Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the debt instruments of DCB Bank Limited (DCB Bank).

 

Consequent to redemption, CRISIL Ratings has also withdrawn its rating on Tier II bonds (under Basel III) of Rs.150 Crore (See Annexure 'Details of Rating Withdrawn' for details) as CRISIL Ratings has received independent confirmation that these are fully redeemed. The withdrawal is in line with CRISIL Ratings withdrawal policy.

 

The ratings continue to reflect the bank’s healthy capitalisation and established market position in the small and medium enterprise (SME) segment, driven by an established track record of sustainable and calibrated growth in advances, comfortable asset quality and stable management team. These strengths are partially offset by the average earnings profile, average resource profile with relatively lower share of CASA deposits, and the modest scale of operations in the overall banking system.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of DCB Bank.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalization: DCB Bank’s healthy capitalisation is reflected in the comfortable capital adequacy ratios (CAR), considerable networth coverage for net non-performing assets (NPAs), and flexibility to raise capital. Capitalisation ratios were comfortable with CET 1 and Tier 1 CAR at 14.3% and overall CAR at 16.6% as on September 30, 2023 (15.2% and 17.6% respectively as on March 31, 2023). Reported networth as on September 30, 2023 stood at Rs 4,784 crore with networth coverage for net NPAs at 10.0 times as on the same date. DCB Bank raises equity well ahead of requirement to support growth; it last raised equity of around Rs 379 crore via qualified institutional placement in April 2017.

 

DCB's capital profile also benefits from AKFED's stance that it will extend support as and when required. In the past, it has infused capital either directly or through associated entities or has helped the bank raise equity. Further, AKFED is planning to infuse Rs 83 crore in DCB (subject to receipt of regulatory approvals) on a preferential basis, post which its shareholding in the bank will increase to 15.66% (14.03% as on September 30, 2023), subject to regulatory approvals. CRISIL Ratings believes that AKFED will provide support to DCB, if the need arises, and that the Reserve Bank of India will not object to AKFED’s support to DCB Bank in a distress situation.

 

The recent regulation by RBI on revised risk weights on unsecured consumer loans, including credit card receivables and loans to NBFCs beyond a specific threshold is expected to have an impact on the capital ratios of the bank. However, since the unsecured loan exposure of DCB Bank is minimal, the capitalisation levels of the bank are not likely to have a material impact. Further, given DCB Bank’s demonstrated ability to raise funds, and considering its growth plans, CRISIL Ratings believes healthy capitalisation will be maintained over the medium term.

 

• Established market position in SME segment, driven by past record of sustainable and calibrated growth: The bank has been growing steadily with net advances increasing to Rs 37,276 crore as on September 30, 2023 (Rs 34,381 crore as on March 31, 2023) registering a growth of 19% [year-on-year (y-o-y)]. The bank continues to remain SME focussed with the SME book constituting over 50% [mortgages (44.4%) and the SME/MSME book (6.6%)]. The remaining was constituted primarily by Agriculture and inclusive banking (24%), Corporate banking (8%), gold loans including co-lending (11%), commercial vehicle (1%), and other segments (5%). Furthermore, since the bank primarily caters to SME and Agriculture segments, majority of the book qualifies for priority sector lending (PSL), which accounted for ~48% of the bank’s advances as on September 30, 2023. The bank has also been tapping co-lending opportunities and has tied up with 6 partners majorly for gold loans and a small part of unsecured business loans and school finance. However, the share of the co-lending book is likely to remain range-bound between 10-15%.

 

Mortgages continue to form majority of the book. Within mortgages, the bank has grown its home loans book in the last 5 years and it now accounts for almost half of the mortgage book. The management plans to increase the share of loans against property going forward and will continue to maintain its focus on the SME businesses in turn garnering expertise and establishing its market position in this segment. CRISIL Ratings believes that the growth momentum shall continue with the bank continuing to focus primarily on the SME segment.

