The cost of being DCB Bank

The lender has gotten its cost-to-income ratio under grips after its aggressive branch expansion last year onwards had pushed up the ratio for two consecutive quarters


At 59.96% in the September quarter, lower than the 60.9% in the June quarter, the cost-to-income ratio looks reasonable for a bank in the middle of expansion.
At 59.96% in the September quarter, lower than the 60.9% in the June quarter, the cost-to-income ratio looks reasonable for a bank in the middle of expansion.

The scorching 50%-plus run-up in DCB Bank Ltd’s shares over the last two quarters suggests that investors have forgiven the bank for its shift in strategy last year that threatened to escalate costs and erode earnings.

Indeed, the private sector lender has gotten its cost-to-income ratio under grips after its aggressive branch expansion last year onwards had pushed up the ratio for two consecutive quarters.

At 59.96% in the September quarter, lower than the 60.9% in the June quarter, the cost-to-income ratio looks reasonable for a bank in the middle of expansion. But the management has maintained its warning that costs will go up as the new branches it added over the last one year will take time to generate earnings.

Analysts believe DCB Bank will keep its costs below 63% as promised by its management last year. The net profit of Rs48 crore was higher by 30% from a year ago, driven by a 27% rise in net interest income and stable asset quality, with bad loan metrics showing no big deterioration.

That should give reason for investors to smile. The bank’s gross non-performing assets (NPAs) were at 1.75% and net NPAs were 0.84% of its loan book.

But that’s where the seeds of future troubles could lie.

Both the gross and net bad loan ratios have gone up for the second straight quarter. Fresh slippages in the September quarter were lower at Rs50 crore from Rs58 crore in the June quarter but so were recoveries.

Unlike peers, DCB Bank’s bad loans are primarily from its retail loan portfolio, which is its focus area for lending. During the September quarter, Rs11.7 crore worth of mortgage loans turned bad.

Given that nearly a quarter of its total slippages arise from mortgages, otherwise considered the safest segment of lending, there is enough reason to be worried.

In a conference call with analysts after the results, the bank’s management indicated that 65-70% of its mortgage portfolio are loans against property.

There is growing concern on loans against property and analysts are already predicting a rise in delinquencies in this segment due to various reasons ranging from loose lending practices to mispricing of loans in the face of competition.

While the bank has chosen not to grow its corporate loan book to keep a lid on non-performing loans, it cannot do the same with mortgages. The cost of expansion may be under control but credit costs could slip away from the lender’s hands.

At around 1.8 times FY18 price-to-book, DCB Bank is no longer cheap and the 1% fall in the stock on Friday could be a sign that the risks are getting the attention of the market.

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