DCB Bank deposit growth and healthy asset quality support sustainable RoE expansion

Investment View and Key Drivers

Anand Rathi Research maintains a BUY view on DCB Bank following another strong quarter. The investment case is supported by healthy and broad-based balance-sheet growth, operating-profit growth ahead of balance-sheet expansion, healthy asset quality, stable margins, sustained fee-income momentum and moderate credit costs.

Anand Rathi expects these factors to support a sustainable improvement in return on equity from about 11–12 per cent to 13–14 per cent over FY27E and FY28E.

Balance-Sheet Growth and Loan Mix

DCB Bank reported Q1 FY27 deposits growth of 20.1 per cent year-on-year to Rs 7,44,820 million, ahead of advances growth of 17.1 per cent year-on-year. Deposit growth continuing to exceed loan growth supports an improvement in the loan-to-deposit ratio.

Credit growth was led by gold loans, which increased 128 per cent year-on-year, corporate lending, which grew 41.6 per cent, and agriculture lending, which rose 22.6 per cent. The loan mix at Q1 FY27 was as follows:

Within retail loans, mortgages represented 39.0 per cent, co-lending 12.3 per cent, gold 7.4 per cent and commercial vehicles 0.5 per cent. Anand Rathi expects DCB Bank to grow 200–250 basis points faster than the system, with incremental growth from the mortgage, MSME and commercial-vehicle segments. Co-lending is expected to grow broadly in line with overall credit.

Q1 FY27 Financial Performance and Margins

Q1 FY27 net interest income rose 17.8 per cent year-on-year to Rs 6,840 million. Pre-provision operating profit increased 5.2 per cent to Rs 3,440 million, while profit after tax grew 35.6 per cent to Rs 2,132 million.

Fee income increased 21.8 per cent year-on-year, while operating expenses to assets declined 4 basis points quarter-on-quarter to 2.43 per cent. This resulted in core operating profit growth of 45.2 per cent year-on-year.

Net interest margin declined 4 basis points quarter-on-quarter to 3.35 per cent, as yields fell 23 basis points and the loan-to-deposit ratio declined 220 basis points. A 14-basis-point reduction in the cost of funds partly offset the pressure. The broker expects margins to remain broadly rangebound, with a better mix of higher-yielding assets offsetting potential funding-cost pressure.

Asset Quality and Credit Costs

Asset quality remained healthy despite seasonally higher stress. Gross and net NPA improved to 2.43 per cent and 0.84 per cent, respectively, in Q1 FY27. Provision coverage strengthened 166 basis points quarter-on-quarter to 66 per cent.

Gross and net slippages were 2.7 per cent and 0.2 per cent, respectively, compared with 4.6 per cent and 1.4 per cent in Q1 FY26. Ex-gold slippages were 1.52 per cent, up 5 basis points quarter-on-quarter but down 158 basis points year-on-year.

DCB Bank has a Rs 2,100 million provisioning buffer for the expected-credit-loss transition and does not expect a material impact. Anand Rathi forecasts net slippages below 50 basis points in FY27E as collections normalise.

Earnings Estimates and Return Outlook

Anand Rathi increased its FY27E and FY28E estimates. The revisions were as follows:

The broker forecasts FY27E PAT of Rs 9,582 million and FY28E PAT of Rs 11,832 million. Return on equity is expected to rise to 13.7 per cent in FY27E and 14.8 per cent in FY28E.

Valuation and Key Risks

The Rs 298 12-month target price is based on 1.2 times FY28E price-to-adjusted-book-value.

Key risks identified by Anand Rathi are:

• Slower loan-book growth.
• Large slippages in the mortgage book.