Hold DCB Bank; target of Rs 120: ICICI Direct

DCB Bank reported bottomline at Rs 51 crore (Rs 48.5 crore in Q2FY17), above our estimate of Rs 46.5 crore, led by higher PPP. NII growth remained healthy at 31% YoY to Rs 209.5 crore, led by higher credit growth. Led by treasury gains, other income growth also remained healthy at 36% YoY to Rs 64.1 crore. Higher PPP was partly offset by an increase in provision expense at Rs 30.6 crore (I-direct estimate: Rs 19.9 crore). With the base effect of higher operating expense fading, PAT growth was reported at 25% YoY.

DCB Bank reported a healthy performance in terms of growth and profitability, maintaining overall asset quality. However, the strategy to expand the bank’s reach at an aggressive pace doubling branch count to 300+ by December 2017, formulated in FY16E, is expected to keep return ratios suppressed in the medium term. In addition, we do not rule out increase in delinquencies in the after maths of demonetisation. Consequently, we largely maintain our estimate and expect PAT CAGR at 14% to Rs 254.6 crore in FY17-18E. RoA is expected at 1% in FY17-18E. Therefore, we maintain our target price at Rs 120 per share, assigning multiple of 1.7x FY18E ABV. We maintain our HOLD recommendation.