Rating Rationale
December 30, 2019 | Mumbai
DCB Bank Limited
'CRISIL A1+' assigned to bank debt; debt Instrument reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore
Short Term Rating CRISIL A1+ (Assigned)
 
Rs.150 Crore Tier II Bonds (Under Basel III) CRISIL AA-/Stable (Reaffirmed)
Rs.1200 Crore Certificate of Deposits (Reduced from Rs.2000 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 'CRISIL A1+' to the Rs 300 crore bank loan facility of DCB Bank Limited (DCB Bank) and reaffirmed its ratings on the Tier II bonds (under Basel III) of the bank at 'CRISIL AA-/Stable', certificates of deposit programme and short-term fixed deposit programme at 'CRISIL A1+'. Based on the request by DCB, CRISIL has reduced the rated quantum of Certificate of Deposit (CD) of DCB to Rs 1200 crore. This is in line with CRISIL's policy for withdrawal of ratings.
 
The ratings continue to reflect the Bank's healthy capitalisation, sustainable and calibrated growth in advances with continued focus on the SME segment, comfortable asset quality and stable management team. These strengths are partially offset by the moderate, albeit improving earnings profile, average resource profile with relatively lower share of CASA and small ticket retail deposits and modest scale of operations in the overall banking system.
 
The bank has maintained strong growth historically as its net advances grew at a cumulative annual growth rate (CAGR) of 23% during fiscal 2015-fiscal 2019. However, growth subdued a little on the back of cautious approach undertaken by bank on account of slow economic environment in first half of fiscal 2020 as it grew at an annualized rate of 10% to reach Rs 24,797 crore as on September 30, 2019. Gross non-performing assets (NPAs) have remained comfortable, ranging between 1.5-1.8% during the past five fiscals, displaying resilience even with the impact of demonetisation and implementation of GST on its customer segments. However, GNPAs inched up marginally to 2.1% as on September 30, 2019 from 1.8% as on September 30, 2018. Further, DCB Bank's SMA-1 and 2 exposures too are less than 1% of net advances each. Nevertheless, CRISIL will monitor for any sharp uptick in GNPAs or slippages over the near term. Operating expenses have remained elevated (2.6% of average assets in fiscal 2019) with opening of new branches. The cost to income ratio has been maintained at around 55-60% despite the more than doubling of branches since fiscal 2015. CRISIL expects improvement in earnings profile, as operating efficiencies flow in.

Analytical Approach

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

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. DCB Bank's capitalisation ratios were comfortable with CET 1 and Tier 1 CAR at 12.6% and overall CAR at 16.2%, as on September 30, 2019 compared to 12.0% and 15.6% respectively as on September 30, 2018. Tangible networth was Rs 3254 crore and networth coverage for net NPAs was high at around 13.7 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 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. However, 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 and 6% (annualised) de-growth in first half of fiscal 2020), growth subdued to 16% and 10% (annualised) for fiscal 2019 and first half of fiscal 2020, respectively. Consequently, net advances stood at Rs 23,568 crore and Rs 24,798 crore as on March 31, 2019 and September 30, 2019, respectively. Nevertheless, DCB Bank continues to maintain its focus on low ticket size loans and the SME businesses in turn garnering expertise in this segment.
 
The segmental break-up of advances mirrors the focus of the bank with SME segment comprising (mortgages (41%) and the SME/MSME book (12%)) constituting over 50% as on September 30 2019. The remaining is constituted primarily by Agriculture and inclusive banking (20%), Corporate banking (12%), and other segments (15%).
 
* 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% in the past five fiscals. While GNPAs increased marginally to 2.1% as on September 30, 2019 from 1.8% as on September 30, 2018, it remained comfortable and in line with expectations. Further, DCB Bank's SMA-1 and 2 exposures too were less than 1% of net advances each as on September 30, 2019.
 
