Development Credit Bank Ltd
Enhancing investment decisions
Initiating coverage
CRISIL Limited. All Rights Reserved.
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade
Assessment CRISIL Valuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 1
June 22, 2011 Fair Value Rs 61 CMP Rs 56
Fundamental Grade 4/5 (Strong fundamentals)
Valuation Grade 5/5 (CMP has strong upside)
Industry Information technology
Polaris Software Limited Business momentum remains intact
Fundamental Grade 2/5 (Moderate fundamentals)
Valuation Grade 3/5 (CMP is aligned)
Industry Banking
Development Credit Bank Ltd Coming out of the woods but challenges remain Development Credit Bank (DCB), one of the smaller private sector banks, offers corporate banking, SME/micro SME lending, agri/rural/microfinance banking and retail banking. It has 80 branches concentrated mostly in Gujarat, Maharashtra and Andhra Pradesh. We assign DCB a fundamental grade of 2/5, indicating that its fundamentals are moderate relative to other listed securities in India.
Came out of the woods DCB, which had focused on high-yield unsecured lending in FY08 to ramp up the loan book funded by wholesale deposits resulting in delinquencies during the economic downturn, has come out of the woods. The bank restructured its balance sheet and renewed its focus on securing the loan book with a diversified mix - small and medium enterprises (SME), micro SME, corporate and secured retail lending). The banks management team was also replaced by a new team led by Mr Murali Natrajan.
but challenges lie ahead in maintaining asset quality DCB still faces a couple of challenges a) balancing its loan book growth with containment of costs and b) ramping up the loan book faster without substantial incremental slippages. However, the managements current strategy of focusing on underwriting standards has been able to arrest further deterioration in asset quality. The efficacy of the revamped model has helped DCB to report lower provisions in FY11 and we will monitor this in the coming quarters. Given the small size of the bank, it is prone to attrition risks. Being small bank, it faces challenges in funding large scale projects.
Loan book growth to start reflecting in top line CRISIL Equities expects DCBs total income to increase at a two-year CAGR of 20% to Rs 4.3 bn in FY13, driven by growth in net interest income (comprising 60-65% of the total income) with the current level of NIMs. With this, the EPS will improve to Rs 3.6 in FY13 from Rs 1.1 in FY11 and adjusted book value per share is expected to increase to Rs 35 in FY13 from Rs 26 in FY11.
Operating parameters and return ratios up but below industry average Although the key operating parameters viz. cost to income, net NPAs and return ratios have improved in FY11, they are still below industry average as the bank has just transitioned from losses. However, we believe that the operating parameters and return ratios should normalise post FY13.
Valuations the current market price is aligned with the fair value We have used the justified price-to-book ratio (P/B) method to value. Accordingly, we have arrived at a fair value of Rs 61 per share. We initiate coverage on DCB with a valuation grade of 3/5.
KEY FORECAST
(Rs mn) FY09 FY10 FY11 FY12E FY13E
Total Income 3,173 2,491 3,012 3,526 4,275 Profit after tax (881) (785) 214 420 820 Net interest margins 2.9 2.8 3.1 2.9 3.1 Capital adequacy ratios 13.4 14.9 13.3 15.4 14.7 Net NPAs to net advances (%) 3.9 3.1 1.0 0.9 0.8 EPS (Rs) -5.1 -3.9 1.1 1.9 3.6 Adjusted book value (Rs) 23.6 21.7 26.0 31.5 34.7 Dividend payout ratio - - - - - P/E (x) -11.0 -14.2 52.1 29.9 15.3 P/ABV (x) 2.4 2.6 2.1 1.8 1.6 RoE (%) -15.1 -14.5 3.9 6.4 10.3
NM: Not meaningful; CMP: Current Market Price
Source: Company, CRISIL Equities estimate
CFV MATRIX
KEY STOCK STATISTICS NIFTY/ SENSEX 5276/17560
NSE /BSE ticker DCB
Face value (Rs per share) 10
Shares outstanding (mn) 200
Market cap (Rs mn)/(US$ mn) 11,800/249
52-week range (Rs) (H/L) 78/39
Beta 1.62
Free float (%) 77%
Avg daily volumes (30-days) 2,291,215
Avg daily value (30-days) (Rs mn) 136
SHAREHOLDING PATTERN
PERFORMANCE VIS--VIS MARKET
Returns
1-m 3-m 6-m 12-m
DCB 4% 36% 21% 37% NIFTY 5% 6% 1% 17%
ANALYTICAL CONTACT Chetan Majithia (Head) [email protected]
Vishal Rampuria [email protected]
