Our Call. DCB Bank: Buy

After a turnaround in operational performance and a substantial improvement in asset quality, DCB Bank is well poised for its next leg of growth. Over the last five years, the bank has shed its risky, unsecured loan portfolio and shifted its focus to secured lending, led by the home loan segment.

At the current price of ₹81.9, the stock is trading at 1.5 times its one-year forward book value, which is on a par with some other regional banks such as Karur Vysya and ING Vysya Bank.

But DCB Bank traded at a significant premium in 2007-08, before it was de-rated after incurring huge losses in FY 2009 and FY 2010. The stock is likely to get re-rated upwards given its strong financial performance in recent times. For investors with a two/three-year horizon, DCB Bank is a good buy at current levels.

Under a new management since 2009, DCB Bank has shifted its focus towards secured lending. Lending has grown 20 per cent annually over the last five years, driven by the home loan segment, which grew 64 per cent annually during this period. As of June 2014, home loans constituted 38 per cent of the bank’s loans, up significantly from just 8 per cent in FY 2009. Despite the slowdown in the economy, the housing segment continues to deliver steady growth.

The other segment that the bank remains focussed on is the SME (small and medium enterprise) portfolio, which offers banks a large financing opportunity. This segment grew 23 per cent annually over the last five years, and now constitutes 16 per cent of DCB Bank’s loan portfolio. Under the SME segment, it provides collateralised term and working capital loans to companies. About 80 per cent of the SME portfolio is secured, mitigating the risk. Both the SME and the home loan segments will continue to drive the bank’s projected loan growth of 22-24 per cent over the next two years.

The asset quality was a huge concern for the bank in 2008-09, when its gross non-performing assets (GNPA) spiked to 8.8 per cent of loans. By shifting focus to secured lending, it has been able to improve its asset quality substantially over the last five years.

GNPAs have declined sharply to 1.7 per cent of loans. A continued focus on secured lending will help the bank maintain stable asset quality.

Also, as part of its transformation, the bank reduced its dependence on high-cost bulk deposits and instead increased the share of retail deposits. This has helped it improve margins. Retail deposits are now 79 per cent of total deposits as against 67 per cent in 2009.

DCB Bank has a strong presence in the western States, such as Maharashtra and Gujarat. It intends to expand into Tier-II to Tier-VI cities to build its retail deposit base. The bank is well capitalised to fund its next leg of growth. As of June 2014, DCB Bank’s capital adequacy ratio was 13.6 per cent.

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