UniconWealthManagement www.unicon.in Long TermInvestmentCall Initiating Coverage CMP :46Rating:BuyTarget:64 Sector:Banking 24-Sep-11 DevelopmentCreditBankLtd. Investment Rationale: Valuation: Businessgrowthtopickup... Wit h end of rest ructu ring,profitsare likel y to impro ve furt her on... Asset quali ty to impro ve on backof highe r provi sioni ng… With n div ers if ic ati on ofits wit h se cure d re ta ilbook n addi t ion t o a l ar ger share of re ta il dep osi ts (> 70% CASA+ te rm) on li abi lit y fr on t. He nc e, NI M to 3. 3% in FY13 E fr om % in FY1 is li ke ly to be le d by a be tter cost of deposits (higher CASA ratio) & focus on high yielding MSME sector in loan portfolio. With revival in business, DCB's profit is expected to increase by ~57% CAGR during FY11-13E. This will be led by healthy topline growth driven by bank's focus on MSME, red uct ion in int erest costs,improvement in nonintere st inc ome (fo cus on inc rea sing fee & trading income). Further bank is also keeping operating expenses in check (~10% CAGR ove r FY11 -13E ). We estimatecost-to-income to decl ine to 61%by FY13 E from71% inFY11, there by impro vingprofitabi lity. There has been a tremendous improvement in DCB's asset quality over the past five quarters, driven by significant reduction in slippages and substantial recoveries/u pgradations. With restructuring coming to an end & 90% of total loan book is secured NPArisk has ebb sharply . GNPAis expected to decline further with minimal incremental slippages, healthy recoveries and secured loan growth. As a result, credit cost is estimated to dip sharply. With Tier-1 capital at 11.1%, DCB seems adequately capi taliz ed for medi um-te rm growth. Bran ch expan sionto drivedepositgrowth goingahead… With limited number of branches (80) management was able to bring back the bank to profitability (INR 214 Mn) & improved its CASA ratio (35%) in FY11. In 2011, DCB has received 10 branch licenses approval from RBI, which we believe to support DCB’s business growth going ahead. The expansion of branch network is likely to improve dep osit gro wth by 15% CAGR in FY11-1 3E and wi th ban ks foc us on CASA - CAS Arat io toimproveto36.46%byFY13E. Thestockhistoricall y tra dedat hig herthan 4x itsone ye ar forwardABVtill Jan08,slid to 2.5x in mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business & returning to profitability, we expect the stock to command higher multiple going forward. At the CMP stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value (ABV)respec tiv ely . We expectretur n rat iosto improv e fro m her eonfor thebank i.e. RoE to reach to 9.5% in FY13E from 3.5% in FY11. Thus, we value the bank's business at 1.7x FY1 3E P/A BV , the reb y evalu ati ng it at INR64. We ini tia te coverage on DCB wit h a pri ce rec ommendat ionof INR64,an ups ideof 40% fro m thecurre nt mar ketprice . restructuring of balance-sheet largely in place, we expect a revival in business growth of 15% CAGR over FY11-13E. This will be achieved with management giving greater focus o advances .I in total deposits s move to 3.1 1, (INR mn) Source:Bloomberg,UniconResearch ShwetaRane| [email protected]Development Credit Bank (DCB) is a small new generation private sector bank serving ~6 lakh customers with a network of 82 branches and ATMs . It s br anch esareconcentra te d inwest ern India with65% br an ch esloc at edin Ma ha rashtra,Guj ar atandGoa.After stra te gic ov erha ul in FY09 , ba nk ha s returned to profitabil ity of in FY11 from a loss of INR 78 5 mn in F 10. e expect bank to continue its profitability ru diversified loan book, efficient retail deposits, redu ctionin ove rallcosts. 