Elizabeth John [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
1 2 3 4 5
1
2
3
4
5
Valuation Grade
Fu
nd
am
en
tal G
rad
e
Poor Fundamentals
ExcellentFundamentals
Str
on
gD
ow
nsi
de
Str
on
gU
psi
de
23.1% 23.1% 23.1% 23.1% 23.1%
2.7% 4.9% 3.6% 8.3% 8.3%8.1% 3.4% 6.2% 3.5% 1.9%
66.1% 68.6% 67.1% 65.2% 66.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
Promoter FII DII Others
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 2
Development Credit Bank Ltd
Table 1: DCB - Banking Operations
Parameters Corporate SME & MSME# AMRB* Retail
Loan book
contribution (FY11) 25.9% 23.9% 19.9% 30.3%
Loan book
contribution (FY13) 24.7% 28.5% 17.9% 29.0%
Service offering Term loans and working
capital loans to mid-
corporate whose annual
turnover is Rs 5,000-
7,000 mn
Term loans and working
capital loans to SMEs
and micro SMEs whose
annual turnover is
Rs 100 mn to Rs 1,000
mn and up to Rs 100
mn, respectively
Priority sector lending as
well as microfinance
lending
Focusing primarily on
mortgages home
loans, LAP, gold loans,
etc. Reducing personal
unsecured loan book,
commercial vehicle and
construction equipment
book
Market position DCB is one of the smallest private sector banks with a market share of 0.1% in advances as well as
deposits among the scheduled commercial banks and a market share of 0.5-0.6% in advances and
deposits among private sector banks in FY10
Industry growth
expectations CRISIL Research estimates banking credit will grow by 18-20% in FY12 and FY13
Loan book growth
(FY09-FY11 2-yr
CAGR)
9% 51% 22% -1%
Loan book Forecast
(FY11-FY13 2-yr
CAGR)
20% 31% 14% 18%
Demand drivers Banking credit growth driven by economic growth, sustained thrust on infrastructure and global trade
Competitors Private sector banks, public sector banks, co-
operative banks and foreign banks
NBFCs and banks
# MSME = micro SME
*AMRB = Agri, micro finance and rural banking
Source: Company, CRISIL Equities
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 3
Development Credit Bank Ltd
Grading Rationale
Revised strategy - restructuring balance sheet
DCBs strategy in 2007 was to grow its loan book primarily through high-
yielding personal loans. Since retail term deposit and CASA deposit growth was
lower than the loan growth, the bank resorted to wholesale deposits/treasury
operations. Exposure to unsecured personal loans increased sharply to ~32% of
the loan book during FY08. Although this strategy helped DCB to grow its loan
book by 53% in FY08 (double the banking industry credit growth of 26%), the
economic downturn resulted in huge delinquencies in the loan portfolio,
predominantly personal loans. Gross NPAs to gross advances and net NPAs to
net advances peaked to 11.24% and 4.96% in Q2FY10 and Q1FY10,
respectively. The reliance on high-cost wholesale deposit also put pressure on
the banks net interest margins (NIMs).
Key changes undertaken by the bank
Rejig at the management level There were many changes at the management level. Mr Murali Natrajan, with nearly three decades of
banking experience across India and other Asian countries, joined as the
CEO and MD effective April 2009. Prior to joining DCB, he served as the
global head of SME banking in Standard Chartered Bank (Singapore). Under
the new leadership, the bank initiated the cleaning process of the loan book
and revamped its strategy.
On the asset side, driver for loan book growth shifted from risky loans, viz. unsecured personal loans, commercial vehicle loans and construction
equipment loans, to a balanced diversified portfolio of secured book, viz.
SME, micro SME, corporate and secured retail lending. The risky personal
loan disbursement was discontinued in August 2008 and has been in runoff
mode since then.
On the liability side, the bank renewed its driver for deposit book growth towards retail term and low-cost CASA deposits instead of wholesale
funding.
Operational realignment of various business verticals was undertaken. Further, underwriting standards were revamped with more focus on secured
loans and other stringent criteria for loan approvals.
Conscious efforts to cut costs resulted in lowering of operational expenses from Rs 2.3 bn in FY08 to Rs 2.0 bn in FY11. Focus was shifted to rein in
efficiency, which lowered the headcount from 2,235 in FY08 to ~2,100 in
FY11.
