Steady quarter for DCB Bank; but will investors buy?

For most banks in the March quarter, the key yardstick to judge their performance would be asset quality. But for DCB Bank Ltd, which had announced a shift in strategy to combat the emergence of new small banks, investors would rather look at how aggressively it has started expansion.

In the middle of the last fiscal year, DCB Bank had said it wanted to double its branches to 300 and increase the number of employees by 50-60% in 12-14 months. After the stock fell 30% in two days, the bank decided to spread its expansion over two years.

Analysts and investors feared that such a sharp expansion would not only impact earnings, depress return ratios and elevate cost-income ratios, but also have an adverse effect on DCB Bank’s asset quality. There is some foundation for these fears—the bank had suffered when it had tried to do this in earlier periods such as the boom between 2003 and 2007. It took a new management to consolidate the books, spruce up its lending practices (such as increasing the share of secured loans) and bring back profitability.

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But the threat of small banks has disrupted the status quo for DCB Bank and led to this strategy shift. In the March quarter, at least, there seems to be not much deleterious effect. Advances grew by 23% and deposits at 18%, not very different from the run rate of the past couple of quarters.

Or take the cost-to-income ratio, for instance, which analysts had feared could rise to as much as 65%. In the March quarter, this ratio was 57.85% for DCB Bank. The whole year ratio was a tad higher at 58.883%, lower than the 62.93% for the previous fiscal.

The bank reported a return on equity (RoE) of 15.91% for the March quarter, and its net profit increased 10% to Rs.70 crore, beating Street expectations. However, for the full fiscal year, RoE was 11.59%, a three-year low.

The bank’s asset quality has held up. Gross non-performing increased by 4% sequentially. It reported slippages of Rs.50 crore, about one-fourth of slippages for the whole fiscal year. Bad loans as a proportion of loans fell to 1.51%, compared with 1.98% at the end of the previous quarter.

Overall, the March quarter has seen the kind of steady performance—in terms of balance sheet expansion and asset quality—which investors had come to expect from DCB Bank in the past couple of years.

Increasing the timescale of its expansion will also reduce the impact of expansion on earnings. Whether this will bring back investors’ confidence remains a moot question—since the threat of competition remains real. The stock has shed 37% since the expansion announcement, compared with a 7.5% loss for the Bankex.

[“Source-Livemint”]