Buy DCB Bank; target of Rs 140: Kotak Securities

Kotak Securities' report on DCB Bank

Another strong quarter with PBT growing 37% yoy (PAT grew 61% yoy) on the back of strong revenue growth (32% yoy) and stable cost-income ratio (61%). Loan growth was strong at 29% yoy and there is a strong shift towards balance sheet growth compared to impairment ratios. We maintain our positive view (TP at Rs 140, unchanged) given the bank’s healthy tier-1 ratio, low impairment ratios, high growth phase and strong execution. DCBB is one of our preferred small-cap banks.

DCBB reported 61% yoy growth in earnings (PBT grew 37% yoy) on the back of 32% yoy revenue growth. NII grew 30% yoy on similar loan growth. NIM was maintained at 3.7% but we see funding costs easing; this should be a significant tailwind for the bank considering its weak low-cost liability franchise. Strong contribution from treasury and recovery boosted noninterest income growth (38% yoy). Slippages were a bit higher, primarily from the corporate segment but sale of select SME loans resulted in a decline in headline NPL ratios.

"We maintain our BUY rating and value the bank at Rs 140 (unchanged), at 2.2X book and 16X EPS for RoEs in the range of 13-14% with strong earnings CAGR of 17-20% over the next few years. Despite the recent outperformance, we still think DCBB is a good bank to own. Given its size, we are not too worried about lofty valuations even though they are on the higher side; however, we see DCBB as a good compounding story for the next few years. A strong tier-1 ratio, low impairment risks, high growth phase and strong execution of the current management makes it one of the best amongst peers. DCBB continues to remain our preferred mid-cap pick", says Kotak Securities research report.

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