Buy Development Credit Bank; target of Rs 65: Nirmal Bang

Nirmal Bang is bullish on Development Credit Bank (DCB) and has recommended buy rating on the stock with a target of Rs 65 in its October 15, 2012 research report.

“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).”

“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.  DCB reported growth both on QoQ and YoY basis (+ 31.4% YoY and 4.1% QoQ) at Rs 5,671 cr. The growth came across all the segments; corporate banking segment (3.95% QoQ and 37.9% YoY), bank’s mortgage book (+8.9% QoQ and 27.9% YoY). Bank’s SME and micro SME segment increased 7.1% QoQ and 37.2% YoY. Management has mentioned that the pipeline for the SME book continues to remain strong. Apart from entering into CV financing DCB has also forayed in Gold loan portfolio. The gold loan contributed around 1% of the total loan book and the book size stands lower than Rs 100 cr. Management targets loan book to grow at 25% for FY13E. We have factored in 23.0% growth in advances in FY13E and 21.9% growth in FY14E.  Deposits grew at 14.0% on YoY and 4.5% on QoQ basis. Credit to deposit ratio stood at 79.8% in Q2FY13.”

“The improvement efforts of the bank are showing results in the form of traction in the banks overall profitability driven by NII, fee income and controlled credit cost (expected range 0.5% for FY13E). We believe that the bank will thrive on improvement efforts over the next couple of years. Moreover, 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).  We believe that at current levels the stock is trading at attractive levels 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 its FY14E adjusted book value of Rs.43.4 per share,” says Nirmal Bang research report.

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