DCB Bank - Steady performer

saninv · January 28, 2020, 8:04am

DCB Bank Q3FY20 Earnings Call Highlights:

Participants:

Perfect Research
Haitong Securities
B&K Securities
Anived PMS
HDFC Securities
Investec
Elara Capital
White Stone Financial Advisors
Emkay Investment

ConCall highlights:

Most of the time DCB loses customer is not because of service or brand, it is usually because they want more money at lower rate which doesn’t fit the risk appetite of the bank
Slippages during the quarter is Rs 41 crore; one packaging manufacturer lost their main client and the manufacturer is not able to recover their receivable from the client which resulted into stop in payment
Bank has provided 25% of that slippages during this quarter
DCB has been reducing its exposure to CV segment for the last one year; CV exposure currently stands at around Rs 1,600 crore
Number of head count increased by 100 during this quarter to 6,500
Head count per branch is higher for DCB compared to other players
There is very good opportunity in home loan for SME segment, where it is good ROE and less risk weight
DCB is not facing and problem in their AIB portfolio
DCB were able to recover fully from one corporate account which got slipped into NPA in Q4FY19
Fee income: Processing fee income picking up, ATM fee income has started improving
Trade finance business will become static again as bank has taken conservative call on exposure towards brokers
DCB has guided 12-14% fee income growth for the bank
Floating provision has been increased by Rs 3 crore during the quarter to Rs 93 crore
Security Receipts have fallen from Rs 70 crore in March 2017 to Rs 34 crore in September 2019
This quarter DCB has sold Rs 64 crore of principle outstanding for Rs 38 crore, which is higher than the Net NPA. As per new RBI guidelines this can’t be recognized in P/L account
Recovery and upgradation during this quarter was Rs 81 crore
DCB aiming to be one of the best in the industry in terms of top 20 depositors in next two years
DCB will enter into personal loan and credit card business, but no time line given yet. Bank has said that unless the bank has strong balance sheet, it’s not very good idea to venture into these business
The bank will add 14-15 branches during Q4FY20
Home loan book comprises 15% of overall loan book and it is almost 40% of the mortgage book. Average tick size of home loan portfolio around Rs 30-35 lakh
Breakup of provisions: Credit- Rs 52 crore; Floating and standard assets- Rs 6 crore; Investment- Rs 1 crore