140 as of June 11 of INR 214 mn Y This remarkable growth was achieved with limited nu mber of branches. Going ahead, on back of bra nch expansion and strong business growth of ~15% CAGR during FY11- 13E, w n. The growth seems to be achievable due to KeyData YearEnd FaceValue(INR) BSECode ReutersCode BloombergCode MarketCap(INR Mn) Ke y Fin an ci al s FY1 0 FY 11 FY 12E FY1 3E NII 1,416 1,891 2,281 2,985 OperatingProfit 483 861 1,202 1,765 OperatingProfit(%) -36 78 40 47 NetProfit -784 214 490 828 NetProfit(%) -11 -127 129 67 Adj.BookV alue 25 29 34 38 KeyRatio FY10 FY11 FY12E FY13E P/E(x) -14.8 54.2 22.6 13.4 P/BV(x) 1.9 1.9 1.3 1.2 ROE(%) -13.1 3.5 6.8 9.6 ROAA (%) -1.3 0.3 0.6 0.9 ShareHoldingPattern Promoters FII FI/MF/OtherInstitutes Others RelativePricePerformance 9,190 52WeekHigh/Low 76/38 BSESensex/CNXNifty 16162/4868 11.67 1.93 23.08 63.32 1-Y ear AverageVolume 5,758,570 Mar 10 DCB DCBA.BO DEVBIN SharesOutstanding(Mn) 200 20 40 60 80 100 Sep Oc t No v De c Ja n Fe b Mar Apr May Ju n Jul Aug Sep DCB NS ENi fty
Transcript
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
With end of restructuring,profitsare likely to improve further on...
Asset quality to improve on backof higher provisioning…
With
n diversification ofits with secured retailbook n addition toa
larger share of retail deposits (>70% CASA+term) on liability front.
Hence, NIM to 3.3% in FY13E from % in FY1 is likely to be led by a better
cost of deposits (higher CASA ratio) & focus on high yielding MSME sector in loan
portfolio.
With revival in business, DCB's profit is expected to increase by ~57% CAGR during
FY11-13E. This will be led by healthy topline growth driven by bank's focus on MSME,
reduction in interest costs, improvement in noninterest income (focus on increasing fee
& trading income). Further bank is also keeping operating expenses in check (~10%
CAGR over FY11-13E). We estimate cost-to-income to decline to 61%by FY13E from71%
in FY11, thereby improvingprofitability.
There has been a tremendous improvement in DCB's asset quality over the past five
quarters, driven by significant reduction in slippages and substantialrecoveries/upgradations. With restructuring coming to an end & 90% of total loan book
is secured NPArisk has ebb sharply. GNPAis expected to decline further with minimal
incremental slippages, healthy recoveries and secured loan growth. As a result, credit
cost is estimated to dip sharply. With Tier-1 capital at 11.1%, DCB seems adequately
capitalized formedium-term growth.
Branch expansionto drivedepositgrowth goingahead…
With limited number of branches (80) management was able to bring back the bank to
profitability (INR 214 Mn) & improved its CASA ratio (35%) in FY11. In 2011, DCB has
received 10 branch licenses approval from RBI, which we believe to support DCB’s
business growth going ahead. The expansion of branch network is likely to improve
deposit growth by 15% CAGR in FY11-13E and with banks focus on CASA - CASA ratio
toimproveto36.46%byFY13E.
Thestockhistorically tradedat higherthan 4x itsone year forwardABV till Jan08, slid to
2.5x in mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business &
returning to profitability, we expect the stock to command higher multiple going
forward. At the CMP stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value(ABV) respectively. We expectreturn ratiosto improve from hereonfor thebank i.e. RoE
to reach to 9.5% in FY13E from 3.5% in FY11. Thus, we value the bank's business at 1.7x
FY13E P/ABV, thereby evaluating it at INR64. We initiate coverage on DCB with a price
recommendationof INR64,an upsideof 40% from thecurrent marketprice.
restructuring of balance-sheet largely in place, we expect a revival in business
growth of 15% CAGR over FY11-13E. This will be achieved with management giving
Development Credit Bank (DCB) is a small new generation private sector bank serving ~6 lakh customers with a network of 82 branches and
ATMs . Its branchesareconcentrated inwestern India with65% brancheslocatedin Maharashtra,GujaratandGoa. After strategic
overhaul in FY09, bank has returned to profitability of in FY11 from a loss of INR 785 mn in F 10.
e expect bank to continue its profitability ru diversified loan book, efficient retail deposits,
reductionin overallcosts.