... puts bottom line back into profit
With the new strategy in place, the bank has been able to improve its key
operating parameters resulting in bottom line back in the black in Q2FY11 after
seven quarters of loss.
Managements efforts
directed at cleaning up
the balance sheet
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 4
Development Credit Bank Ltd
Figure 1 A: DCB turns profitable at bottom line after seven
consecutive in the red quarters
Source: Company
but small balance sheet restricts its ability to fund large projects
In spite of the bank restoring its balance sheet and attempting to improve its
financial position, we believe its small balance sheet size compared to its peers
restricts its ability to fund large projects.
Figure 1 B: Cannot fund large projects
Balance sheet size FY10
Source: Company
Moving from risky high-yield unsecured lending
The key problem area for the bank was its inability to manage unsecured
personal loans and commercial vehicle (CV) and construction equipment (CE)
loans which were part of the retail vertical. Though the yield on such loans was
attractive, the portfolio suffered huge delinquencies during the economic
downturn in FY09. Inadequate underwriting standards resulted in higher
slippages in the unsecured retail portfolio. As a prudent measure, DCB
completely curtailed disbursing such loans in August 2008 to prevent further
stress in the loan portfolio, which had comprised a large chunk, i.e.~77%, of
10
-32
-913
-353
-169 -181
-82-29
48 82113
-1,000
-800
-600
-400
-200
0
200
Q2-F
Y09
Q3-F
Y09
Q4-F
Y09
Q1-F
Y10
Q2-F
Y10
Q3-F
Y10
Q4-F
Y10
Q1-F
Y11
Q2-F
Y11
Q3-F
Y11
Q4-F
Y11
(Rs mn)
62
81
105
116
220
255
271
339
354
364
374
425
438
1,807
2,226
3,639
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
DC B
Dhanlakshmi Bank
Lak Vilas Bank
City union bank
Karur Vysya bank
South Indian Bank
Karnataka bank
ING Vysya Bank
IndusInd Bank
Yes bank
Kotak Mahindra bank
J&K Bank
Federal Bank
Axis bank
HDFC Bank
ICICI Bank
(Rs b
n)
Running down problem
area: Personal unsecured
loans as well as commercial
equipment, construction
equipment loan book
reduced sharply to Rs 0.3
bn and Rs 1.76 bn
respectively in Q2FY11
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 5
Development Credit Bank Ltd
the retail portfolio and peaked to ~32% of the total loan book in FY08. The
delinquencies resulted in gross NPA increasing from 1.5% in FY08 to 8.7% in
FY10. With management curtailing disbursement, such loans have been in
runoff mode; the share of unsecured personal loans, CV, CE and STLV loans
(commercial vehicle, corporate equipment and small ticket vehicle loan) reduced
sharply to 7.3% of the retail portfolio and 2% of the total loan book in FY11. We
expect it will be almost wiped out from the books by FY13.
Figure 2: Sharp run down of personal loan book Figure 3: Running down CE, CV and STLV loans
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
to secured balanced diversified lending
Under the revamped asset strategy, the bank is now cautiously focusing on
secured loans, viz. mortgages, SME, micro SME, mid-corporate and AMRB (agri,
micro finance and rural banking), thereby diversifying its loan book and making
it more balanced. It is also moving towards a floating rate regime which offers
the flexibility to re-price loans.
With this perspective, DCB started focussing on mortgage loans (home loans
and loans against property) or secured retail lending. To achieve faster growth
in mortgages, it is even exploring inorganic routes. During Q2FY11, the bank
acquired a significant portion of mortgage assets from a leading non banking
financial company (NBFC). The management indicated that the portfolio was
acquired after stringent risk assessment of individual loans from the available
loan pool.
Table 2: Significant mortgage book acquired
FY09 FY10 Q2FY11
Sourced mortgages 80.9% 71.4% 50.3%
Acquired mortgages 19.1% 28.6% 49.7%
Source: Company, CRISIL Equities
CRISIL Research expects housing loans to register double-digit growth in FY12
on the back of higher housing demand in an improved economy. We expect
DCBs mortgage book to grow by ~18% from FY11 to FY13. Mortgage loan book
is expected to dominate the retail vertical with a dominant share by FY13.
