Graphic: Mint
Graphic: Mint

A closer look at DCB Bank’s mortgages raises some red flags

DCB Bank's asset quality ratios have been low simply because of the fast pace of growth in the loan book

For a mortgage-centric lender like DCB Bank, an enviable bad loan ratio is a given. After all, home loans are the safest asset a lender can amass. Stretching that to provisioning and profitability, investors expect the lender to report a robust double digit growth.

DCB Bank did not disappoint in both, as it reported a bad loan ratio of 1.86% and net profit growth of 6.6% to 69.50 crore for the first quarter of 2018-19.

Along with a provision coverage ratio of 71%, one of the highest among banks, the results should give enough cheer to investors. 

Its core operating metrics are strong with a core income growth of 17% on the back of a 31% expansion in its loan book. The loan book itself is quite diversified with 40% being mortgages, followed by corporate loans that make up 17% and loans to small businesses at 12%.

The management has indicated that the mix of the loan book is unlikely to change in the future. 

While mortgages are a source of calm for investors, digging into the details raises certain red flags. 

DCB Bank’s asset quality ratios have been low simply because of the fast pace of growth in the loan book. 

Look closely, and gross bad loans have surged 40% from a year ago for the first quarter. To be fair, the pace of increase has come down but it still outstrips the loan growth.

Furthermore, more than 36% of the private lender’s bad loans are from mortgages. The reason is that 70-75% of mortgages are loan against property, a segment most susceptible to delinquencies. Loan against property is a segment wherein several analysts have raised concerns in the past as these loans tend to come under pressure when small business are hit.

The disruptive goods and services tax (GST) that followed demonetization has hit many small businesses and loan repayments in this segment have gone awry. 

The pain is visible on DCB Bank’s book but is beginning to fade.

“We are now seeing these things (demonetisation and GST impact) getting settled," said Murali Natrajan, managing director & CEO of the bank.

Another problem with fast growth in mortgages is the compression of margins. Net interest margins of DCB Bank have already narrowed 33 basis points to 3.90% from a year ago. 

Perhaps investors were wary of these issues as the stock dropped 2% on Friday and has moved nowhere since April.