140
as of June 11 of
INR 214 mn Y This remarkable growth wasachieved with limited number of branches. Going ahead, on back of branch expansion and strong business growth of ~15% CAGR during FY11-
13E, w n. The growth seems to be achievable due to
KeyData
YearEnd
FaceValue(INR)
BSECode
ReutersCode
BloombergCode
MarketCap(INR Mn)
KeyFinancials FY10 FY11 FY12E FY13E
NII 1,416 1,891 2,281 2,985
OperatingProfit 483 861 1,202 1,765
OperatingProfit(%) -36 78 40 47
NetProfit -784 214 490 828
NetProfit(%) -11 -127 129 67
Adj.BookValue 25 29 34 38
KeyRatio FY10 FY11 FY12E FY13E
P/E(x) -14.8 54.2 22.6 13.4
P/BV(x) 1.9 1.9 1.3 1.2
ROE(%) -13.1 3.5 6.8 9.6
ROAA (%) -1.3 0.3 0.6 0.9
ShareHoldingPatternPromoters
FII
FI/MF/OtherInstitutes
Others
RelativePricePerformance
9,190
52WeekHigh/Low 76/38
BSESensex/CNXNifty 16162/4868
11.67
1.93
23.08
63.32
1-Year AverageVolume 5,758,570
Mar
10
DCB
DCBA.BO
DEVBIN
SharesOutstanding(Mn) 200
20
40
60
80
100
S ep O ct N ov D ec J an F eb Ma r A pr M ay Ju n J ul A ug S ep
D CB N SEN ifty
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
Company Background ..............................................................................................................................................3
Valuation & Outlook ................................................................................................................................................12
Development Credit bank (DCB) is small modern emerging new generation private sector
bank. Present since 1930s, DCB is the only co-operative bank in India to have been converted
into a private sector commercial bank in 1995. DCB has distribution network of 82 branchesacross 28 cities and 138 ATMs (as on June 30, 2011). Its branches are concentrated in western
India with 65% branches located in Maharashtra, Gujarat and Goa. Its promoter and pro-
moter group, the Aga Khan Fund for Economic Development (AKFED) and Platinum Jubilee
Investments Ltd, hold over 23% stake.
In 2005 when the bank was recapitalised and new leadership took charge under the aegis of
Nasser Munjee as Chairman and Gautam Vir as CEO new strategic decisions were taken
which changed the course of the bank. DCB went public in FY06 and has taken a more
aggressive stance to grow its business with heavy investment in infrastructure and technol-
ogy. As a part of new strategy to ramp up the loan portfolio, the bank grew its unsecured loan
portfolio with heavy exposure in personal loans, commercial vehicle and construction equip-
ment. During FY09, the adverse economic conditions mounted NPAs for the bank (in unse-cured loan portfolio), that affected the profitability during FY09-10.
In April 2009, Mr. Murali Natrajan took charge as a CEO & MD & under his aegis entire
business was revamped & consolidated to run down the mounting NPAs & to bring DCB to
profitability. This was achieved by a change in business strategy with focus on secured
lending garnering more CASA & diminution of costs. Since then DCB has evolved itself from
loss making bank in FY08 to a profitable bank in FY11. With this positive change in banks
growth parameters rating agencies have upgraded their rating guidelines for DCB. Crisil
assigned the rating for Long term of BBB + / Stable & for Short term P1 and Fitch assigned the
AKFED is an international development enterprise dedicated to promoting entrepreneur-
ship and building economically sound companies. It has around 150 companies and employs
over 30,000 people with a turnover of approximately USD 2 bn. AKFED needs to dilute itsstake in the bank which stands at 23% at present to less than 10% as per the RBI norms for
scheduled commercial banks. The bank has been given time till 2014 by the RBI to reduce its
promoter's stake in a phased manner.
