Rating Rationale
December 29, 2017 | Mumbai
DCB Bank Limited
'CRISIL A+/Stable' assigned to Tier II Bonds (Under Basel III)
 
Rating Action
Rs.150 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Assigned)
Rs.2000 Crore Certificate of Deposits (Enhanced from Rs.1500 Crore) 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 assigned its 'CRISIL A+/Stable' rating to the Rs 150 crore Tier II bonds (under Basel III) and reaffirmed its 'CRISIL A1+' rating on the certificates of deposit and short-term fixed deposit programmes of DCB Bank Limited (DCB).
 
The ratings reflect healthy capitalisation, with support from the Aga Khan Fund for Economic Development (AKFED) as and when required, and stable asset quality. These strengths are partially offset by subdued, but improving, earnings, and modest, though growing, business franchise.

Key Rating Drivers & Detailed Description
Strengths
* Healthy capitalisation
Healthy capitalisation is reflected in comfortable capital adequacy ratios (CAR), considerable networth coverage for net non-performing assets (NPAs), and flexibility to raise capital. The Common Equity Tier 1 (CET 1) and Tier 1 CAR was 12.9% and overall CAR 14.7%, as on September 30, 2017, an increase from 10.8% and 11.9%, respectively, a year earlier. The tangible networth was Rs 2685 crore and networth coverage for net NPAs was high at 17 times as on the same date. The bank raises equity well ahead of requirement to support growth; it last raised equity of around Rs 380 crore through qualified institutional placement in April 2017 and Tier II capital of Rs 300 crore in November 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 its demonstrated ability to raise funds, and considering its growth plans, the bank should maintain healthy capitalisation over the medium term.
 
* Stable asset quality
This is reflected in low gross non-performing assets (NPAs) of 1.5-1.6% in the three fiscals ended March 31, 2017. As on September 30, 2017, too, gross NPAs remained comfortable at 1.8%.
 
The advances book is granular. Corporate advances formed just 17% of total advances as on September 30, 2017. The mortgages book, comprising loans against property and home loans, formed 43% of advances. The book is now adequately seasoned and the two-year lagged gross NPAs were stable at 1.5-1.6%, in the three fiscals ended March 31, 2017. The SME (small and medium enterprise) and MSME (micro, SME) segments had gross NPAs of 1.6-1.7% at the end of fiscals 2016 and 2017, while agriculture and related segments had gross NPAs of below 1.5% in the three fiscals ended March 31, 2017.
 
Granularity and comprehensive underwriting, monitoring, and collection mechanism helped maintain stable asset quality. However, slippages in the corporate loan segment may lead to a sharp rise in gross NPAs, given the bank's small size. Nevertheless, asset quality should remain stable over the medium term. 
 
Weakness
* Modest, albeit improving, earnings profile
Earnings profile has been impacted in the past due to high operating expenses following branch expansion and investments in technological improvements. Return on assets (RoA; annualised) stood at 1.0% for the first half of fiscal 2018 against a three-year average RoA 1.1%, which remains lower than that of CRISIL-rated peers.
 
However, the net interest margin (NIM) improved to around 4% (annualised) for the first half of fiscal 2018 from 3.7% for fiscal 2017. Newer branches achieving scale would help in the resource profile which would aid cost of borrowings. Hence, profitability is likely to remain average, but will improve gradually over the long term driven by increasing contribution from new branches.
 
* Modest scale of operations
As on September 30, 2017, the bank accounted for a small share of around 0.2% of deposits and advances in the banking system in India. Despite branch expansion in recent years, it has a limited reach with a network of 310 branches as on September 30, 2017.
 
* Modest asset-liability management (ALM) profile
ALM has been modest due to negative mismatches in certain buckets between 6-12 months. However, tight liquidity market could pose challenges in liquidity management. Therefore, liquidity remains a key rating sensitivity factor.
Outlook: Stable

CRISIL believes capitalisation will remain healthy and support business growth over the medium term. Furthermore, asset quality is likely to be comfortable over this period. The outlook may be revised to 'Positive' if the bank strengthens its market position significantly while maintaining asset quality and improving earnings. Conversely, the outlook may be revised to 'Negative' in case of significant deterioration in DCB's asset quality or earnings profile.

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 of 15.01% as on September 30, 2017. DCB Bank had 306 branches as on September 30, 2017.
 
AKFED is an international development enterprise. It is dedicated to promoting entrepreneurship and building economically sound companies. It has 150 companies and employs over 30,000 people, with revenue of USD 2 billion. 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.
 
In fiscal 2017, profit after tax (PAT) was Rs 200 crore on total income (net of interest expense) of Rs 1047 crore, against PAT of Rs 195 crore on total income (net of interest expense) of Rs 840 crore in the previous fiscal. 
 
In the six months through September 2017, PAT was Rs 124 crore on total income (net of interest expense) of Rs 632 crore, against PAT of Rs 96 crore on total income (net of interest expense) of Rs 489 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended September 30   2017 2016
Total Assets Rs crore 25,908 21,948
Total income (net of interest expenses) Rs crore 632 489
Profit after tax Rs crore 124 96
Gross NPA % 1.8 1.8
Overall capital adequacy ratio % 14.7 11.9
Return on assets % 1.0 0.9

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
NA Tier II Bonds (Under Basel III)^ NA NA NA 150 CRISIL A+/Stable
NA Certificate of deposit NA NA 7-365 days 2000 CRISIL A1+
NA Short-Term Fixed Deposit Programme NA NA NA Programme CRISIL A1+
^yet to be issued
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  2000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Lower Tier-II Bonds (under Basel II)  LT    --    --    --  10-07-15  Withdrawal  03-12-14  CRISIL A-/Positive  CRISIL A-/Stable 
Short Term Fixed Deposits  ST  0  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Tier II Bonds (Under Basel III)  LT  150  CRISIL A+/Stable    --    --    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
 
Links to related criteria
Rating Criteria for Banks and Financial Institutions

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