 

• Modest yet range-bound asset quality metrics: The gross non-performing assets (GNPA) ratio for DCB Bank improved from the peak of 4.3% as on March 31, 2022 to 3.2% as on March 31, 2023 (3.4% as on September 30, 2023). GNPA ratio for mortgage book has witnessed an inch up and stood at 2.2% as on September 30, 2023 (1.8% as on March 31, 2023 and 2.8% as on March 31, 2022) while that of AIB and corporate book stood steady at 3.4% and 6.9% respectively as on September 30, 2023. GNPA of SME/MSME book also increased to 6.1% (4.4% as on March 31, 2023).

 

Nevertheless, overall slippage ratio improved to 4.2% (annualised) for the half year ended fiscal 2024 (H1 FY24) from 5.7% for fiscal 2023 and 6.7% for fiscal 2022. The mortgage book witnessed higher slippages in H1 FY24 owing to majority of restructured book coming out of moratorium. The bank’s funded SMA-1 and 2 exposures combined remained at 5% of gross advances as on September 30, 2023 (4.6% as on March 31, 2023 and 4.9% as on March 31, 2022).

 

The corporate advances formed 8% of total advances as of September 30, 2023, wherein the exposures are primarily to higher rated corporates. The bank runs this portfolio as liquidity management tool and focuses on a shorter tenure lending, which supports performance of this book. Given this, the bank has a track record of recovering from stressed accounts as well.

 

Furthermore, given the experience of the management, coupled with secured and granular portfolio, should help the bank  to improve its asset quality metrics to the pre-pandemic levels. Restructured portfolio constituted 4% of the gross advances as on September 30, 2023 and is entirely out of the moratorium period. The ability of the bank to comfortably manage its asset quality and credit costs will however remain a key monitorable.

 

• Stable management team: Majority of the top management team at DCB Bank, including Mr. Murali Natrajan, the Managing Director (MD) and Chief Executive Officer (CEO), joined the bank in mid-2009, after the bank was struck with poor asset quality issues. The management has since then sorted out the asset quality issues and adopted a policy of steady growth in secured asset classes, targeting SMEs. The management team has clearly demonstrated high levels of consistency in chalking out and executing policies and growth strategies. Mr Natrajan’s 15-year tenure as MD & CEO of the bank ends in April 2024. The bank has hired an external firm as a part of succession planning and the new appointment shall be subject to the RBI’s approval. Further, Mr. Ravi Kumar has taken over as new Chief Financial Officer of the bank from Mr. Satish Gundewar with effect from June 2023.

 

Weaknesses:

• Average earnings profile: The earnings profile has been moderate amidst high operating expenses, following the branch expansion and investments in technological upgradation. The operating expenses (as a percentage of average total assets) increased to 2.8% in fiscal 2023 (from 2.4% in fiscal 2022) owing to increased hiring. However, it was offset by improved credit costs at 0.3% in fiscal 2023 (1.0% in fiscal 2022). As a result, the ROA improved to 1.0% for fiscal 2023 (0.7% for fiscal 2022). RoA for H1 FY24 remained range bound at 0.9% (annualised). The bank has Rs 43 crore of contingency provision on restructured and stressed assets, Rs 146 crore of floating provisioning which can be used in emergency, Rs 6 crore of specific standard asset provision and Rs 126 crore of standard asset provision as on September 30, 2023.

 

Net interest margin (NIM) was 3.4% (annualised) in first half of fiscal 2024 (3.5% in fiscal 2023). Repricing of floating rate loan book provides cushion against the rising cost of deposits. However, rationalization of operating expenses as the bank further scales up, along with controlled credit cost in steady state scenario, are likely to improve DCB Bank's profitability over the medium to longer term and will remain key monitorables.

 

• Average resource profile with relatively lower share of CASA; focus on retail deposits: The deposit base grew by 23.1% Y-o-Y to Rs 45,496 crore as on September 30, 2023, majorly driven by growth in term deposits. The CASA ratio, however, declined to 25.0% as on September 30, 2023 (26.4% as on March 31, 2023 and 29.3% as on September 30, 2022), which is still lower than the peer banks. CASA ratio of the bank has increased as compared to the pre-covid levels, however, has declined recently in the last year in line with the industry trend. However, the retail deposits ratio (defined as Savings Accounts + term deposits with ticket size below Rs 2 crore as a proportion of total deposit base) stood healthy at 66% as on September 30, 2023 and March 31, 2023.