Key non-promoter shareholders
Al Bateen Investment Co LLC: 3.69% The India Fund, INC: 3.58% Tata Capital Ltd: 3.29%
With most of the balance sheet restructuring in place, we expect the credit growth to pick up~15% CAGR during FY11-13E (CAGR -5% during FY08-10) led by SME+MSME, mid corporate &
Agri loans. This will aid business growth ~15% CAGR over FY11-13E buoyed by a well diversified
loan book and retail deposit based liability franchise.
During FY08-10, DCB's business growth contracted by 7% CAGR, mainly owing to new
management's (since Apr 09) strategy of risk-averse lending, restructuring & revamping of
business. DCB considerably changed its business focus through diversified & secured loan
book reducing bank's dependence on bulk deposits & increased the share of retail deposits.
Since June 08, DCB completely stopped unsecured personal lending by running down its
exposure from INR 7 bn (17% of loans) in FY08 to 85 mn in FY11. DCB also reduced its
exposure to commercial vehicle (CV) from 15% in FY08 to 2% in FY11 of total loans. Despite
a slowdown in personal & CV loans the assets are gradually growing with diversificationstrategy (focus on mortgage, mid-corporate, MSME, Agri). This change resulted in DCB
returning to profitability in FY11 (PAT of INR 214 mn) after two year consecutive losses during
FY08-10.
0% 20% 40% 60% 80% 100%
FY09
FY10
FY11
Q1FY12
Corporate Retail Agri&InclusiveBanking SME+MSME
Share of Secured & Unsecured Loan (INR Mn)
0
10000
20000
30000
40000
FY08 FY09 FY10 FY11
SecuredLoan UnsecuredLoan
Advances (INR Mn)
On the asset front, its loan book mix has been systematically spread out with the SME+MSME
and agriculture and rural banking (ARB) segment, increasing their share from 4% and 8% in
FY08 to 25% and 17%, respectively in Q1FY12. Some measures adopted by DCB to push asset
growth are introducing products such as: a) warehouse-based commodity financing, which is
focused on priority sector lending and b) cash management and trade finance products tomid-corporate/SME customers, c) wealth management advisory to its retail clients. This will
benefit the business growth going forward.
-40.0%
-20.0%
0.0%
20.0%
40.0%
0
25000
50000
75000
100000
FY09 FY10 FY11 FY12E FY13E
TotalAdvances TotalDeposits
%Advances %Deposits
Business Growth
Source: Company, Unicon Research
Source: Company, Unicon Research
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
With influx of new management in April 2009, various initiatives have been taken up to bring
back DCB on profitability path & improve it on all growth parameters. With change inmanagement's strategy of reducing unsecured loan book, costs & focusing on CASA, DCB
registered a net profit of INR 48 mn in Q2FY11 after two years of consecutive losses (net loss
of INR 882 mn & 785 mn in FY09-10 respectively). We expect DCB to continue its business
strategy of well diversified secured loan book, focus on CASA & reduction of costs with
healthy NII growth. This will result in DCB posting a net profit growth of ~60% CAGR during
FY11-13E.
Deposit Growth
Branch Expansion to drive deposits growth
On the liability front, during FY08deposits to fund its expanded loan book strategy DCB
increased its share of bulk deposits, which led to higher cost of deposits of ~8%. However, as
part of new management strategy, DCB started reducing its dependence on wholesale depositsto curtail costs since 2009. This was achieved by increasing the share of retail deposits in total
deposits (higher incremental share of CASA). The bulk deposits share was brought down
from 57% in FY08 to 18% in FY11 and improved the CASA ratio to 35% in FY11 from 24% in
FY08. This structural shift has been instrumental in reducing cost of deposits from 6.8% in
FY08 to 5.6% in FY11.