7.0
3.3
1.0 0.6
0.3 0.1 0.1 0.0
17.2%
10.1%
2.8%1.7%
0.8% 0.2% 0.1% 0.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY08
FY09
FY10
Q1-
FY11
Q2-
FY11
FY11
FY1
2E
FY1
2E
(Rs bn)
Personal Loan Personal Loan % of total Loan Book (RHS)
6.1 5.6 2.8 0.7 1.3 0.9
15.1%
17.0%
8.0%
2.0% 2.5%1.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY08 FY09 FY10 FY11 FY12E FY13E
(Rsbn)
CE, CV and STLV Loans CE and CV as % of total loans (RHS)
New growth engine:
Secured retail loans, viz.
mortgages increased
sharply to Rs 9.2 bn
through sourcing as well as
acquired mortgages in
Q2FY11
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 6
Development Credit Bank Ltd
Figure 4: Mortgage share to be 24-25% of the loan
book
Figure 5: Retail loan mix moves towards secured
lending
* Mortgages include home loans and LAP
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Based on factors like the huge potential in Indias SME sector, new
managements strong domain experience in handling SMEs and the location of
the majority of its branches in areas where a lot of self-employed persons/
entrepreneurs are based, DCB intends to aggressively target the SME and
micro-SME segments with an annual turnover of Rs 100 mn to Rs 1,000 mn
and up to Rs 100 mn, respectively. However, this segment faces huge
competition from other large banks and NBFCs. The bank plans to attract such
customers through services like cash management services which are available
only to large corporates catered to by other banks. However, considering
various risks associated with lending to SMEs, it has beefed up its underwriting
standards and risk management system using the expertise of the current
management team. The lending to SMEs typically has collateral ranging from
~60% to 90% of loan. We expect overall SME loan book to grow at a CAGR of
31% from FY11 to FY13.
On the corporate side, DCB earlier suffered on few big corporate accounts
which went delinquent due to the economic slowdown. Small size restricts large
corporate funding for the bank. Moreover, loans to large corporates results in
concentration of the loan book which increases the credit risk. Therefore, the
bank is now targeting the mid-corporate segment with an annual turnover of
Rs 5-7 bn - disbursing largely working capital loans through a cautious lending
strategy. We expect corporate loans to grow at a CAGR of 17% from FY11 to
FY13E.
The AMRB segment is another growth driver for the loan book, through which
DCB primarily aims to meet its priority sector lending (PSL) targets. Alongside,
under the microfinance segment, it has started offering gold loans.
With these initiatives, we expect composition of the overall loan book to alter
towards increasing proportion of SME (29%), corporate (25%) and AMRB (18%)
loans in FY13E.
0.02.6
4.1
10.812.8
15.1
0.0%
8.0%
11.9%
25.3% 25.2% 24.4%
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
14
16
FY08 FY09 FY10 FY11 FY12E FY13E
(Rs bn)
Mortgages % of total loan book (RHS)
0%
20%
46%
84% 84% 84%
41%
25%
11%
1% 0% 0%
59% 55%43%
16% 16% 16%
0%
20%
40%
60%
80%
100%
FY08 FY09 FY10 FY11 FY12E FY13E
Mortgages Personal Loan Other Loans
Moving towards secured,
balanced and diversified
loan book
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 7
Development Credit Bank Ltd
Table 3: Growing SME, AMRB and corporate book
along with curtailing growth in retail book
Figure 6: Moving towards secured, balanced and
diversified loan book composition
Rs bn FY08 FY09 FY10 FY11 FY12E FY13E
Corporate loans 18.5 9.3 11.1 11.1 12.7 15.3
% growth y-o-y -49% 19% 0% 15% 20%
SME & micro SME loans 1.7 4.5 6.0 10.2 13.3 17.6
% growth y-o-y 168.0% 33.9% 70.2% 30.0% 32.5%
Retail loans 17.0 13.2 8.9 12.9 15.2 17.9
% growth y-o-y -22.4% -32.6% 45.2% 17.6% 17.5%
AMRB loans 3.4 5.7 8.6 8.5 9.4 11.0
% growth y-o-y 68.4% 50.3% -0.9% 11.0% 17.0%
Total Loans 40.6 32.7 34.6 42.7 50.7 61.8
% growth y-o-y -19.3% 5.7% 23.5% 18.6% 22.0%
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Loan book expected to grow in line with industry
The loan book which grew marginally by 5.7% in FY10 (least growth vis--vis all
other listed private sector banks) rose by ~23.5% y-o-y in FY11 helped by the
acquisition of mortgage assets, outpacing the industry bank credit growth of
21.5%. With the new focus area in place, DCBs overall loan book is expected to
continue to grow a CAGR of 20% from FY11 to FY13.
