securities.

"NIMs contracted by 35bps in Q1FY24. owing to a sharp rise in CoF and a slight contraction in yields due to shift in portfolio mix. The management has indicated that the yields should normalize as the growth in the core segments picks up. Additionally, the pace of increase in CoF in the coming quarters should decelerate, thereby arresting the pace of margin contraction.

Thus, NIMs are expected to range between 3.7-3.75%, with efforts to maintain margins at the upper end of the band. Even as the bank continues to make investments towards the franchise and capacity building, the management remains confident that improving productivity will support cost ratio improvement (C-I Ratio expected to improve to 55% over the medium term). Even as margins compress, we believe moderating Opex ratios and steady credit costs should enable DCB to deliver RoA/RoE of 0.9-1%/11-13% over FY24-25E," said Axis Securities.

DCB Bank Share Price Target

"We recommend a BUY rating on the stock with a TP of Rs 131, implying an upside of 10% from CMP," said Axis Securities.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.