DCB Bank faces investors’ wrath on weak performance in June quarter
2 min read.Updated: 17 Jul 2019, 11:04 PM ISTAparna Iyer
The lender’s net profit growth of 15.7% also missed Street estimates by a mile
The lender’s developer finance book is causing it a lot of heartburn and DCB Bank wants to be cautious in lending now
DCB Bank Ltd’s disastrous June quarter performance was enough to jolt investors and send its stock down by a massive 16.4% on Wednesday. A handful of corporate loans turned sour, farm loans came under increased stress and the stretched troubles of the real estate sector left a mark on the loan book.
As a result, DCB Bank’s asset quality metrics took a knock with gross bad loans rising to 1.96% of the book. Add the ₹38 crore in restructured loans and close to 2.1% of the book is stressed.
The lender’s net profit growth of 15.7% also missed Street estimates by a mile.
“The four-five accounts which resulted in the extra slippage are a one-off case. Beyond that, we have not seen any stress other than what is typical for small and medium enterprises," the bank’s managing director and chief executive officer Murali M. Natrajan said in an interview.
DCB Bank has been known as a success story in lending to small businesses as its asset quality metrics have trumped that of its peers and public sector banks. Other lenders have witnessed higher bad loan ratios in their MSME (micro, small and medium enterprises) book in the last three years.
However, stress seems to have caught up with the bank now and with loan growth also disappointing, stress ratios have worsened. The lender’s developer finance book is causing it a lot of heartburn and DCB Bank wants to be cautious in lending now. “Real estate is weak; if we talk of motorcycles and cars, they too are weak. The sense we get is that this is a time to be cautious," said Natrajan.
He added that entrepreneurs who approach for an increase in credit limits are most likely to be turned down, unless general economic conditions give the confidence that they would be able to pay back.
Loan growth was 13% for the June quarter, far lower than 30% a year ago.
Analysts noted that along with a weak liability profile, DCB Bank’s performance doesn’t match up to its valuations.
“DCB’s liability profile remains weak and its plan to go slow on further branch expansion may impact margins in the long run. We believe that the stock is trading at expensive valuations for a relatively lower RoA (return on assets) of 1%," analysts at Emkay Global Financial Services Ltd wrote in a note. The 17% drop in valuation on Wednesday helps correct this anomaly to an extent; even so, some concerns remain for investors.
For instance, the lender’s low-cost current account and savings account is just a quarter of the deposit book. This puts DCB Bank at a risk of borrowing at higher costs as it would have to depend on wholesale deposits.