Rating Rationale
December 28, 2018 | Mumbai
DCB Bank Limited
Rating upgraded to 'CRISIL AA-/Stable' 
Rating Action
Rs.150 Crore Tier II Bonds (Under Basel III) CRISIL AA-/Stable (Upgraded from 'CRISIL A+/Stable')
Rs.2000 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
Short Term Fixed Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the Rs 150 crore Tier II bonds (under Basel III) of DCB Bank Limited (DCB Bank) to 'CRISIL AA-/Stable' from 'CRISIL A+/Stable' and reaffirmed its rating on the bank's certificates of deposit programme and short-term fixed deposit programme at 'CRISIL A1+'.
The rating upgrade is driven by the bank's demonstrated ability to maintain asset quality even through disruptions as seen in recent years while also scaling up its loan book. Gross non-performing assets (NPAs) have remained comfortable, ranging between 1.5-2.0% during the past five fiscals, displaying resilience even with the impact of demonetisation and implementation of GST on its customer segments. Further, DCB Bank's SMA-1 and 2 exposures too are at just 1% of advances. As on September 30, 2018, gross NPAs stood at around 1.8%. Net advances for the bank grew at a cumulative annual growth rate (CAGR) of 25% during fiscal 2013-fiscal 2018 with a 27% year-on-year increase to reach Rs 22,069 crore as on September 30, 2018. The rating upgrade also reflects CRISIL's expectation of an improvement in earnings profile, as operating efficiencies flow in. Operating expenses have remained elevated (2.9% of average assets in fiscal 2018) with opening of new branches. The cost to income ratio has been maintained at around 60% despite the more than doubling of branches since fiscal 2015. With these newer branches achieving scale, the cost to income ratio is expected to reduce from current levels, supporting the bank's earnings profile.

Analytical Approach

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

Key Rating Drivers & Detailed Description
* 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. DCB Bank's capitalisation ratios were comfortable with CET 1 and Tier 1 CAR at 12.0% and overall CAR at 15.6%, as on September 30, 2018 compared to 12.9% and 14.7% respectively as on September 30, 2017. Tangible networth was Rs 2931 crore and networth coverage for net NPAs was high at around 19 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 Aga Khan Fund for Economic Development (AKFED) 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 believes support will be available if needed. CRISIL 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 they will maintain healthy capitalisation over the medium term.
* Sustainable growth in advances with continued focus on the SME segment
DCB bank's net advances have grown at a strong pace with a CAGR of 25% between fiscal 2013 and 2018 reaching Rs 20,337 crore as on March 31, 2018. Net advances grew further by 27% (year-on-year) reaching Rs 22,069 crores as on September 30, 2018. DCB bank's has maintained its focus on low ticket loans and the SME segment over the past decade in turn garnering expertise in this segment.
The segmental break-up of advances mirrors the focus of the bank with SME segment comprising (mortgages (40%) and the SME/MSME book (12%)) constituting over 50% as on September 30 2018. The remaining is constituted primarily by agriculture and inclusive banking (19%), corporate banking (15%), and other segments (14%). Going forward, CRISIL believes that the bank is expected to continue to show steady growth rate with no material change in the segmental share of the book. 
* Stable asset quality
DCB Bank's stable asset quality is reflected in low gross non-performing assets (NPAs) in the range of 1.5%-2.0% in the past five fiscals. Even as on September 30, 2018, gross NPAs remained comfortable at 1.8%. Further, DCB Bank's SMA-1 and 2 exposures too are at just 1% of advances.
Corporate advances formed just 15% of total advances as of September 2018. The mortgages book, comprising loans against property and home loans, formed 40% of advances. The 2-year lagged gross NPAs in the mortgage book are comfortable, at around 2.5% as on September 30, 2018. The SME (small and medium enterprise) and MSME (micro, small and medium enterprise) segments had gross NPAs of 1.3% as on September 30, 2018 better than 1.6% as on September 30, 2017, while agriculture and related segments had gross NPAs in the range of 1.3%-1.7% in the past three fiscals. In the corporate book, the exposure is primarily to higher rated corporates with the bank also being able to recover from difficult accounts. Slippages in the corporate loan segment could lead to sharp rise in gross NPAs, given the bank's small size. Nevertheless, CRISIL believes that granularity in the overall book will help the Bank maintain stable asset quality over the medium term.
* 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 in fiscal 2009. The management has since then sorted out the asset quality issues and adopted a policy of steady growth in secured asset classes with the target customer segment of SMEs. The management team has clearly demonstrated high levels of consistency in chalking out and executing policies and growth strategies.
* Moderate, albeit improving, earnings profile
DCB Bank's earnings profile has been moderate amidst high operating expenses following the bank's branch expansion and investments in technological improvements. RoA (annualised) stood at 0.9% for the first half of fiscal 2019 compared to a three-year average return on assets 1.0%, which remains lower than that of CRISIL-rated peers.
Net interest margin (NIM) remained comfortable at 3.5% (annualised) for the first half of fiscal 2019 against 3.6% for fiscal 2018. Newer branches achieving scale would help in improving the cost to income ratio. CRISIL, therefore, believes DCB Bank's profitability will improve gradually over the medium term, driven by increasing contribution from new branches.
* Average resource profile with relatively lower share of CASA and small ticket retail deposits
The deposit base for the bank has grown at a CAGR of 23% during fiscal 2013 to fiscal 2018 reaching Rs 24,007 crore as on March 31, 2018. Deposit base grew further by 27% (year-on-year) reaching Rs 26,169 crore as on September 30, 2018. Of this, the CASA deposits of the bank have ranged between 23-25% (24% as on September 30, 2018) over the past five years, which is lower compared to peer banks. In terms of retail deposits of less than Rs 1 crore, they are at around 30% of the total deposit base. Consequently, the total granular retail deposit base is just around 54% of total deposits. With the newly opened branches achieving scale, CRISIL expects an increase in CASA and small ticket retail deposit base over the medium term.
* Modest scale of operations
Furthermore, DCB Bank's scale of operations remains modest. The bank, as on September 30, 2018, accounted for a small share of around 0.22% of deposits and advances in the banking system. Amidst the branch expansion in recent years, the bank now has a network of 328 branches as on September 30, 2018.
Outlook: Stable

