Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Healthy capitalisation

DCB Bank’s healthy capitalisation is reflected in 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 15.5% and overall CAR at 19.7%, as on March 30, 2021 compared to 13.9% and 17.8%, respectively, as on March 30, 2020. Reported networth as at Sep 30, 2021 was Rs 3,858 crore and networth coverage for net NPAs was moderate at around 5.5 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. Although the present regulatory requirement to maintain stake in DCB Bank at 15% limits the quantum of fresh capital AKFED can infuse to fund growth, CRISIL Ratings believes support will be available if needed. CRISIL Ratings also believes the Reserve Bank of India will not object to AKFED's support to DCB Bank in a distress situation.

Given DCB Bank’s demonstrated ability to raise funds, and considering its growth plans, CRISIL 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

DCB bank’s net advances have grown at a strong pace, recording year-on-year (Y-O-Y) growth of over 20% between fiscals 2012 and 2018, and reached Rs 20,337 crore as on March 31, 2018. However, growth moderated to 16% in fiscal 2019, on the back of cautious approach undertaken by the bank on account of slow economic environment and reduction in corporate book (12% de-growth in fiscal 2019). The bank maintained the cautious stance in fiscal 2021 as well as net advances grew by 2% to Rs 25,959 crore as on March 31, 2021. Further, Amidst the Covid 2nd wave, book remained almost flat in the first quarter of Fiscal 2022 but has grown in the second quarter of Fiscal 2022 with improvement in the macro-economic environment. For the first half ended September 30, 2021, the banks advances registered an annualized growth of 7.9% to Rs 26,850 crore. Nevertheless, DCB Bank continues to maintain its focus on low ticket size loans and the SME businesses in turn garnering expertise and establishing its market position in these segments. CRISIL believes that while growth may remain muted in fiscal 2022 too, with the bank focussing more on asset quality rather than growth, a rebound is likely in fiscal 2022, wherein the bank may get back on a strong growth trajectory by fiscal 2023 with the expectation of improvement in the economic environment.

The segmental break-up of advances mirrors the focus of the bank with SME segment comprising (mortgages (41%) and the SME/MSME book (10%)) constituting over 50% as on September 30, 2021. The remaining is constituted primarily by Agriculture and inclusive banking (22%), Corporate banking (11%), commercial vehicle (4%), gold loans (6%), Co-lending (3%) and other segments (3%).

Modest asset quality

The gross non-performing assets (NPAs) for DCB Bank deteriorated to 4.1% as on March 31, 2021 from 2.5% as on March 31, 2020 amidst the economic environment. Post the second Covid-19 wave and its resultant lockdown, the GNPAs deteriorated further to 4.9% as on June 30, 2021 which with the reopening of the lockdowns improved to 4.7% as on September 30, 2021. While Covid-19 disrupted cash flows of several borrowers, especially small businesses, the bank has reported improvement in collections efficiencies for its key segments: 98.1%[1] in Sep-21 vs 94.5%1 in Apr-21 in Home Loans segment (~16% of overall advances as on Sep-21), 95.8%1 in Sep-21 vs 91.5%1 in Apr-21 in Loan Against Property (LAP) (~25% of overall advances as on Sep-21) .Furthermore, the share of customers (in value) who have not paid any instalments (between April 1, 2020 to October 25, 2021) stood at 0.7% in LAP, 1.5% in Home Loans, 2.7% in CV.

Consequently, the bank has been able to control slippages and improve on the recoveries with bulk of the recoveries being cash recoveries reflecting on lower reliance of the bank on restructuring to control asset quality metrics. Further, the bank’s funded SMA-0, 1 and 2 exposures combined too remain below 2% of net advances as on March 31, 2021. Having said that, the bank has a track record of comfortably managing its asset quality even during turbulent phases such as demonetisation and implementation of GST. Therefore, experience of the management, coupled with secured and granular portfolio, should help the bank navigate through a one-off turbulent time of disruptions in the economy owing to Covid-19.