saumya2010 · April 5, 2020, 5:46am

CONCALL last

Deposits are more or less stable
Fortunately, government deposits are not a big number for us, and that too it is spread out across India. So, we don’t have chunky
There are no disbursals happening as of now for two reasons. If you ask me, because you know that mortgage and SMEs was for bigger resources there. You need the lawyer, you need the valuer, these people are not allowed to work.
Second thing is, in a situation that has developed we have to completely rethink our credit risk strategy and model. So therefore, it is better to keep away from disbursals. And therefore there is going to be no disbursal at all. I think most disbursals stopped about almost 7, 10 days ago, maybe a little bits and pieces here.
our Corporate book is very small. And normally we have given a lot of short tenure loans. I don’t have a readymade number, but I would expect about 8% to 12% of our Corporate book is very short tenure loans which comes back by the end of the quarter.
liquidity which I want to say is that, as far as I can remember, in the last 11 years, we have always maintained excess liquidity because of any contingency. And I was just speaking to our money market head, and more than 90% of the days we would have been net lender into the call market, because we always are sitting on excess liquidity.
Ours is a very granular portfolio. It is SME portfolio. Now people are asking me what do you think will happen? It is a tough thing to call as to what exactly will happen. But I do know that many of our customers are customers who have been in the business for quite some years, they may have some challenge here and there may be for two months, three months. But I think if you look at our Basel III declaration on various things in terms of wholesale trade, retail trade, housing loan and so on. I draw a little bit of comfort to say that these granular portfolios will have a chance to come back as and when the situation starts to normalize. That is anybody’s guess as to when this will start to normalize.
our MFI exposure including business correspondence, including PTC, including lending to MFI NBFCs is about 5% to 6% of our total book
Regarding unsecured portfolio, we have a very small PL portfolio
We had about Rs. 59 crores of provision last quarter that had a Rs. 10 crores one-off provision. So, you take that out, we are talking about something like Rs. 50 crores of provision. So, we had more than 3x cover of our provision, I would say probably even 3.5x. So, the margin of safety gives us some comfort that if there were some deterioration, we don’t know right now as to what exactly will happen because not easy to collect these as access to customer is limited. Even so, I know that people are there on the call and some collection money is coming. I am getting those reports on a very frequent basis. So, we have a decent margin of safety in our business model
our Tier-1 capital was 12.3% as on December 31, and that did not include the profits of the first three quarters and any profit that we may have in this particular quarter. So on Capital Adequacy Tier-1, we should be fine. And if you add the Tier-2, which is about 3.5% odd, so we should be quite okay on Capital Adequacy as well
We have a call center which has got 150-odd maybe people right. Now, God forbid if any one person is affected by COVID, I will have to quarantine the entire team, then what do I do? How do I run my things? Which means that we have had to split the team into some three, four parts, here there and all, and give them connectivity.
So last six, seven days have gone in executing all our contingency plans. Some of it was as per document, some of it we are realizing new that this is a different situation from the normal contingency plan, and we are executing those plans.
With regard to disbursals, we don’t think it’s a good idea to disburse any loan at this point in time, because the entire credit thinking has to be reset, we have to evaluate what is right, what is not. So since we don’t have a disbursal and I can’t see that happening for at least next 30 to 45 days. The reason I am saying is, you don’t have a valuer, you don’t have a lawyer, you don’t have a customer, you can’t pick up the document, there is no registrar working, government is not working and so many things that are dependent is required for disbursing alone.
I don’t think one should be thinking that salary segment will be all right, however SME will suffer. And I may even say that salary people could either face a reduction in salary, postponement of their incentives, I don’t know what size and shape it will happen. But salaried segment also will get impacted in this particular situation. There is no doubt that I have in my mind.

Disclosure: was invested since 3 years sold out @170/share now tracking for re entering.

gautham1 · April 5, 2020, 6:21am

Good summary. I appreciate the management for being frank. (A lot of companies give rosy picture no matter what)
Discl: Not holding any bank.

hnk_so · April 5, 2020, 9:55am

DCB loan book is more oriented towards non salaried and MSME, CV, rural …which could hit hard during this lockdown and Covid-19. However, this has been priced in current valuation of DCB!

Meena · May 29, 2020, 7:00am

DCB bank has an Investment in Pass Through certificate of 1755 Cr.

What exactly is this Securities, Can someone help me in understanding it.

Vikrantydv · May 29, 2020, 4:42pm

Banks / NBFCs can securitize their loan assets under securitization guidelines of RBI via 2 routes - a) Direct Assignment b) Pass Through Certificates (PTC)

Origination institution package their assets, get them rated and issue PTCs through SPV structure which enables investee institution to invest in these papers.

DCB has invested in PTCs issued by other financial institutions.

Meena · May 29, 2020, 5:39pm

Hi Vikrant,
I am having a lot of question regarding this , I hope you can help me understand this issue.

What is purpose or why would a bank choose PTC to park its investment , isnt a Debt MF/Bond market a safer investment ?
DCB has invested in another financial institution PTC, so what is this financial institution PTC : Is it a Home Loan / MFI Loan /CV loan
What is the credit rating for this PTC ?
US housing market crash happen because of Low grade securtization of Home loans ? So, i am thinking will this be a concern if this PTC are low credit rated …

Vikrantydv · May 29, 2020, 7:44pm

Hello,

1/4. It’s effectively an inorganic route to originate assets. One bank / NBFC does it and then they securitize the assets to other banks. Remember mortgage bonds circa 2008. RBI has extremely strict rules around securitization, so we don’t need to worry about 2008 like crisis in India. This is fairly a small market. MF actively invest in PTCs as well.

On your other point, why would bank put money in liquid funds - see MF are their competition.

Another rationale is, PTCs don’t attract priority sector lending targets i.e. investments doesn’t fold into ANBCs of the bank. PTC investments are not advances, so no PSL on it With quarterly targets banks keep running behind PSL targets through out the year.