Figure 7: DCBs credit growth expected to exceed
industry credit growth
Figure 8: Improving credit off-take every quarter
post Q2FY10
Source: CRISIL Research, CRISIL Equities Source: Company
Signals of asset quality improving on change in mix
The asset quality of DCB had worsened with percentage gross NPAs to gross
advances and percentage net NPAs to net advances peaking to 11.24% and
4.96% in Q2FY10 and Q1FY10, respectively. For FY10, gross NPAs and net NPAs
as a percentage of loan book remained at 8.7% and 3.1%, respectively, the
highest amongst peers in the banking industry in FY10. However, the impact of
the restructuring of the balance sheet was visible in FY11 with gross NPAs and
net NPAs at 5.9% and 1.0%, respectively. Provision coverage ratio was a
healthy 88% in FY11 (including technical write-offs), much higher than the RBI
46%
28% 32% 26% 25% 25%
4%
14%17%
24% 26% 28%
42%
40% 26% 30%30% 29%
8%17%
25% 20%19% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY08 FY09 FY10 FY11 FY12E FY13E
Corporate loans SME & Micro SME Loans Retail loans AMRB loans
53.1%
-19.5%
5.7%
23.5%
18.6%22.0%
26.0%
21.0%17.0%
21.0%
23.0% 23.0%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
FY08 FY09 FY10 FY11 FY12E FY13E
DCB Loan growth Industry Bank Loan Growth
33 31 30 3135 35
38 4043
-20%
-5% -5%
6%
10%
1%
10%
3%8%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
0
5
10
15
20
25
30
35
40
45
Q4-
FY09
Q1-
FY10
Q2-
FY10
Q3-
FY10
Q4-
FY10
Q1-
FY11
Q2-
FY11
Q3-
FY11
Q4-
FY11
(Rs bn)
Advances book q-o-q (%) (RHS)
Worsened asset quality
starts correcting with focus
on secured lending
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 8
Development Credit Bank Ltd
guidelines. We do not expect further losses due to PL, CV and CE as
provisioning is already in the book and also because 70% to 90% of the overall
loan book is secured now. The loan provisioning ratio has significantly improved
from 4.1% in FY09 to 1.2% in FY11 and we expect it to be ~1% by FY13.
Assuming a slippage ratio of ~1.1% and 0.9% in FY12 and FY13, we expect a
fall in gross NPA and net NPA by 209 bps and 14 bps over FY11-FY13. However,
it is a challenge for the bank to grow the loan book without any incremental
slippages especially when it has ramped up its loan book in the SME segment.
Also, if the bank again decides to ramp up the loan book aggressively by
compromising on asset quality, it may once more get into trouble.
Figure 9: DCBs NPA ratio expected to taper
southwards
Figure 10: Loan loss provisions expected to decline
as provisions for unsecured personal loan provided
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
But NPA ratio still one of the highest
In comparison to the listed peers in the private banking space, DCBs net NPA
ratio to net advances was one of the highest in FY11.
Table 4: One of the highest NPA ratios in FY11 in industry
Listed banks % Gross NPA %Net NPAs
DC B 5.9 1.0
ICICI Bank 4.5 0.9
HDFC Bank 1.1 0.2
AXIS Bank 1.0 0.3
Bank of Baroda 1.4 0.4
Corporation Bank 0.9 0.5
Dhanlaxmi Bank 0.7 0.3
IndusInd Bank 1.0 0.3
ING Vysya Bank 2.3 0.4
Source: BSE, CRISIL Equities
Trying to shift from wholesale to retail deposits
During FY05-09, DCB funded the loan book by high-cost wholesale deposits as
growth in the loan portfolio was higher than in retail deposits and CASA
accretion. This resulted in cost of overall deposits escalating to 7.5% in FY09.
The bank has currently shifted focus on retail term deposits and low-cost CASA
deposit to fund the loan book.
