Development Credit Bank Ltd’s (DCB’s) turnaround strategy is gathering steam. After all, the bank has been focusing on retail, even before it became the manna for the banking industry in these sluggish times.
Retail banking now accounts for 40% of DCB’s business compared with 26% in March 2010. The focus on retail meant net advances grew a healthy 31.4% in the September quarter from a year ago, about double the industry rate, albeit on a lower base.
However, deposit accumulation continues to lag. DCB grew deposits by 13.9% over a year ago in the September quarter, slower than even the 14.19% rate in the three months ended June. Still, unlike the heady days of 2009, when the bank funded its loan growth with wholesale sources, retail deposits now make up 83.22% of the total. Low-cost current and savings account deposits accounted for 30.4% of total deposits, a steady slip from March 2011 when they were just shy of 36%.
However, note that with the cost of wholesale funding coming down in recent times owing to improving systemic liquidity, DCB has managed to do well. Its cost of funds slipped six basis points during the quarter to 7.74%. With the yield on advances more or less stable, that meant DCB grew its net interest margin six basis points to 3.24%. One basis point is one-hundredth of a percentage point.
But on a year-on-year scale, that still is lower than the 3.41% net interest margin of the September 2011 quarter.
Consequently, net interest income grew only 13.3%, down from the 23.23% in the June quarter. Operating profit grew a strong 27.4%, but down from the heady 50% rate in the first quarter.
So, as has been the norm in recent times, the 66% improvement in its profits was owing to a decrease in provisioning. The bank was able to do that because its asset quality has improved tremendously. In the September quarter, gross non-performing assets as a proportion of its loan book fell to 3.86%, half of what it two years ago.
With the economy being what it is, the contribution of tweaked provisions to boost profits cannot continue for long. DCB has to increase deposits to keep pace with loan book growth. Only then can it sustain its recent outperformance versus the Bankex index on the Bombay Stock Exchange.