It could be any type of loan. DCB may or may not disclose it. They would typically invest in assets for which they have risk appetite for.
Credit rating - Pls ask DCB management on the underlying assets / rating

Just to add - this is normal operations of the bank - nothing to really worry about. NBFCs are able to source assets cheaper which they further sell to banks via direct assignment / PTCs. Also originator needs to hold the asset for certain period & also retain certain portion of the loan with them (MRR / MHP.

Hope this helps.

Meena · May 29, 2020, 8:17pm

Only thing i am worried about is the pain in the economy with lot of loans may turn into NPA , DCB invest almost 1755 Cr in PTC. Lets consider this PTC can be a MFI or CV Loans , if these Loans turn into NPA for the originator , then DCB losses its captial ? and will this comes under NPA of DCB bank ?

Vikrantydv · May 30, 2020, 3:44am

Yes, DCB will lose as the sale is on ‘True Sale’ basis. Investments are fair valued basis the rating / underlying cash flows.

Vikrantydv · May 30, 2020, 5:32am

You may refer to the attached rating issued by ICRA for 2 PTC mortgage tranches from Aavas. I would believe one the bank would have invested in these papers -

https://www.icra.in/Rationale/ShowRationaleReport/?Id=95383

krups · June 7, 2020, 2:44pm

Thanks for sharing! Pre-covid, DCB definitely looked like a good investment. However, because of Covid, since most of the lending book is to self-employed -> the worst impacted and the same can be seen from the loans under moratorium %, this could turn out to be one of the worst impacted(Q4 results were definitely not encouraging and worst is expected to come in the next quarter) I think valuation for banks right now makes no sense, and any decision on investment might have to wait till at least Q2 results.

Disclosure : Invested at 80 levels

saninv · June 19, 2020, 3:32pm

smallcapvaluefind · July 5, 2020, 1:16pm

Hi All

I was trying a way to find the cheapest stock in banks and used the below methodology. what you all think?

I use an average of P/E x Gross NPA% AND P/B x Gross NPA % to find the lowest ratio along with those banks only where Capital Adequacy is >12.5% as required by Basel norms on a conservative basis**

Many of you might be seeing above stock-picking methodology for first time. Reasons for this is as below

Example 1: Suppose you have two stocks with a P/E of 10 and Gross NPA of 1% and 2% respectively with all else being the same. Which one will you choose? Of course stock 1 with NPA of 1%

Example 2: Suppose you have two stocks with a P/B of 1 and Gross NPA of 1% and 2% respectively with all else being the same. Which one will you choose? Of course stock 1 with NPA of 1%

So this is what this formula tries to do when I do use the above methodology. The assumption, of course, is if a stock has High P/E it should have lower NPA% and good CAR that’s why it depending high P/E. Given the inverse relationship NPA% has with P/E and P/B, I take a multiplicative average of both so that i can do a fair comparison b/w large cap and small cap as small-cap companies are expected to have lower P/E and higher NPA% than large-cap.

Now I don’t have all the data but last time I did an analysis of Banking stock I noticed below ( i usually refresh my analysis every quarter post result get published and rebalance my sector holding as per that and same goes for banking )

You will see the last three columns where I have calculated using the above methodology. You will see that the lowest average using the average of P/E x Gross NPA% AND P/B X Gross NPA % are of**

(1) DCB Bank

(2) Federal Bank

(3) Karnataka bank

Now on top 3:

Karnataka bank: I am not comfortable with such a high NPA % on absolute level although it might be the cheapest as NPA being high is already reflected in its low P/E. Different people can have a different view but my model showed this as the cheapest stock in Private banks
DCB vs Federal bank: Really a very close fight. On DCB:

Net and gross NPA % is slightly better although I agree P/E is slightly higher than Federal
The potential as per Historical P/E was higher in DCB as compared to Federal
Capital adequacy of DCB is slightly better than Federal

What you all think of this approach?

Jaisish_Mohanty · July 5, 2020, 1:37pm

Does Saurabh Mukherjea currently have holdings in DCB Bank. He told he has it in some customer profiles in little champs PF.