20.0
25.0
30.0
35.0
40.0
20000
40000
60000
80000
100000
FY08 FY09 FY10 FY11 FY12E FY13E
TotalDeposits CASA%
Despites CAGR -8% fall in deposits during FY08-10 (due to bulk deposit contraction), the
CASA deposits witness a 5% CAGR growth during this period. This remarkable growth wasachieved with limited number of branches ~80. Continuing with this liability strategy, we
expect deposit base to grow at CAGR 16% during FY11-13E on back of branch expansion (RBI
approval of 10 branches) & with focus on CASA - CASA ratio is likely to improve to 36.46% by
FY13E. Going ahead, the cost of deposits are likely to be higher (higher deposit rates in the
system), however, garnering higher CASA deposits DCB is expected to curtail the costs
~5.8%.
Source: Company, Unicon Research
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
Going forward, we expect asset quality to steadily improve, as 90-95% of the loan book issecured & bank to focus on recovery process. Due to this the credit costs for bank are likely
to fall below 100 bps by FY13E. The decline in credit costs is likely to improve bank's profitability
& lead ROA progression. We expect the GNPA & NNPA to fall to 3.5% & 0.5% by FY13E.
0%
25%
50%
75%
100%
0%
3%
5%
8%
10%
FY09 FY10 FY11 FY12E FY13E
ProvisionCoverage% GNPA% NNPA%
Declining GNPAs & NNPAs
Source: Company, Unicon Research
GNPAs Sectoral Composition
Fund raising to improve capital adequacy thereby to fuel business growth
In FY10, DCB issued lower Tier II subordinated bonds of INR 650 mn as well as raised QIP of
INR 800 mn at INR 32 per share which improved the capital adequacy ratio (CAR) to 14.8%
from 13.3% ion FY09. In FY11, the CAR stood at 13.25% with tier I at 11.1% of risk weighted
assets. DCB has got approval of its board to raise INR 1.5 bn QIP (expected to be executed
in FY12), this would support bank's business expansion going ahead. With abundant tier I
capital the bank would not be keen in raising its tier II capital in near future. However,
promoter holding in the bank is high as ~23%, which is against the RBI's norms. According to
management RBI has allowed DCB to reduce promoter's stake to 10% by FY14 and bank is
expected to adhere to it.
CAR (%)
11.49 11.93 11.10 11.07
1.81 2.92 2.15 1.85
13.3014.85
13.25 12.92
0.00
5.00
10.00
15.00
20.00
FY09 FY10 FY11 Q1FY12
TierIITierI
0
700
1400
2100
2800
3500
FY09 FY10 Q111 Q211 Q311 Q411 Q112
PersonalLoans CV/CE/STVL*
Corporate Others
Source: Company, Unicon Research
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
Cost efficiency ratios to improve with aggressive cost controls
In FY10, DCB's cost to income ratio was highest among its peers at ~80% on account of
balance sheet restructuring which led to fall in net income. Since then, DCB has overhauled
various processes like centralized most of its vendors and headcount, which helped it toreduce operating cost from INR 2.2 bn in FY08 to INR 2 bn in FY11. Overall, operating expenses
declined 6% CAGR during FY08-10, with employee expenses & other expenditure declining
by 3% & 13% respectively during FY08-10. This resulted in cost to income ratio declining to
71% in FY11 from 80% in FY10. We expect the operating costs to increase CAGR 11% during
FY11-13E, factoring 10 branch additions & field staff during FY12-13E. With an improvement
in top line we expect cost to income ratio improve to ~61.1% by FY13E.
Cost to Income Ratio to decline with growth in business
Source: Company, Unicon Research
Cost to Avg Assets Ratio is likely to fall with low operating costs
50%
60%
70%
80%
90%
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
CosttoIncomeRatio
2.50%
3.00%
3.50%
4.00%
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
CosttoAvgAssetsRatio
CONCERNS
Negative macro-economic factors to increase incremental slippages for bank
Recent changes in macro-economic fundamentals to pressure the various sectors of the
economy. This would result in higher than anticipated slippages for the bank. We believe,
growing its loan book without incremental slippages to be a challenge for the bank. Any
increase in slippages would impact the profitability of the bank.
