DCB Bank: MOSL upgraded this private bank to ‘buy’, sees over 23% upside – 5 key reasons why

Despite an almost 11 percent rise in the stock in June so far, brokerage house Motilal Oswal (MOSL) has upgraded DCB Bank to ‘buy’ from ‘neutral’ earlier.

"We had downgraded our rating on DCB Bank to Neutral in July 2019 (stock price at ₹239) amid weaker operating performance and an uncertain growth/asset quality outlook. However, with a recovery in loan growth and anticipated improvements in operating leverage, we estimate a 21 percent earnings CAGR over FY24-26E. We, thus, find the current valuations at 0.7x FY26E ABV attractive and accordingly upgrade our rating to BUY from Neutral, with a revised TP of ₹175 (0.9x FY26E ABV)," it said.

The above-mentioned target price implies an over 23 percent upside in the private sector lender.

The brokerage noted that DCB Bank has seen a healthy recovery in loan growth over the past two years after reporting tepid trends over FY20-22. Moreover, the lender has maintained NIMs (net interest margins) within a healthy range of 3.6-4 percent, aided by a granular liability profile, limited reliance on bulk deposits and an improving asset mix as the bank has strategically reduced the mix of low-margin corporate loans, it observed.

While OPEX (operating expense) has been high owing to investments in business, MOSL expects operating leverage to kick in, pushing RoA towards 1 percent. It believes the C/I ratio has broadly peaked at 64 percent in FY24 and expects it to moderate to 60 percent by FY26E. MOSL also forecasts a healthy 19 percent CAGR in revenue over FY24-26E amid stable margins and steady loan growth.

It estimates RoA/RoE to reach 1 percent/14 percent by FY26 (FY24 RoA: 0.9 percent).

Stock price trend

DCB Bank stock has gained 21 percent in the last 1 year and around 7 percent in 2024 YTD. It jumped almost 11 percent in June after an 8.3 percent fall in May. Before that, it rallied 17 percent in April, shed 6.6 percent in March and 7.5 percent in February; and jumped 4 percent in January.

Currently trading at ₹142, the stock is 13 percent away from its 52-week high of ₹163.40, hit in January this year while It has advanced 29 percent from its 52-week low of ₹110, hit in October 2023.

Investment rationale

Loan growth to sustain at 19% CAGR after a blip in FY20-22: DCB Bank management is focusing on generating more business from its existing branches and investing in digital capabilities to enhance customer experience. The bank has seen healthy loan growth recovery over the past two years, following a sluggish FY20-22. It continues to emphasise granular retail loans while increasing business loans for profitable growth. Mortgages now make up 45 percent of the portfolio. The bank is expected to deliver an 18 percent CAGR in its overall balance sheet for FY24-26, with advances and deposits growing at 19-20 percent CAGR during the same period, said MOSL.

Retail mix rising; branch expansion to aid business growth: Under the leadership of new MD Praveen Kutty, DCBB has shifted focus towards granular loans, reducing exposure to corporate segments while increasing mortgages and AIB segments to around 70 percent in the last two years, noted MOSL. The bank aims for steady growth in retail and business loans, expanding its branch network by 15-20 branches annually and bolstering ground staff. It aims to enhance branch productivity and efficiency in states with untapped SME potential, aiming to double its balance sheet size over the next 3-4 years, in line with historical growth rates, it added.

Estimate NIMs to stabilise at 3.65 percent: Despite a lower CASA ratio of 26 percent, DCB Bank maintains healthy NIMs between 3.6 percent and 4.0 percent. This stability is supported by a granular liability profile, minimal reliance on bulk deposits, and an improved asset mix with reduced exposure to low-margin corporate loans. The bank offers competitive rates on larger savings account balances but most balances fall within lower pricing tiers. With deposit repricing largely completed, DCBB anticipates manageable funding costs, expecting margins to sustain around 3.65 percent for FY25-26, while the CASA mix remains stable, it stated.

Improved productivity: DCB Bank's aggressive investments to expand its business have led to a notable increase in the Cost-to-Income (C/I) ratio. This has been exacerbated by higher operating expenses growth compared to revenue growth over the past three years, resulting in a C/I ratio deterioration to 64 percent (from an average of 57% in FY18-20), observed the brokerage. As branches mature and loan growth stabilises, the bank anticipates improved productivity, aided by digital enhancements and branch network optimisation. Opex growth is expected to moderate to a 15 percent CAGR for FY24-26 (down from 22 percent CAGR in FY21-24), driving the C/I ratio to an estimated 60 percent by FY26, down from 64 percent in FY24, forecasted MOSL.

Asset quality outlook healthy; GNPA to improve further: As per the brokerage, despite facing asset quality challenges during the COVID pandemic, DCBB has refocused on enhancing underwriting standards. The bank's portfolio now emphasises secured, well-diversified, and granular loans. Improved collection and recovery processes, along with streamlined credit appraisals, have bolstered asset quality. Although the restructured book remains elevated at ₹1070 crore (2.6 percent of loans), controlled slippages are expected due to growth in secured retail, SME, and agri/microfinance sectors. MOSL projects GNPA/NNPA ratios to improve to 2.6 percent/0.8 percent by FY26, with credit costs estimated to sustain at 0.5 percent for FY26E.

Valuation and view

"DCBB has seen a healthy recovery in loan growth after witnessing sluggish trends during FY20-22. The bank's shift in loan mix toward retail loans has not only shielded its margins but also provided stable, profitable growth. The bank has made significant investments in the business and is well poised to sustain the healthy growth rate, while improvement in operating leverage helps sustain RoA at 1 percent by FY26E vs. 0.9 percent in FY24," said the brokerage.

It, thus, estimates RoE to recover toward 14 percent by FY26E vs an average 10 percent over FY22-24.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.