Mumbai: Development Credit Bank Ltd (DCB), which last year emerged from nine consecutive quarterly losses, is on the road to revival, aided by secured lending, fewer bad loans and improved interest margins, say analysts.
The surest indicator of this is the approval for 10 branch licences the lender received last week, the most it has got since 2006, they said. DCB currently has 80 branches.
Analyst Udit Mitra, who tracks the private bank at Mape ADMISI Securities Pvt. Ltd, said the Reserve Bank of India’s approvals are significant because its branch licensing policy is correlated to profits.
“It’s definitely a vote of confidence,” he said. “The bank profits have been increasing for the last three quarters, and the business looks more steady than, say a year earlier.”
Expansion track: A file photo of a Development Credit Bank branch in Delhi. The bank currently has 80 branches across the country.
DCB returned to profit in the September quarter after posting losses in fiscal 2010 (FY10) and FY09 mainly after keeping aside a chunk of its revenue to provide for unusually high non-performing assets (NPAs).
From a net profit of Rs38.33 crore in FY08, DCB made a loss of Rs88.10 crore in FY09. In FY10, it posted a loss of Rs78.45 crore.
Amandeep Goraya, analyst at Finquest Securities Pvt. Ltd, said DCB has been successful in cleaning up its portfolio, which is now less risky.
“For nine quarters they made losses because unsecured personal loans slipped into NPAs in the downturn; recovery was slow and these loans had to be provided for,” Goraya said.
From 1.48% of gross advances in March 2008, the bank’s NPAs increased to 11.24% in September 2009. At the end of March, its NPAs had improved to 5.86% of gross advances.
“The current NPAs, though still high, are comparatively much lower than two years ago and, more importantly, very few bad loans are from new assets,” said Goraya, who has a “hold” recommendation on DCB. He has a price target of Rs60 on the stock.
In November 2008, DCB’s continuing non-performance forced its then managing director and chief executive Gautam Vir to resign.
In May 2009, the bank appointed Murali Natrajan, a Standard Chartered banker, to the post.
Mape’s Mitra, who rates the DCB stock a “hold”, said credit for the revival should go to Natrajan as well.
“The previous management went all out to gain market share, offering 60-70% of loans at fixed rates, and also taking a huge exposure on small enterprises. So when the markets turned after the global crisis, the bank lost out both on margins and also increased bad loans,” he said.
From 3% in FY08, DCB’s net interest margin, or NIM, slipped to 2.79% in FY10 before improving to 3.5% in FY11. NIM is the difference between interest charged on loans and that paid on deposits.
Natrajan refused to comment. “We are not commenting on a turnaround, improvement, etc., for another one year as a policy,” he said in a text message.
DCB’s stock is among the better performers in the sector, having fallen just 1.36% since January.
The benchmark Bombay Stock Exchange (BSE) Sensex lost 11.1% this year, and its 14-share Bankex index has shed 8.21% of its value.
On Tuesday, DCB rose 3.11% to Rs59.70, while the Sensex climbed 1.49%.
Kajal Gandhi, assistant vice-president at online brokerage ICICI Direct, said she will recommend investors to buy DCB on dips.
“This bank has already been stretched on asset quality and provisions for the last two years and so concerns on other banks do not apply to DCB currently,” she said.
Analysts said DCB has managed to move away from unsecured retail loans to more secured mortgages, which holds it in good stead.
But the higher-than-permitted promoter stake continues to be a bone of contention between the regulator and the bank. The Aga Khan Fund for Economic Development (AKFED) holds around 23% of DCB, higher than RBI’s 10% limit.
DCB’s management has promised that AKFED’s stake will be lowered gradually as they raise more funds later this year.