Growth overrides slip in DCB Bank’s asset quality
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At first glance, the scorching 50% rise in DCB Bank Ltd’s stock may resemble the classic case of irrational exuberance but the bank’s numbers seem to justify most of the gains.
DCB Bank reported a net profit of Rs52.86 crore for the quarter to March, a 24% decline from a year ago.
The fall in profit doesn’t sit well with the stock price gains. But the story of the lender is not in its profits but in its ability to generate income from its core operations even in adverse conditions.
At a time when demonetisation has blunted loan growth across the banking system, DCB Bank reported a 22% growth in loan disbursals.
The number can be dismissed given a low base, but for an expanding lender such as DCB Bank, retaining core growth is crucial.
It shouldn’t surprise that net interest income grew 31% for the quarter from a year ago.
The bank also reported an enviable net interest margin of 3.9% for the final quarter of 2016-17.
Recall that the bank’s December quarter results were impressive in the wake of demonetisation.
But it would be wise to look at the pain points as well. While the cash purge didn’t hit asset quality immediately, it has hurt with a lag.
The bank’s bad loans rose 11% sequentially and were 1.59% of the total loan book as of March end.
Even on a net basis, bad loans as a percentage of total loans rose to 0.79%.
The bank has prudently provided for the slippages with provisions rising 11% to Rs3,393 crore.
But the lender hasn’t gone the whole mile as provision coverage ratio has slipped.
The slip on asset quality can be forgiven considering its strong core performance.
Further, the slowdown in fresh slippages is reassuring and the rise in upgrades is a positive surprise.
For now, DCB Bank’s stock seems to justify its valuation, even at a price to book value of around 3 times its estimated earnings for 2017-18.