1.5%
8.4% 8.7%
5.9%
4.7%
3.8%
0.7%
3.9%
3.1%
1.0% 0.9% 0.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
FY08 FY09 FY10 FY11 FY12E FY13E
Gross NPA ratio Net NPA ratio
1.5%
4.1%
3.4%
1.2%
1.1%0.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
FY08 FY09 FY10 FY11 FY12E FY13E
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 9
Development Credit Bank Ltd
With no branch additions in the past two years, growing CASA remains a
challenge for DCB. However, by sweating branch assets, it has been able to
grow CASA by 17.5% and 16.7% y-o-y in FY10 and FY11, respectively.
Assuming six-seven branch additions over the next two years, CRISIL Equities
expects absolute CASA to grow in FY12 and FY13, supported by growth in the
CA portion on the back of services offered to SMEs and mid-corporates. We
expect proportion of CASA deposits to moderate from the current level due to
higher growth in retail term deposits. However, the share of overall retail
deposits is expected to remain at the current 78-79%.
Figure 11: Absolute CASA growth ~17% in FY11-13 Figure 12: Proportion of CASA ratio to remain flat
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Table 5: DCBs CASA % in line with banking peers in FY11
CASA %
HDFC Bank 51.0
ICICI Bank 45.1
AXIS Bank 41.0
ING Vysya Bank 34.6
DC B 35.2
Bank of Baroda 28.7
IndusInd Bank 27.2
Corporation Bank 26.0
Dhanlaxmi Bank 22.9
Source: CMIE, CRISIL Equities
to help NIMs stay around 3% level
Growth in low-cost CASA deposits and retail term deposits, which has offset
run-off in high-yielding personal unsecured loan book, will help maintain NIMs
at 3% level during FY11 to FY13. The attempt to shift from high-cost wholesale
funding to low-cost deposits has reduced the overall cost of deposits.
Additionally, the loan book has moved from fixed to floating interest rates with
low duration giving re-pricing flexibility which will maintain NIMs. However,
given interest rate scenario, NIM is expected to moderate to 2.9% in FY12 and
again improve to 3.1 % by FY13.
15
14
17 20
24 27
17.8%
-2.3%
17.5% 16.7%
19.0%
15.3%
-5%
0%
5%
10%
15%
20%
25%
0
5
10
15
20
25
30
FY08 FY09 FY10 FY11 FY12E FY13E
(Rsbn)
Absolute CASA y-o-y growth (RHS)
24.3%
31.0%35.4% 35.2% 35.5% 34.7%
53.0%
67.9%
82.6% 80.4% 79.6% 79.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY08 FY09 FY10 FY11 FY12E FY13E
CASA/ Total Deposits Retail Deposits / Term Deposits
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 10
Development Credit Bank Ltd
Figure 13: NIMs to hover at ~3% Figure 14: NIM comparison (FY11)
Source: Company, CRISIL Equities Source: Industry, CRISIL Equities
Focus on SME segment to grow non-interest income
With the bank targeting a more diversified and balanced loan book, we believe
SME, micro SME and mid-corporate segments will help generate core fee income
for the bank. The bank targets to provide cash management services, letters of
credit, bank guarantees, etc. to SMEs and micro SMEs post the due diligence
process, which is a key driver for core fee income. To conserve capital, DCBs
treasury desk is following a conservative approach with ~85-90% of the
investment in held to maturity (HTM) category. The exposure limits are
squeezed given its small balance sheet size. For FY12 and FY13, we expect
marginal trading gains, factoring in that once a year it is allowed to transfer
investments from HTM to AFS and book trading profits, if any.