 

Also, the top 20 depositors’ ratio has also improved to 7.1% as of September 30, 2023, as compared to 14.9% as on March 31, 2018. With the newly opened branches achieving scale and the bank’s focus on making its retail deposit base more granular, CRISIL Ratings expects an increase in CASA and small ticket retail deposit base over the medium term.

 

• Modest scale of operations: Scale of operations remains modest, with the bank accounting for a small share of deposits and advances in the banking system, as on September 30, 2023. Amidst the branch expansion in the recent years, the bank now has a network of 439 branches as on September 30, 2023 as compared to 262 as on March 31, 2017.

Liquidity: Strong

The structural liquidity statement as on September 30, 2023, shows positive cumulative mismatches in the buckets upto 1 year and the liquidity coverage ratio stood at 112.9% as on the same date. Further, the bank's liquidity benefits from access to systemic sources, such as the liquidity adjustment facility from RBI, access to the call money market, and refinance limits from sources such as National Housing Bank, Small Industries Development Bank of India and National Bank for Agriculture and Rural Development.

 

ESG profile

CRISIL Ratings believes that DCB Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment and other sustainability related factors.

 

DCB Bank has an ongoing focus on strengthening various aspects of its ESG profile.

 

DCB Bank’s key ESG highlights:

• The bank has taken initiatives to reduce Green House gas emissions including use of products made from re-cycled content wherever possible, use of air-conditioners using green refrigerants, installation of solar panels for generation of renewable power wherever possible in branches and offices and use of green certified products which are aimed at reduction of resources.
• The bank has Agriculture and Inclusive Banking (AIB) as a separate unit with the primary objective of achieving financial inclusion, priority sector lending and enhancing the Bank’s footprint in the rural and semi urban areas. At the end of fiscal 2023, AIB had 194 branches in 13 states of India.
• About 13% of the bank’s workforce comprised females as on March 31, 2023. Further, the bank has taken initiatives to promote gender equity within the organization. 
• 75% of the board members are independent directors, and none of them have tenure exceeding 10 years.  The bank also has a dedicated investor grievance redressal mechanism.
• ESG disclosures of the bank are evolving; and it is in the process of further strengthening the disclosures going forward.

 

There is growing importance of ESG among investors and lenders. DCB Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes DCB Bank’s capitalisation will remain adequate to meet its business growth and manage its asset-related risks.

Rating Sensitivity factors

Upward factors:

• Substantial ramp up in operations with improvement in asset quality metrics and earnings profile with RoA improving to around 1.5% on a sustained basis
• Increasing granularity in deposit profile with CASA ratio improving on a sustained basis

 

Downward factors:

• Significant deterioration in asset quality thereby impacting the earnings profile of the bank
• Weakening of capital position of the bank with overall Capital adequacy ratio consistently below 17%

About the Company

DCB Bank was incorporated in 1995, by reconstituting the Development Co-operative Bank Ltd (DCBL) to Development Credit Bank Ltd as a joint-stock banking company. In 2014, it got its present name. DCBL was set up in 1981, by amalgamating Ismailia Co-operative Bank Ltd with Masalawalla Co-operative Bank Ltd. AKFED and its Indian associate, Platinum Jubilee Investments, are the largest shareholders in DCB Bank, with combined stake at 14.81% as on September 30, 2023. DCB Bank had 439 branches as on September 30, 2023.

 

AKFED is an international development agency, dedicated to promoting entrepreneurship and building economically sound enterprises in developing economies. AKFED operates as a network of affiliates with more than 90 separate project companies employing over 55,000 people, with group revenue of USD$ 4 billion in 2021. AKFED had co-promoted Housing Development Finance Corporation Ltd in India in the late 1970s.

Key Financial Indicators

As on /for the period ended		Half-year ended September 30, 2023	Year ended March 31, 2023	Year ended March 31, 2022
Total Assets	Rs crore	57,710	52,366	44,793
Total income (net of interest expenses)	Rs crore	1,161	2,126	1,810
Profit after tax	Rs crore	254	466	288
Gross NPA	%	3.4	3.2	4.3
Overall capital adequacy ratio	%	16.6	17.6	18.9
Return on assets	%	0.9*	1.0	0.7

*Annualised

Any other information: Not Applicable