Compounding_Miracles · July 5, 2020, 3:51pm

Yes , he has bought DCB in the last couple of months. He said so in an interview.

bimalb · July 10, 2020, 7:17am

TVS capital further invested in DCB bank. They announced yesterday.

https://www.tvscapital.in/portfolio/

Vineetjain111 · July 11, 2020, 10:54am

Hi @smallcapvaluefind, below are my observations on your approach.

First things first, I am no banking expert, so take what I say with a pinch of salt

I see that your approach hinges on two basic assumptions:

NPA and PE/PB are inversely proportional
These are the most important metrics to gauge the fair value of the bank

Thoughts on assumption 1: While that may be true, they are not linearly proportional. For example, Bank A with a PE of 10 and an NPA of 2% is much better off as far as I am concerned than Bank B with a PE of 5 and an NPA of 4%. The element if increased risk outwights the lower valuation. And so I don’t take Karnataka Bank into consideration at all as there is a high risk of permanent loss of capital.

Thoughts on assumption 2: While PE/PB are important metrics, the market values banks primarily on their future earnings growth. And to grow earnings in the future, the banks need to do to things - increase advances and reduce costs.

In the last four years (FY 17 to FY 20), Federal Bank has increased advances at 26%, 25%, 20% and 12% YoY. DCB Bank has increased advances at 22%, 28.5%, 16% and 7.5%. So Federal Bank seems to be the more aggressive bank in terms of increasing the top line.

Now on the cost front, the CASA ratio plays a big role in reducing the cost of borrowing. which is usually the biggest cost for banks. The CASA ratio for Federal Bank for FY 20 was 30.7% while CASA for DCB Bank was 21.5%. This is reflected in the cost of liabilities as well which is lower for Federal Bank than for DCB Bank. So on these parameters Federal is a clear winner.

However, inspite of having higher advances and lower cost of liabilities, Federal has lower NIMs and yields than DCB Bank. And this is primarily because Federal has higher NPAs. And this strain on profitability because of NPAs becomes even more important in these times of uncertainty.

This is why DCB Bank is definitely a better bet than Federal Bank at the moment in my view.

smallcapvaluefind · July 11, 2020, 12:24pm

Hi Vineet

Thanks for your comment. I think you are spot on

How to balance high NPA with low PE is a major question.Although in my analysis Karnataka Bank was the cheapest at 0.09 output vs federal and DCB at 0.12 but even I wasn’t comfortable with NPA of 4 percent hence I decided not to go ahead with that

I think beside the above formula with lowest value and CAR > 12.5 percent , I should have one more criteria of Gross NPA less than 3 percent ?

Yes I also noticed the deposit growth but interesting observations on CASA which I do don’t notice but agree to it . One of the reason why I didn’t selected federal was it’s too much concentrated geographically while DCB geographical distribution of loan book is very balanced . Imagine south India business getting impacted and Federal would have more risk than DCB but you can also argue that it’s better to be good in one Region than having decent presence in all regions

So I think based upon that we should also have a fourth criteria on loan book concentration which I am still consolidating across all bank ( will share shortly )

Do you also believe DCB is overall the best priced bank or some other bank ? Would love to compare and see where criteria’s can be narrowed further logically

smallcapvaluefind · July 19, 2020, 7:22am

was looking at the Q4-20 result, below are the details

(1) Company grew its deposit and income by 8% which is a decent growth
(2) I am checking with company investor forum on what % of the loans be under moratorium. Anyone knows or checked it?

btw its beneficial to banks if borrower opts for it in the medium term as higher interest income impact will be seen in Q3 mostly provided business hasn’t gone bankrupt and borrowers can still pay

(3) Bank made a COVID provision of 63cr and i have a feeling all banks provision will increase in Q2. if we exclude that provision, performance has been rock solid (68cr post provision vs 97cr last year q4)…so without provision the result would have been awesome

Bank has in past also overcome this challenge so no change in views on this bank …one of the advantage over Federal bank is also that the loan portfolio is really well distributed geographically as compared to federal bank which is heavy south India focused.

disc : investment at 69.5 which is 4% of my equity portfolio and no change in views on this