Buy DCB Bank; target of Rs 140: Emkay

Emkay Global Financial Services report on DCB Bank

“We initiate coverage on DCB Bank with a Buy rating and a target of Rs140. We expect its prudent business growth strategy, focused network expansion and superior asset quality to drive 1.2% ROA (post tax) over FY15-17E. With a proven management team and high capital adequacy, the bank is well positioned to exploit profitable business opportunities in its next growth phase. Over FY10-14, DCB Bank’s management shifted its focus to secured lending across diverse segments, while maintaining a consistently large share of retail deposits (~81%). This strategy paid off with improved credit quality, expanded risk-adjusted NIMs and better profitability as well as capital adequacy. Following up on this strategy, we estimate a 28% CAGR in business over FY14-17E, fuelled by mid-corporate, SME, agri-business and priority sector lending. The bank’s high secured loan exposure entails low overall risk weights in the computation of capital adequacy, thereby reducing the strain on tier-1 capital for asset growth.”

“To compete with larger banks and establish itself, the bank’s distribution strategy is focused on tier II-VI centres in Odisha, Madhya Pradesh, Chhatisgarh and Rajasthan. This is likely to propel advances growth in chosen segments of MSME and agri business. Additionally, as seen in our state-wise analysis of CASA distribution, the bank has strategically planned its branch expansion in states with good potential for CASA mobilization. As the branch expansion entails low-cost structures, it is likely to aid faster breakeven and better productivity. With continuous monitoring, robust credit appraisal and limited exposure to consortium lending and troubled segments, the bank’s asset quality is one of the best in the sector. Over time, the bank has also reduced its concentration risks, both in advances and deposits. The management’s track record in managing asset quality is commendable, especially in the difficult macroeconomic environment seen over FY10-14. Given this backdrop and a likely pick-up in economic activity, we expect stable credit costs and asset quality to sustain over FY15-17E, driving further profitability.”

“We expect robust profitability (1.2% RoA post-tax) over FY15-17E, led by the bank’s prudent business growth strategy, focused network expansion and superior asset quality. We initiate coverage with a Buy rating, and expect the stock to sustain its premium valuations led by stronger business growth, high asset quality and greater capital adequacy ahead. Our target price of Rs140 is based on the two-stage dividend-discount model (CoE: 15.9%; beta: 1.2; Rf: 7.5%). Risks: Change in management, sharp rise in credit costs due to sluggish economic recovery, irrational competition from large banks”, says Emkay Global Financial Services research report.

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