Figure 15: Non-interest income expected to grow at
a CAGR of 13% from FY11 to FY13
Figure 16: Core fee income to grow at a CAGR of
13% from FY11 to FY13
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Proposed fund-raising to help in loan book growth
In FY10, DCB issued lower tier II subordinated bonds and raised Rs 650 mn as
well as raised QIP of Rs 800 mn at Rs 32 per share, on account of which the
capital adequacy ratio improved from 13.4% in FY09 to 14.9% in FY10. With
this, the promoters (AGA Kan Fund) stake fell to 23%. The capital adequacy
ratio stands at 13.3% in FY11. We expect that a further announcement of QIP
13.6%
12.3%
11.1% 10.9% 11.3%
7.5%6.4%
5.8% 6.1% 5.8%
2.9% 2.8% 3.1% 2.9% 3.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY09 FY10 FY11 FY12E FY13E
Yield on Advances Cost of Funds NIM
4.4%
3.7%
3.7%
3.5%
3.3%
3.1%
2.6%
2.6%
2.5%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
HDFC Bank
Bank of Baroda
AXIS Bank
IndusInd Bank
ING Vysya Bank
DCB
ICICI Bank
Dhanlaxmi Bank
Corporation Bank
1.7
1.2
1.1 1.1 1.2 1.4
88%
-31%
-11%
5%11%
15%
-40%
-20%
0%
20%
40%
60%
80%
100%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
FY08 FY09 FY10 FY11 FY12E FY13E
(Rsbn)
Non-Interest Income y-o-y growth (RHS)
1,383
957
830 778
859
991
182
20
178253 288
332
172224
6390 94 108
0
250
500
750
1,000
1,250
1,500
FY08 FY09 FY10 FY11 FY12E FY13E
(Rs mn)
Core Fee Income and Other Operating Income Trading Gains Forex Income
Non-interest income
expected to grow, but
would contribute ~35% of
the loan book
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 11
Development Credit Bank Ltd
of Rs 1.5 bn - assuming Rs 60 per share (three months average market price) -
will result in capital adequacy ratio (CAR) of 15.3% in FY12. This will result in
further equity dilution of promoters stake by 3-4%, moving in line with RBIs
guideline of bringing down the promoters stake to 10% by FY14E. Additionally,
the run-down in unsecured personal loans which carry high-risk weight of 125%
will help lower the overall risk weighted assets of the bank, thereby shoring up
the capital adequacy ratio going forward.
Figure 17: Capital adequacy ratios
Figure 18: Movement of promoters stake
(AGA Khan Fund#)
#Assumed fund raising at Rs 60 per share
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Cost efficiency ratios below industry par to drag overall profitability
DCBs cost to income ratio was 80% in FY10 (highest among all listed private
banks) on account of a fall in total income due to balance sheet restructuring.
Deteriorating cost to income ratio coupled with improvement in opex/average
assets (3.7% in FY08 to 3.4% in FY10 despite balance sheet reduction) indicate
that assets did not translate into income generation for the bank in FY10. DCB
revamped various processes and headcount which helped it to reduce operating
cost from Rs 2.2bn in FY08 to Rs 2.0 bn in FY11. We expect operating cost to
increase at a CAGR of 8-10% during FY11-13. We have factored in six-seven
new branches during that period. With an improvement in top line, we expect
cost-to-income ratio to improve to ~62% in FY13. However, the same would
continue to remain high, thereby impacting DCBs overall return ratios.
11.8% 11.6% 12.0% 11.1% 13.4% 13.0% 12.9%
1.6% 1.8%
2.9%
2.2%
2.0%1.7% 2.0%
13.4% 13.4%
14.9%
13.3%
15.4%
14.7%
15.0%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY08 FY09 FY10 FY11 FY12E FY13E FY13E
Tier I Capital Tier II Capital Total CAR (RHS)
27%26%
23%23%
20%
21%
22%
23%
24%
25%
26%
27%
FY08 FY09 FY10 FY11
Improving cost
efficiencies but still
below industry par
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 12
Development Credit Bank Ltd
Figure 19: Improvement in cost to income ratio due
to increase in total income
Figure 20: DCBs cost to income ratio highest
among private banking peers (FY10)
Source: Company, CRISIL Equities Source: CMIE, CRISIL Equities
68.5%
76.3% 80.6%
71.4%
67.9%
61.7%
3.7%3.6%
3.4%3.2%
3.0%2.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
60%
65%
70%
75%
80%
85%
90%
FY08 FY09 FY10 FY11 FY12E FY13E
Cost to income Opex/ Avg. assets (RHS)
35%
37%
39%
42%
43%
47%
48%
51%
57%
60%
71%
81%
83%
0% 20% 40% 60% 80% 100%
Federal Bank
Yes bank
City union bank
Axis bank
Karur Vysya bank
South Indian Bank
HDFC Bank
IndusInd Bank
ING Vysya Bank
Karnataka bank
Kotak Mahindra bank
DC B
Dhanlakshmi Bank
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 13
Development Credit Bank Ltd
Key Monitorables
Failure to ramp-up the loan book without any incremental slippages
DCB has been largely successful in moving out of the problem assets. For the
bank to enter the next league, we believe growing the loan book faster without
any incremental slippages would be a challenge. Hence, management is trying
to improve asset quality, especially under writing standards. So far, the bank
has adopted a conservative lending approach. However, if it again decides to
ramp the loan book aggressively by compromising on asset quality, it may get
into trouble.