CRISIL believes that DCB Bank's capitalisation will remain adequate to meet its business growth and manage its asset-related risks. The outlook may be revised to 'Positive' if the bank strengthens its market position significantly while maintaining healthy asset quality and improving earnings. Conversely, the outlook may be revised to 'Negative' in case of significant deterioration in DCB Bank's asset quality or earnings profile.
Liquidity Profile
The structural liquidity statement shows negative cumulative mismatches in certain buckets between 1-12 months. However, the bank's liquidity benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

About the Bank

DCB Bank was incorporated in 1995 by reconstituting Development Co-operative Bank Ltd to Development Credit Bank Ltd (DCBL) 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 stake at 14.94% as on September 30, 2018. DCB Bank had 328 branches as on September 30, 2018.
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 47,000 people, with revenues of USD 4.3 billion in 2017. AKFED had co-promoted Housing Development Finance Corporation Ltd in India in the late 1970s. Some of AKFED's other major investments are in Habib Bank Ltd, the largest private bank in Pakistan, Kyrgyz Investment and Credit Bank in Kyrgyzstan, and Diamond Trust Bank in Kenya, Tanzania, and Uganda.
For fiscal 2018, DCB Bank's profit after tax (PAT) was Rs 245 crore on a total income (net of interest expense) of Rs 1306 crore compared to PAT of Rs 200 crore on total income (net of interest expense) of Rs 1046 crore in the previous fiscal. 
For the half year through September 2018, the bank's PAT was Rs 143 crore on total income (net of interest expense) of Rs 711 crore compared with a PAT of Rs 124 crore on total income (net of interest expense) of Rs 632 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended September 30   2018 2017
Total Assets Rs crore 32,510 25,908
Total income (net of interest expenses) Rs crore 711 632
Profit after tax Rs crore 143 124
Gross NPA % 1.84 1.80
Overall capital adequacy ratio % 15.6 14.7
Return on assets % 0.9 1.0

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue Size
(Rs. Cr)
Rating assigned 
with Outlook
INE503A08044 Tier II Bonds (Under Basel III) 12-Jan-18 9.85% 12-Jan-28 150 CRISIL AA-/Stable
NA Certificate of deposit NA NA NA 2000 CRISIL A1+
NA Short-Term Fixed Deposit Programme NA NA NA Programme CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  2000.00  CRISIL A1+      29-12-17  CRISIL A1+  28-12-16  CRISIL A1+  10-07-15  CRISIL A1+  CRISIL A1+ 
Lower Tier-II Bonds (under Basel II)  LT    --    --    --    --  10-07-15  Withdrawal  CRISIL A-/Positive 
Short Term Fixed Deposits  ST  0.00  CRISIL A1+      29-12-17  CRISIL A1+  28-12-16  CRISIL A1+  10-07-15  CRISIL A1+  CRISIL A1+ 
Tier II Bonds (Under Basel III)  LT  150.00
CRISIL AA-/Stable      29-12-17  CRISIL A+/Stable    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions

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