2 min read.Updated: 13 May 2021, 01:29 PM ISTAparna Iyer
Analysts are concerned that DCB Bank would see disproportionate impact of the lockdowns on its asset quality in the first quarter mainly due to its borrower profile
Analysts expect DCB Bank's growth to accelerate and move towards a higher return on equity
Small businesses were hit hard last year due to the pandemic and remain vulnerable this time too as a second wave grips the country. While lockdowns are localised and less strict than the nationwide restrictions of last year, small businessmen have been disproportionately hit because of their vulnerability.
Considering that DCB Bank Ltd predominantly caters to this segment and has a large share of self-employed individuals as borrowers, a rise in stress should not come as a surprise. Indeed, collections have been impacted during April and May due to the curfews and lockdowns imposed to curb the second covid wave.
Analysts are concerned that the lender would see disproportionate impact of the lockdowns on its asset quality in the first quarter mainly due to its borrower profile. As such, bad loans remained elevated in the March quarter with gross bad loan ratio at 4.09%, higher than the previous quarter. Besides that, the lender also restructured 4.3% of its loan book, one of the highest among peers. What’s more is that fresh slippages surged in the March quarter to ₹664 crore. “We believe that the bank has relatively higher dependence on the self-employed category which remains the most impacted in the second covid wave," wrote analysts at Emkay Global Financial Services Ltd in a note. Those at Nirmal Bang Equities Pvt. Ltd believe that both bad loans and the restructured pile may increase due to the current disruptions.
Another worry is that DCB Bank’s provisions don’t seem to give enough coverage for risks ahead. In fact, a reduction in provisions was a contributing factor in the lender’s 13% net profit growth for the fourth quarter. Provisions fell 14% from a year ago period. The coverage ratio was 62.35%, down from a year ago. Analysts expect incremental provisioning needs to remain high in the coming quarters and, thereby, keep return on assets ratio under pressure.
Even as asset quality remains a worry, DCB Bank may see headwinds on the growth front too. Loan growth remained tepid at 2% for the March quarter. Despite these troubles, analysts believe that DCB Bank may report improvement once economic recovery gains momentum. “Unlike previous cycles in the bank’s history and on a relative basis in this cycle, we believe DCB Bank has done well. As the macro stabilizes, we expect growth to accelerate and move towards a higher RoE (return on equity)," said a report from Kotak Institutional Equities Ltd.