Buy DCB Bank Ltd for the Target Rs.165 by Axis Securities Ltd
NIMs Managed Well, Credit Costs Disappoint; Growth Outlook Intact!
Est. Vs. Actual for Q1FY26: NII – INLINE; PPOP – BEAT; PAT – BEAT
Changes in Estimates post Q1FY26
FY26E/FY27E (in %): NII: -2.6/-2.1; PPOP: +0.2/-0.7; PAT: -10.7/-2.6
Recommendation Rationale
• NIMs Well-Managed; Sharper Decline in CoD to Aid NIMs: In Q1FY26, DCB’s contraction in NIMs was well-managed, supported by a sharp decline (16bps QoQ) in CoD. The bank has taken an additional SA rate cut, which should reflect in CoF in the coming quarter, thereby aiding NIMs. To minimise the impact of the rate cuts on margins, the bank consciously pursued growth in smaller tenor fixed-rate loans (co-lending and gold loans). While near-term NIMs will face pressures with the impact of the Jun’25 repo rate cut reflecting on the yields, a gradual downward repricing on TDs and SA deposits should partially cushion the fall in NIMs. Moreover, the bank will be looking to accelerate growth in the better-yielding LAP segment vs Mortgages to further aid NIM improvement.
• Credit Costs Expected to Moderate: In Q1, slippages were higher primarily on account of higher flows from the MFI, unsecured DA, small ticket size secured DA and Gold portfolio. While the bank remains confident of recoveries from the gold slippages despite the higher slippages, the secured DA portfolio has cropped a negative surprise. The management expects the pain in the MFI portfolio will continue for another couple of quarters. During the quarter, elevated credit costs were on account of one-time accelerated provision towards NPA stock of MFI and unsecured DA loans as on Mar’25, as a prudent measure. Going ahead, the management expects credit costs to be capped at <45bps over FY26, with the limited exposure of the secured DA book and incremental flows from the unsecured flows remaining manageable. On a steady state basis, credit costs are expected to be contained at 45-55bps.
• Growth Buoyancy to Continue: The bank has been clocking healthy credit/deposit growth over the past few quarters, largely led by co-lending, while the mortgage book growth has taken a breather. This was owing to accelerated growth being pursued in the short-term fixed rate products to manage NIMs. Hereon, as the visibility on further sharper rate cuts remains low, the bank will resume its growth journey in the Mortgage, SME and LAP segments. Going forward, co-lending will contribute <15% to the portfolio mix over FY26. The bank has strengthened its SME team to tap the opportunity amongst the graduating SME customers (higher ATS of Rs 3- 10 Cr), to ensure lower customer attrition. Furthermore, the bank remains optimistic about the construction finance vertical and is comfortable growing the segment at 30%+. Thus, with growth in the core segments picking up, we expect DCB to deliver a healthy credit growth of 21% CAGR over FY25-28E.
Sector Outlook: Positive
Company Outlook: With demand visibility remaining strong in the target customer segment, along with the bank’s efforts to push growth in the higher-yielding segments, DCB remains well-poised to drive healthy business growth. The bank is well-poised to deliver an aspirational RoA of 1% by FY27, supported by (1) Steady to improving NIMs, (2) Strengthening Fee income profile, (3) Gradual Moderation in Opex ratio with improved efficiency and productivity, and (5) Range-bound credit costs. We expect DCB’s RoA/RoE to improve to 1%/14-15% over FY27-28E vs 0.8%/11% in FY26. Current Valuation: 0.8x FY27E ABV; Earlier Valuation: 0.75x FY27E ABV Current TP: Rs 165/share; Earlier TP: Rs 160/share Recommendation: We maintain our BUY recommendation on reasonable valuations. Alternate BUY Ideas from Our Coverage City Union Bank (TP – Rs 270); IDFC First Bank (TP – Rs 83)
Financial Performance:
? Operational Highlights: Disbursements grew by 28/-5% YoY/QoQ. Advances growth stood at 21% YoY/flat QoQ. Deposits growth outpaced credit growth and stood at 20/3% YoY/QoQ, led by TDs, which grew by 23/5% YoY/QoQ. CASA Deposits grew by 10/-2% YoY/QoQ. CASA Ratio contracted to 23.3% vs 24.5% QoQ. C-D Ratio stood at 82.6% vs 85% QoQ.
? Financial Performance: NII growth was healthy at 17/4% YoY/QoQ supported by strong growth and better-than-expected performance on NIMs (down 9bps QoQ). NIMs stood at 3.2% vs 3.29% QoQ. CoF declined by 16bps QoQ, while yields declined by 30bps QoQ. Non-interest income grew by 65/8% YoY/QoQ, primarily led by treasury gains of Rs 101 Cr vs Rs ~43 Cr QoQ. Opex growth was under check mainly owing to lower other expenses (flattish QoQ) while employee opex was higher 8% QoQ. Driven by fairly healthy topline growth, the C-I Ratio improved to 60.0% vs 67.9/60.7% YoY/QoQ. PPOP growth was strong at 59/7% YoY/QoQ. Provisions came in higher than expected, with credit costs at 90bps (calc.) vs 54bps QoQ. Earnings growth was healthy at 20% YoY, though it declined by 11% QoQ.
? Asset Quality remained steady at 2.98/1.22% vs 2.99/1.12% QoQ, despite elevated slippages. Slippage ratio stood at 4.5% vs 3.6/3.0% YoY/QoQ. Slippages are higher likely from the agri pool (seasonal). Recoveries were healthy, keeping asset quality stable. PCR stood at 74%, flat QoQ
Key Highlights
Opex Ratios to Remain Range-bound: DCB has reduced its headcount by 800 mainly from the frontline operations, depsite which the bank has reported healthy growth and productivity gains. Going ahead, the bank plans to add 600-700 people across functions. The bank also plans to add 20-25 branches in FY26. The management has guided for the CA Ratio of <2.5% is trending towards it. We expect the C-A ratio to range between 2.4-2.5% over FY26-28E.
Outlook
We factor in healthy business growth momentum and pen down Credit/Deposit growth of 21% CAGR each over FY25- 28E, thereby enabling the bank to maintain a steady LDR ranging between 84-85%. With the strategic initiatives taken towards margin improvement, we believe DCB will weather near-term challenges and see a gradual improvement in NIMs over the medium term. Factoring in near-term NIM headwinds and higher credit costs, we trim our NII/Earnings estimates by ~2-3%/3-11% over FY26-27E. We expect RoA scale-up to 1% by FY27E. We expect DCB to deliver a healthy Advances/NII/Earnings growth of 21/21/26% CAGR growth over FY25-28E.
Valuation & Recommendation The stock currently trades at a valuation of 0.65x FY27E ABV, and we value the stock at 0.8x FY27E ABV and arrive at a target price of Rs 165/share, implying an upside of 23% from the CMP. We maintain our BUY recommendation backed by reasonable valuations.
Key Risks to Our Estimates and TP
• The key risk to our estimates remains a slowdown in overall credit momentum, which could potentially derail earnings momentum for the bank.
• Inability of the bank to mobilise deposits, which could potentially derail credit growth or hamper margins
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