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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 14.2% and overall CAR at 18.3%, as on September 30, 2020 compared to 12.6% and 16.2%, respectively, as on September 30, 2019. Reported networth was Rs 3584 crore and networth coverage for net NPAs was high at around 17.4 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 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 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 2020 as well as net advances grew by 8% to Rs 25,345 crore as on March 31, 2020. This further dropped to Rs 24,879 crore as on September 20, 2020, owing to disruptions in the form of the nationwide lockdown and sporadic regional lockdowns. 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 2021 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 2022 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 (42%) and the SME/MSME book (11%)) constituting over 50% as on September 30 2020. The remaining is constituted primarily by Agriculture and inclusive banking (21%), Corporate banking (10%), commercial vehicle (6%), gold loans (4%) and other segments (6%).
* Comfortable asset quality
DCB Bank's comfortable asset quality is reflected in low gross non-performing assets (NPAs) in the range of 1.5%-1.8% over fiscals 2014-19. While GNPAs increased marginally to 2.5% as on March 31, 2020 from 1.8% as on March 31, 2019, amidst the slow economic environment, it remained comfortable. Further, GNPAs stood at 2.3% as on September 30, 2020. The bank's funded SMA-0, 1 and 2 exposures combined too were below 1% of net advances as on March 31, 2020.
Corporate advances formed just 10% of total advances as of September 2020. The mortgages book, comprising loans against property and home loans, formed 42% of advances. The 2-year lagged gross NPAs in the mortgage book are comfortable, around 2.5% and 2.8% as on September 30, 2020 and March 31, 2020, respectively. The SME or MSME (micro, small and medium enterprise) showed uptick in gross NPAs to 2.6% as on March 31, 2020 as compared to 1.5% same time last year, owing to the economic slowdown. The same improved to 1.9% as on September 30, 2020, primarily on account of moratorium and freeze on asset classification. GNPAs were stable in agriculture related segments at 2.2% as on September 30, 2020 and March 31, 2020, as compared to 2.1% as on March 31, 2020. The asset quality metric weakened in the CV segment with GNPA increasing to 7.1% and 6.5% as on September 30, 2020 and March 31, 2020, respectively, as compared to 2.9% as on March 31, 2019. While the bank expects recovery in this segment in the near future, the same remains to be seen, Nevertheless, CV segment constituted only about 6% of the total advances of the bank. In the corporate book, the exposure is 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. However, slippages in the corporate loan segment could lead to sharp rise in gross NPAs, given the bank's small size.
While Covid-19 has disrupted cash flows of several borrowers, especially small businesses, the bank has reported improvement in collection efficiencies for its key segments: 91.3%2 in sep-20 vs 56.9%2 in apr-20 in Home loans segment (~16% of overall advances as on Sep-20), 87.5%2 in sep-20 vs 51.6%2 in apr-20 in LAP (~26% of overall advances as on Sep-20) and 77.1%2 in sep-20 vs 30.1%2 in apr-20 in CV segment (~6% of overall advances as on Sep-20). Furthermore, the share of customers (in value) who have not paid any instalments (over Apr'20 to Oct'20) stood at 7.4% in LAP, 5.4% in Home loans, 10.8% in CV. This was 7.0% in MFI BC segment (~3% of overall advances as on Sep-20) for the days between April 01, 2020 and Oct, 26, 2020. CRISIL expects the bank to restructure around 3-5% of its book in fiscal 2021.
While the collection efficiency has shown an improvement, it is not back to pre-Covid levels, and hence, CRISIL will monitor for any sharp uptick in GNPAs or slippages over the near term. 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.
* 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 2.4% (as a percentage of average total assets) in fiscal 2020, from 2.6% in fiscal 2019, return on assets (RoA) decreased to 0.9% in fiscal 2020, from 1.0% for fiscal 2019, mainly due to increased credit cost arising from Covid-19 related provisions (Rs 63 crore in the fourth quarter of fiscal 2020). Operating expenses improved further to 2.1% (annualised) in the first half of fiscal 2021, partly because of low business volume and partly because of cost-saving measures. This helped the bank make additional Covid-19 related provisions of Rs 80 crore in the first half of fiscal 2021, along with additional floating and NPA provisions. Consequently, the bank had Rs 143 crore of Covid-19 related provisions, Rs 103 crore of floating provisions and Rs 368 crore of NPA provisions, leading to PCR of 64% as on September 30, 2020.
Hence, RoA remained stable at 0.9% (annualised) with credit cost increasing to 1% (annualised) in first half of fiscal 2021, as compared to 0.7% in fiscal 2020. Credit cost ranged from 0.4% to 0.5% over fiscals 2016 to 2019.
Net interest margin (NIM) although comfortable, decreased to 3.4% for fiscal 2020 and first half of fiscal 2021, against 3.5% for fiscal 2019, 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 rose by 7% reaching Rs 30,370 crore as on March 31, 2020, and shrunk to Rs 28,775 crore as on September 30, 2020. Of this, share of CASA deposits were in the range of 23-25% (22.4% as on September 30, 2020) over the past five years, which is lower compared to peer banks. Having said that, 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 20% over fiscals 2016 to 2020. Also, the top 20 depositors' ratio has also been steadily declining as it was around 7.89% as of September 30, 2020, as compared to 14.9% as on March 31, 2018. Having said that, in terms of granular deposits (defined as SA + term deposits with ticket size below Rs 2 crore), the contribution, though, rose to 66% of the total deposit base as of June 2020, from 48% as of March 2018, yet it remains low as compared to peers. 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, 2020. Amidst the branch expansion in recent years, the bank now has a network of 344 branches as on September 30, 2020 as compared to 262 as on March 31, 2017.
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