SECTOR: FINANCIAL
DCB Bank
STOCK INFO.
BLOOMBERG
BSE Sensex : 26443
S&P CNX : 7905
DEVB.IN
REUTERS CODE
27 August 2014
Initiating Coverage
(INR CR)
BUY
INR83
DCBA.NS
Y/E MARCH
FY13
FY14
FY15E
We recommend to BUY DCB Bank for a target of INR110 (P/B
of 2.3x on FY15E adjusted book value per share).
INVESTMENT ARGUMENT:
NII (INR Cr.)
OP (INR Cr.)
NP (INR Cr.)
EPS (INR)
EPS Growth (%)
BV/Share (INR)
P/E (x)
P/BV (x)
ABV/Share (INR)
P/ABV (x)
RoE (%)
RoA (%)
284
126
102
4.1
78
38
20
2.2
36
2.3
11.7
1.0
368
188
151
6.0
48
44
14
1.9
41
2.0
14.8
1.3
477
275
181
7.2
20
51
11
1.6
48
1.7
15.2
1.3
On the comeback trail:
DCB's management team was replaced by
a new team led by Mr. Murali Natrajan in April 2009. DCB's new
management restructured its balance sheet, improved underwriting
standards with more focus on secured loans and other stringent criteria
for loan approvals. After undergoing structural transformation, the bank
has all the enablers in place to tread the growth path.
Marked improvement in asset quality:
NPA have showed steady
improvement over FY10-14, with GNPA falling from 8.8% in FY09 to
1.7% in FY14. Provision Coverage Ratio (PCR) also improved
significantly from 48% in FY08 to 81% in FY14. Further, stringent
risk management, low unsecured portfolio, modest risky sector exposure
and smaller ticket size, provides comfort on asset quality.
Advances to double in three years:
DCB's overall credit has
registered 24% CAGR in last three years primarily driven by mortgage
& mid-corporate segments, which posted 43% & 23% CAGR,
respectively over the same period. The mortgage segment (40% of
advances) is highly under penetrated and offers robust growth
opportunities. DCB strategically targets self-employed customers, given
its huge potential (51% of total workforce) and relatively high yields.
We expect DCB to double its advances book in the next 3 years
translating to a CAGR of 25%.
Improved NIMs to sustain:
DCB's NIMs have improved from
2.80% in FY10 to 3.56% in FY14 led by (1) Increasing share of retail
term deposits in place of high cost wholesale deposits; and (2) Shift in
loan book from unsecured personal loans and unsecured corporate
loans towards low risk high yield segments like mortgages and secured
mid-corporates. The management is confident of maintaining NIM's
above 3.3% in coming years.
Valuations and View:
KEY FINANCIALS
Shares Outstanding (Cr)
Market Cap. (INR Cr)
Market Cap. (US$ M)
3 yrs NII Growth to FY15E (%)
Past 3 yrs NP Growth (%)
25.03
2,078
346
28%
49%
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders (as of Jun'14)
Promoter
Non Promoter Corp Holding
Public & Others
Average Daily Turnover(6 months)
Volume
Value (INR mn)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
262,207
18.7
27/63/104
14/6/17
18.5
29.1
52.5
88/38
Maximum Buy Price: INR87
DCB's current valuations of 1.7x FY15E P/ABV and 11x FY15E P/E
do not reflect the bank's ability to scale up its redefined business model.
We attach a fair P/ABV multiple of 2.3x FY15E, a 25% premium to
comparable peers (small to medium sized banks) owing to higher
advances growth, superior NIM, improving asset quality, robust earnings
growth and improvement in return ratios. We recommend to BUY for
a target price of INR110 - potential upside of 32%.
Jehan Bhadha
(jehan.bhadha@motilaloswal.com); Tel:+912233124915

DCB Bank
CONCERNS
Non-interest income to remain a drag:
Non-interest income has remained a disappointing factor
for the bank. Non interest income has grown at 18% CAGR over FY12-14. As the bank has shifted
its focus from large corporates to mortgages, core fee income has suffered over the years. Non-
interest income to total income has declined from 50% in FY08 to 27% in FY14. As advances
growth is likely to be strong going ahead followed by stable margins, we expect the ratio to decline
going ahead as well.
Promoter stake likely to be reduced:
The promoter stake in the bank is currently high at 18.5%
and needs to be reduced down to 10% as per RBI directives. However the bank is currently in talks
with RBI to extend the timeline for diluting the promoter stake.
New Bank Licenses to increase competition:
New bank licenses can be a major threat to DCB
as there will be several new generation private sector banks which will add on to the existing competition
of DCB.
Rise in tax rates to restrict profit growth and return ratios in near term:
With tax benefits on
accumulated losses likely to end in the current year, tax rates are expected to rise to 18% in FY15
and full tax rates shall be applicable from FY16. This is likely to restrict profit growth over FY14-
16E to 16% as compared to 42% growth in profit before tax. The RoE which increased from 8% in
FY12 to 15% in FY14 is expected to remain at these levels until FY16 owing to the increase in tax
rates. However, we expect RoE to resume its uptrend post FY16.
BACKGROUND
DCB Bank is a modern emerging new generation private sector bank with 130 plus branches across
17 states and 2 union territories. DCB Bank has deep roots in India since its inception in 1930s. Its
promoter and promoter group the Aga Khan Fund for Economic Development (AKFED) & Platinum
Jubilee Investments Ltd. hold 18.5% stake. AKFED is an international development enterprise
dedicated to promoting entrepreneurship and building economically sound companies. DCB Bank
was converted into a Scheduled Commercial Bank in 1995, in the wake of India's economic
liberalization. It is the only co-operative bank, which successfully crossed over as a private bank.
PEER VALUATION
ADVANCES GROWTH
PEER COMPARISON
FY14-16E
GNPA
NIM
FY14
ROA
ROE
FY15E
P/ABV
P/E
City Union Bank
Karur Vysya Bank
ING Vysya Bank
Indusind Bank
Federal Bank
South Indian Bank
Average
DCB Bank
15%
21%
24%
19%
17%
16%
19%
25%
1.8%
0.8%
1.8%
1.1%
2.5%
1.2%
1.5%
1.7%
3.5%
2.6%
3.5%
3.7%
3.3%
3.0%
3.3%
3.6%
1.4%
0.9%
1.3%
1.8%
1.2%
1.0%
1.3%
1.3%
19.1%
13.4%
10.9%
17.5%
12.8%
16.0%
14.8%
14.8%
2.0
1.5
1.8
3.2
1.5
1.2
1.8
1.7
11.1
9.0
15.2
16.8
10.4
6.8
11.6
11.4
Source : Bloomberg estimates used for peer banks
27 August 2014
2

