Mortgage and small business loan specialist DCB Bank Ltd would have checked all the right boxes for investors but for the surprise increase in slippages during the third quarter.

Fresh slippages jumped 11% to 114.3 crore, the highest in three years, and more than half of them came from agriculture and mortgages. More than a third of fresh slippages came from mortgages, which is by nature the safest credit and collateralized.

To be sure, DCB Bank’s mortgage portfolio is 40% of its loan book and therefore, delinquencies tend to dominate from this segment.

That said, an year-on-year increase of 26% in delinquencies from mortgages should be a concern. The lender has a large LAP (loan against property) book, given that loans to small businesses are usually against property. The health of the LAP segment is not clear, although it is the usual suspects during times of increase in mortgage delinquencies.

However, slippages from the micro, small and medium enterprises (MSMEs) book have been contained. During the December quarter, the MSMEs book contributed to 9% of slippages, lower than 10.5% a year ago.

Clearly, small businesses are healthy and hence it can be concluded that they are repaying on time. Ergo, the mortgage delinquencies become that much more serious.

The slippages worsened the overall bad loan ratio to 1.92% from 1.89% a year ago. But DCB Bank’s provisioning coverage ratio of 77% should give ample comfort to investors. The lender reported robust growth numbers with its loan book expanding 23% and deposits growing by 29%.

What is surprising is that DCB Bank’s loan growth has slowed compared with 27% in the September quarter. Recall that the troubles over liquidity among non-banking financial companies had kept them from aggressively lending. Therefore logically, lenders like DCB Bank should have gained greater business.

Beyond asset quality, the lender reported profit in line with estimates, as well as a healthy core income growth of 17%. The DCB Bank stock has gained 16% in the past three months and it trades at a multiple of 1.7 times its estimated book value for FY20.

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