Corporate advances formed just 12% of total advances as of September 2019. The mortgages book, comprising loans against property and home loans, formed 41% of advances. The 2-year lagged gross NPAs in the mortgage book are comfortable, at around 2.7% as on September 30, 2019. The SME (small and medium enterprise) or MSME (micro, small and medium enterprise) and agriculture related segments showed a slight uptick in its gross NPAs to 2.5% and 2.1%, respectively, as on September 30, 2019 as compared to 1.4% and 1.8%, respectively, same time last year owing to slowdown in the economy. However, CRISIL expects GNPAs in these segments are expected to remain in comfortable range going forward as the bank has a track record of comfortably managing its asset quality even during turbulent times like demonetisation and GST. In the Corporate book, the exposure is primarily to higher rated corporates with the bank also being able to recover from difficult accounts and with the focus 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. CRISIL believes that granularity in the overall book should help the Bank maintain stable asset quality over the medium term. Nevertheless, CRISIL will monitor for any sharp uptick in GNPAs or slippages over the near 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.
 
Weaknesses:
* 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 return on assets of 1.0% for fiscal 2019, which remains lower than that of CRISIL-rated peers.
 
Net interest margin (NIM) although remained comfortable, decreased to 3.4% (annualised) for the first half of fiscal 2019 against 3.5% for fiscal 2019 on account of increased cost of borrowings. Nevertheless, given the fact that the bank is increasing its retail deposit base along with making it more granular, the cost of borrowings is expected to go down. Further, 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 2015 to fiscal 2019 reaching Rs 28,435 crore as on March 31, 2019. Deposit base grew further by 13% (year-on-year) reaching Rs 29,363 crore as on September 30, 2019. Of this, the CASA deposits of the bank have ranged between 23-25% (23% as on September 30, 2019) 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 40% of the total deposit base. Consequently, the total granular retail deposit base is just around 59% of total deposits. With the newly opened branches achieving scale and 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
Furthermore, DCB Bank's scale of operations remains modest. The bank, as on September 30, 2019, accounted for a small share of deposits and advances in the banking system. Amidst the branch expansion in recent years, the bank now has a network of 334 branches as on September 30, 2019.
Liquidity Strong

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.

Outlook: Stable

CRISIL believes that 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 asset quality remaining comfortable evidenced by GNPAs remaining below 2%
* Increasing granularity in the deposit profile with improvement in CASA ratio along with earnings profile improving on a sustained basis
 
Downward Factors:
* Significant deterioration in asset quality evidenced by GNPAs increasing to beyond 4% thereby impacting the earnings profile of the bank
* Weakening of capital position of the bank
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 14.90% as on September 30, 2019. DCB Bank had 334 branches as on September 30, 2019.
 
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 2019, DCB Bank's profit after tax (PAT) was Rs 325 crore on a total income (net of interest expense) of Rs 1499 crore compared to PAT of Rs 245 crore on total income (net of interest expense) of Rs 1306 crore in the previous fiscal. 
 
For the half year through September 2019, the bank's PAT was Rs 172 crore on total income (net of interest expense) of Rs 806 crore compared with a PAT of Rs 143 crore on total income (net of interest expense) of Rs 701 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended September 30   2019 2018
Total Assets Rs crore 37,018 32,510
Total income (net of interest expenses) Rs crore 806 711
Profit after tax Rs crore 171 143
Gross NPA % 2.09 1.84
Overall capital adequacy ratio % 16.2 15.6
Return on assets % 0.9* 0.9*
*Annualised

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 Proposed Short Term
Bank Loan Facility		 NA NA NA 300 CRISIL A1+
NA Certificate of Deposits NA NA 7-365 days 1200 CRISIL A1+
NA Short Term Fixed Deposits NA NA NA Programme CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1200.00  CRISIL A1+      28-12-18  CRISIL A1+  29-12-17  CRISIL A1+  28-12-16  CRISIL A1+  CRISIL A1+ 
Short Term Fixed Deposits  ST  0.00  CRISIL A1+      28-12-18  CRISIL A1+  29-12-17  CRISIL A1+  28-12-16  CRISIL A1+  CRISIL A1+ 
Tier II Bonds (Under Basel III)  LT  150.00
30-12-19  		CRISIL AA-/Stable      28-12-18  CRISIL AA-/Stable  29-12-17  CRISIL A+/Stable    --  -- 
Fund-based Bank Facilities  LT/ST  300.00  CRISIL A1+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Short Term Bank Loan Facility 300 CRISIL A1+ -- 0 --
Total 300 -- Total 0 --
Links to related criteria
Rating Criteria for Banks and Financial Institutions

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