DCB Bank
IVRCL: Financials and Valuation
Financials and valuation
Income Statement
Y/E March
Interest Income
Interest Expenses
FY12
717
489
228
20%
100
328
9%
244
84
-3%
29
55
0
0%
55
158%
FY13
916
632
284
25%
117
401
22%
275
126
50%
24
102
0
0%
102
85%
FY14
1,128
760
368
30%
139
507
26%
319
188
49%
37
151
0
0%
151
48%
FY15E
1,356
878
477
30%
164
641
26%
366
275
46%
53
222
40
18%
181
20%
(INR Cr)
FY16E
1,605
1,012
593
24%
193
786
23%
419
367
34%
61
306
104
34%
202
11%
Expect 27% NII CAGR
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
FY14-16 PBT CAGR of 42%
FY14-16 PAT CAGR of 16%
owing to increase in tax
rates.
PBT
Tax
Tax Rate (%)
Profit After Tax
Change (%)
*Core PPP is (NII+non interest income-Opex)
Balance Sheet
Y/E MARCH
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Other Borrowings
Total Deposits and Borrowings
Other Liabilities
Total Liabilities
Balance with RBI
Investments
FY12
241
618
861
6,336
13%
2,035
3%
1,123
7,459
367
8,687
457
2,518
5,284
185
244
8,687
FY13
250
750
1,003
8,364
32%
2,272
12%
1,526
9,889
386
11,279
883
3,359
6,586
239
211
11,279
FY14
250
901
1,154
10,325
23%
2,581
14%
860
11,185
584
12,923
690
3,634
8,140
239
221
12,923
FY15E
250
1,082
1,335
12,262
19%
3,066
19%
1,123
13,386
857
15,578
718
4,099
10,257
239
266
15,578
(INR Cr)
FY16E
250
1,284
1,537
14,333
17%
3,583
17%
1,374
15,707
1,229
18,472
753
4,345
12,821
239
315
18,472
Expect 25% loan CAGR over
FY14-16
Loans
Net Fixed Assets
Net Current Assets
Total Assets
Asset Quality
(%)
242
30
4.6%
0.6%
91%
215
49
3.3%
0.7%
86%
138
74
1.7%
0.9%
81%
168
90
1.6%
0.9%
79%
198
108
1.5%
0.8%
77%
Asset quality to remain
stable
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR
E: MOSL Estimates
27 August 2014
3

DCB Bank
IVRCL: Financials and Valuation
Financials and valuation
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost of Deposits and Borrowings
Net Interest Margin
Profitability Ratios (%)
RoE
RoTA
Int. Expense/Int. Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost to Income
Emp. Cost / Operating Expenses
Provisions to NII
Asset-Liability Profile (%)
Loans/Deposit Ratio
CASA Ratio
Investment/Deposit Ratio
CAR
Valuation
Book Value Per Share (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
E: MOSL Estimates
74
51
13
69
50
8
63
49
10
57
49
11
53
49
10
8.1
0.68
68
31
11.7
1.02
69
29
14.8
1.25
67
27
15.2
1.27
65
26
14.6
1.19
63
25
FY12
9.7
11.2
7.2
7.0
3.25%
FY13
9.8
12.0
6.7
7.3
3.34%
FY14
9.9
11.8
7.0
7.2
3.56%
FY15E
10.0
11.6
6.9
7.1
3.89%
FY16E
9.9
11.3
6.7
7.0
3.99%
Higher margins led by high-
yield loans
83
32
40
15.4
79
27
40
13.6
79
25
35
13.7
84
25
33
13.7
89
25
30
13.7
33
19%
-
32
-
2
114%
-
38
13%
2.2
36
2.3
4
78%
20.3
44
16%
1.9
41
2.0
6
48%
13.7
51
17%
1.6
48
1.7
7
20%
11.5
59
16%
1.4
55
1.5
8
11%
10.3
DCB Bank Valuation Chart Historical P/BV (TTM)
27 August 2014
4

DCB Bank
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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
DCB Bank
No
No
No
No
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