Graphic: Mint
Graphic: Mint

DCB Bank delivers a strong Q2 but pressure on margins foreseen

DCB Bank ticked all the right boxes in terms of growth metrics for the September quarter

DCB Bank Ltd ticked all the right boxes in terms of growth metrics for the September quarter and showed it can withstand intense competition in lending to small businesses, its key focus area.

The lender’s loan book grew at a robust 27% for the quarter, leading to core income growth of 14%. A steady asset quality required no sharp increase in provisions and, therefore, net profit came in at 73.4 crore, which was in line with Street’s expectations. That the bank slowed its branch expansion this year, compared with previous years, helped keep a lid on operating expenses and brought down the cost-to-income ratio.

Having said that, analysts believe that the benefits of the branch network built over the past years—328 as of end-September—will become visible in the coming quarters. The management also endorsed this in its conference call and added that some nascent benefits from reduced competition from non-banking financial companies (NBFCs) have helped it during the quarter.

NBFCs suffering from liquidity issues have slowed down lending, which directly benefits lenders like DCB Bank in acquiring new business.

Moreover, the lender said that it has witnessed improvement in small business asset quality, as well as growth in loan offtake, which goes against the stated experience of other banks in the small and medium enterprises segment. What’s more, margins in the small business segment are higher.

But there are undoubtedly some concerns that investors need to keep in mind. The net interest margin was 3.83% for the quarter and the management has guided 3.75-3.85% for the full year. Essentially, there is not much room for margins to expand any more. DCB Bank also said that cost pressures are increasing even though growth in low-cost current and savings account deposits was at a healthy 19%.

On asset quality, DCB Bank wrote off 18 crore during the quarter, its biggest write-off in a year. Unless investors are convinced this is a one-off, it could undermine the lender’s track record in keeping its bad loans under check.

The DCB Bank stock fell more than 4% on Wednesday and trades at a multiple of 1.7 times its estimated book value for FY20. At this valuation, the lender is still considered reasonable by most analysts. The market was closed on Thursday for Dussehra.

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