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Graphic: Pradeep Gaur/Mint
Graphic: Pradeep Gaur/Mint

DCB Bank: Non-interest income drives Q1 profit while asset quality declines

DCB bank's gross NPA as a percentage of gross advances rose to 1.74% in the June quarter from 1.59% in the March quarter

DCB Bank Ltd’s net profit in the June quarter beat analysts’ estimates, rising 38% from a year ago to Rs65 crore. But this surge was largely driven by a sharp rise in non-interest income that grew 43% year-on-year to Rs86 crore. Non-interest income also includes treasury gains of Rs21 crore. Net interest income grew around 32% year-on-year to Rs233 crore.

The problem is that while profit improved, asset quality deteriorated.

Sequentially, the bank’s gross NPA as a percentage of gross advances rose to 1.74% from 1.59% in the March quarter. Similarly, net NPA increased to 0.92% from 0.79% on a quarter-on-quarter basis. Year-on-year, too, non-performing assets (NPAs) saw a marginal uptick.

In a post-earnings call, the bank’s management told Mint that mortgages, which form a substantial part of its overall lending book, contributed nearly 40% to the overall NPAs.

The bank’s interaction with its clients in the MSMEs segment showed that there is still a lingering pain of demonetization and smaller businesses are grappling with good and services tax (GST). Thus, the bank is lending cautiously. Provisions too saw a substantial jump of 73% year-on-year.

CASA ratio increased to 26.85% in the June quarter.

Meanwhile, net interest margin (NIM) stood at 4.23% as against 4.05% reported in the same quarter a year ago. NIMs benefited from a capital raising exercise of nearly Rs379 crore that the bank concluded in April, the management said.

DCB Bank has been on an expansion spree since October 2015 and currently has a branch network of 290 branches, an increase of 28 branches during the June quarter. The private sector lender aims to have more than 300 branches by the end of FY18.

No wonder the bank’s cost-to-income ratio was higher at 57.23% in the June quarter. Since a new bank branch typically takes 18-22 months to break-even, the cost-to-income ratio is likely to remain on the higher side for some more time, the management said.

Also, unlike earlier, in the GST regime service providers have to get a state-wise registration done for every state they are operating in, thus the bank’s cost of compliance would increase in the near-term.

But the bank’s management doesn’t expect that cost to reflect in its P&L account as it would be simultaneously looking at cost saving measures.

Apart from asset quality, movement in the bank’s cost-to-income ratio will be closely watched since the bank has been aggressively expanding, analysts said. Shares of the bank ended Friday’s session at Rs202.15, up nearly 2%.

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