Of the advances, the corporate advances formed just 11% of total advances as of September 30, 2021, wherein the exposures are primarily to higher rated corporates, wherein the bank is also able to recover from difficult accounts and is focused on running a shorter tenure book which supports performance of this book. The mortgages book, comprising loans against property and home loans, formed 41% of advances, with 2-year lagged gross NPAs in the mortgage book at around 4.4% and 2.8% as on September 30, 2021 and March 31, 2021, respectively. The SME or MSME (micro, small and medium enterprise) showed uptick in gross NPAs to 4.5% as on March 31, 2021 as compared to 2.6% same time last year, owing to the economic slowdown. The same inched up to 4.9% as on September 30, 2021, primarily on account of the impact on the businesses of SMEs amidst Covid. GNPAs have marginally deteriorated in agriculture related segments at 4.3% as on September 30, 2021 and at 4.0% as on March 31, 2021, as compared to 2.2% as on March 31, 2020.

With improvement in the collection efficiencies and recoveries, the asset quality metrics should improve going forward. Nevertheless, slippages from the restructured portfolios could also impact asset quality as and when the book comes out of moratorium and impact of any Covid-19 third wave, if any, bears watching and remains a key monitorable.

Stable management team

Majority of the top management team at DCB Bank, including the MD and 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.

Weaknesses:

Moderate earnings profile, likely to remain muted in the near to medium term

The earnings profile has been moderate amidst high operating expenses in the past, following the branch expansion and investments in technological upgradation. While operating expenses improved to 2.2% (as a percentage of average total assets) in fiscal 2021, from 2.4% in fiscal 2020, return on assets (RoA) decreased to 0.8% in fiscal 2021, from 0.9% for fiscal 2020, mainly due to increased credit costs. RoA’s further declined to 0.6% (annualised) with credit cost increasing to 1.2% (annualised) in first half of fiscal 2022, as compared to 1.1% in fiscal 2021. The bank has made Rs 78 crore of Contingency provision on restructured and stressed assets which is about 0.2% of total advances, Rs 115 crore of floating provisioning which can be used in emergency, Rs 24 crore of specific standard asset provision and Rs 84 crore of standard asset provision in first half of fiscal 2022.

Net interest margin (NIM) although comfortable, decreased to 3.4% for fiscal 2021 and 3.1% for first half of fiscal 2022, against 3.3% for fiscal 2020, on account of increased borrowing cost. Nevertheless, as the bank is increasing its retail deposit base and making it more granular, cost of borrowings should drop. Further, while operating expenses will increase from current levels once the bank gets back on the growth trajectory, the same will lag previous year levels. This, along with controlled credit cost in steady state scenario, will improve DCB Bank's profitability over the medium to longer term. Nevertheless, in the near to medium term, the bank’s ability to control credit cost will be the key determinant of profitability and the ability of the bank to do so will remain a key monitorable.

Average resource profile with relatively lower share of CASA; focus on retail deposits

Deposits have grown in line with advances. After posting a compounded annual growth rate (CAGR) of 23% over fiscals 2015 to 2019, deposit base shrunk marginally reaching Rs 29,704 crore as on March 31, 2021 and increase by 7% to Rs 31,769 crore as on September 30, 2021. Of this, share of CASA deposits were in the range of 23-26% (25.4% as on September 30, 2021) over the past five years, which is lower compared to peer banks.

The bank is following a strategy of growing its retail term deposit base, as a result of which retail term deposit of the bank has grown at a CAGR of around 20% over fiscals 2016 to 2021. Also, the top 20 depositors’ ratio has also been steadily declining as it was around 6.67% as of September 30, 2021, as compared to 14.9% as on March 31, 2018. Even in terms of granular deposits (defined as SA + term deposits with ticket size below Rs 2 crore), the contribution, rose to 73% of the total deposit base as of September 2021, from 48% as of March 2018. With the newly opened branches achieving scale and the bank’s focus on making its retail deposit base more granular, CRISIL 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, 2021. Amidst the branch expansion in recent years, the bank now has a network of 356 branches as on September 30, 2021 as compared to 262 as on March 31, 2017.

[1] Collection efficiency = Current collections divided by current billing for the month