Fall in credit demand & rising interest rates to hit small banks more
Any slowdown in industry growth will drag down the credit demand in the system. Also the
higher inflationary environment to negate the retail credit growth. This will have larger
effect on DCB than large cap banks. The high interest rates pushed up both lending & depos-
its rates in the system. With sluggish deposits growth in the system deposits rates are likely
to go up pushing up the costs for banks especially negative for DCB.
Small size makes a potential acquisition target
Large cap banks which are looking to strengthen their footprint in western India, DCB can
become a potential target with small balance sheet size & branches.
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
From losses of INR 784 mn in FY10, DCB returned to profitability in FY11 (INR 214 mn). This
was due to a revival of business in terms of change in loan mix, write down of unsecured loan book, focus on CASA and improvement in cost to income ratio. Going ahead, we expect
management to continue its current business strategy & expect profitability to improve
~57% CAGR during FY11-13E.
Net Interest income to grow 17% CAGR during FY11-13ELoan book growth to be driven by balanced mix of MSME+SME, agri & retail segments, while
retail deposits drive the total deposit growth in the bank. This will help DCB to register a NII
growth of ~16% CAGR during FY11-13E. Also, we expect non interest income to grow at
CAGR ~13% in FY11-13E on back of strong fee income growth.
Source: Company, Unicon Research
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
FY09 FY10 FY11 FY12E FY13E
RoE RoAA
NIMs to improve
DCB has consistently improved NIMs from 2.6% in FY10 to 3.1% in FY11. We expect the CASA
deposits to grow ~16% CAGR during FY11-13E & its share in total deposits to improve 36.46%
by FY13E from 35% in FY11. This will result from cost of deposits at 5.8% & with bank's focus
on MSME sector yield on advances are likely to increase in future. This is likely to improve
NIMs ~3.3% in FY13E from 3.1% in FY11.
ROE & ROAA to expand in FY13E
DCB's ROE has improved from (14.3%) in FY09 to 3.5% in FY11, and we expect it to further
improve to 9.5% by FY13E with factoring the capital infusion. With change in management
strategy & restructuring of balance sheet its ROAA has significantly improved 0.29% in FY11
from -1.48% in FY08, and further we expect it to increase to 0.85% by FY13E.
Source: Company, Unicon Research
Net Interest Income (INR Mn)
1196
17391972
14161891
2281
2985
0
700
1400
2100
2800
3500
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
NII
CA G R
1 6 %
8/4/2019 Development Credit Bank Ltd - Initiating Coverage
DCB has revamped itself since FY09 and with change in management and business strategy
we believe DCB to run on growth trajectory going forward. We believe that with thrust on
improving NIMs, CASA ratio, better core operating income and return ratios, DCB would be
one of the fastest growing Indian banks over next few years. We expect DCB to control its
incremental slippages and maintain NIM in the range of ~3.3% levels by FY13E.
The stock historically traded at higher than 4x its one year forward ABV till Jan 08, slid to 2.5xin mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business & returning to
profitability, we expect the stock to command higher multiple going forward. At the CMP
stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value (ABV) respectively. We expect
return ratios to improve from hereon for the bank i.e. RoE to reach to 9.8% in FY13E from 3.5%
in FY11. Thus, we value the bank's business at 1.7x FY13E P/ABV, thereby evaluating it at INR
64. We initiate coverage on DCB with a price target of INR 64, an upside of 40% from the
current market price.
VALUATION & OUTLOOK
PEER COMPARISON
Despite the limited number of branches, DCB is ahead of its peers interms of business per
branch at INR 1,246 mn, CASA ratio of 33.3%. Also, DCB’s NIMs are in par with its peers at
3.1%. However, on the asset quality front bank is lagging behind its peers, but with continu-
ous efforts we believe bank to reduce its NPAs going ahead. We believe DCB can further
improve on this parameter, as it returns to profitability in the coming quarters. This effi-
ciency makes a case for DCB to trade at a premium relative its peers. Interms of valuations
DCB is trading in par with its other peers at 1.2x of its FY13 book value.
Dhanlakshmi Bank Lakshmi Vilas Bank City Union bank Ltd. Development Credit Bank Ltd.
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