Research on DCB Bank: Buy with a target of Rs 170

DCB Bank is one of the new emerging banks of India. The bank has been in existence since 1930’s and is the only co-operative bank to get converted into private bank in 1995. There are about 154 branches in 94 locations, 328 ATM’s across the nation. The bank has strong presence in Gujarat, Maharashtra, Telengana and in the current fiscal year, the bank will expand to Chhattisgarh, Madhya Pradesh, Odisha, Punjab & Rajasthan.

The bank has various financial products in the following areas:  Micro SME, SME, Retail Mortgages, Commercial Vehicle, Gold Loans, mid-Corporate and Agri / Inclusive Banking. Mortgages contribute about 45% of the loan portfolio of the bank followed by corporate banking 23%, SME/MSME 13%. The bank has a CASA of 23.40% and CRAR of 14.95% under BASEL III. The bank is focusing on the retail segment for building deposits. The bank has also increased its fee income by cross selling insurance, mutual funds, and trade and cash management. The promoter’s hold 16.33% stake, and there is an increase in the FII and DII holdings indicating strong growth prospects of the bank.

Although the stock market sentiment has improved, the economic conditions continued to be difficult. The banking industry continues to be under pressure due to rising NPAs and restructured loans. The MSME / SME sector plays a very important role in the growth of the Indian economy. It is estimated that MSME / SME contribute 17% to GDP and employs over 70 mn people in about 30 mn units. According to IBEF, total Indian banking sector assets reached US$ 1.8 trillion in FY14 from US$ 1.3 trillion in FY10, with 70 per cent of it being accounted by the public sector. Total lending and deposits increased at a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent, respectively, during FY07-14 and are further poised for growth, backed by demand for housing and personal finance. In the past fiscal year, private sector have outperformed the state and government run banks.

The bank has grown by 61% (y-o-y) for the quarter ending March’15 in terms of net profit. This growth is largely due to the growth in assets that led to immense increase in net interest income of the bank. The operating cost to operating income ratio has come down significantly for the past four years i.e. from 74.45% in FY12 to 58.83% in FY15. The Net NPA is almost stable for the past four quarters at 1%. The net profit margin for the bank is around 28% for the FY15 which is the highest in the banking industry.

The bank is currently trading at Rs 147 with a P/E of 21.7x (industry P/E 21.5x). The bank’s ROE has been growing at a robust 31% CAGR over the past three years. The credit policy of the bank is well maintained to restrict the NPA to 1% whereas the industry average NPA is 2.5%. Considering the bank’s expansion plans and increasing asset in the balance sheet, we recommend a BUY with a target price of Rs 170.

DCB Bank vs Bank Nifty                                              Source: Google finance