Over the past year, Development Credit Bank Ltd (DCB) has scripted a turnaround by focusing on growth of its balance sheet led by low-cost current and savings accounts (Casa). After seven straight quarters of losses, it posted profit in the September quarter last year. This strategy, while successful, can prove difficult to implement when liquidity is tight and economic growth is slowing.
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The bank has done well in terms of restructuring its balance sheet over the past year. At the end of June, gross non-performing asset levels decreased by 2.57 percentage points from a year ago to 5.9%. That means the bank had to set aside a smaller amount for bad loans, which helped boost profitability.
Indeed, DCB’s net interest margin for the June quarter stood at 3.1%, unchanged from the previous fiscal, clearly indicating a structural improvement in its balance sheet. But operationally, things are not so smooth. Net interest income rose by one-fifth in the June quarter from a year ago to Rs 52 crore. However, a decline in fee income—something which bails out bigger banks in times like these—and an increase in expenses meant that operating profit declined by one-fourth.
In other words, the net profit in the June quarter, compared with a loss in the year-ago quarter, can be wholly attributed to the decline in provisions, which came down by two-thirds from a year ago. The tough environment also meant that the bank’s loan book shrunk a bit over the course of the June quarter, though that might also be attributed to its continued restructuring.
More importantly, its Casa ratio has come down by around 2 percentage points compared with March-end. While the recent central bank nod to open 10 more branches should help DCB, investors will be keenly tracking how it is able to expand its business during the slowdown and maintain numbers.
That will determine the momentum of the stock rather than rumours of billionaire investor Rakesh Jhujhunwala buying a stake.
Graphic by Yogesh Kumar / Mint
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