Inability to acquire new branch licences
As per management, in the past two years, the RBI did not give any new branch
licence to DCB as the bank was incurring losses and its promoters shareholding
has been above RBI guidelines. With DCB turning profitable and the banks
roadmap to reduce promoters stake, we believe RBI should give a green signal
for new branch licenses. In July, 2010 DCB received permission from RBI to
open two new rural/semi-urban branches in Gujarat, which are slated to be
operational by end of FY12. Any inability to acquire new licenses will put
pressure on growth in the long run.
Potential target given its size and branches
Given DCBs small balance sheet size and branch network, CRISIL Equities
believes that it can be a potential target.
Employee retention
Being one of the smaller banks in the private sector, employee retention is
expected to be a huge challenge.
Growing the loan book
without significant NPAs
could be a challenge
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 14
Development Credit Bank Ltd
Financial Outlook
Total income to grow at two-year CAGR of 20% in FY13
We expect DCBs total income to grow to Rs 4.3 bn in FY13 with higher
contribution from net interest income (comprising ~60-65% of total income).
We expect 23% CAGR for DCBs net interest income in FY13 driven by strong
business (deposits + advances) growth of ~20% with slight moderation in NIMs
at ~2.9% to 3%. Loan book growth will be driven by a balanced mix between
various segments viz. corporate, SME, retail and AMRB whereas deposit book
growth will be driven by retail deposits (comprising almost ~78% of total
deposit book).
We expect a marginal 13% CAGR in non-interest income driven by core fee
income, trading gains and miscellaneous income.
Figure 21: Total income expected to grow at two-
year CAGR of 20%
Figure 22: Net interest income expected to drive
total income
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
PAT to grow manifold; adjusted book value to increase from Rs 26 in FY11 to Rs 35 in FY13
DCBs PAT has moved from a loss of Rs 784 mn in FY10 to a profit of Rs 214 mn
in FY11 and is expected to continue its positive run with a profit of Rs 820 mn in
FY13, primarily driven by strong income growth, improvement in cost to income
and reduction in provisions due to a significant write-down in unsecured
personal loans, commercial equipment and commercial vehicle loans. We have
also factored in equity infusion of Rs 1,500 mn at Rs 60 per share (current
market price) for FY12. With an expected improvement in profitability, we
expect adjusted book value (adjusting for net NPA) per share to rise from Rs 26
in FY11 to Rs 35 in FY13.
3173
24913012
3526
4275-8.7%
-21.5%
20.9%
17.1%
21.2%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY09 FY10 FY11 FY12E FY13E
(Rs mn)
Total Income y-o-y growth (RHS)
62.2% 57.0%62.8% 64.8% 66.5%
37.8% 43.0% 37.2%35.2% 33.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY09 FY10 FY11 FY12E FY13E
Net Interest Income/ Total Income Non Interest Income/ Total Income
Total income of the bank
to grow at a CAGR of
20% led by net interest
income (comprising 60-
65% to the total income)
Strong growth in total
income drive bottom line
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 15
Development Credit Bank Ltd
Figure 23: PAT to grow on lower base Figure 24: Book value per share
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
ROE and ROA to expand in FY13 but remain below industry average
DCBs ROE has improved from -14.5% in FY10 to 3.9% in FY11 and we expect it
to further improve to 10.3% in FY13E with capital infusion factored in FY12 but
it still remains below industry average. Its ROA has significantly improved from
-1.3% to 0.3%, due to balance sheet restructuring and we expect it to increase
to 0.9% by FY13. We believe its ROA in FY13 will be somewhat in line with the
industry average of 1%. We expect return ratios to normalise post FY13.
(881)
(785)
214 420
820
-330%
-11%
127%96%
96%
-500%
-400%
-300%
-200%
-100%
0%
100%
200%
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
FY09 FY10 FY11 FY12E FY13E
(Rs mn)
PAT y-o-y growth (RHS)
23.6
21.7
26.031.5
34.7
-31.3%
-7.9%
19.8% 21.1%
10.2%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0
5
10
15
20
25
30
35
40
FY09 FY10 FY11 FY12E FY13E
(Rs )
Adjusted Book Value y-o-y growth (RHS)
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 16
Development Credit Bank Ltd
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and
business prospects, and financial performance.
Restructuring of the management team
DCB revamped its key management team starting FY09. Mr. Murali Natrajan
joined as the Managing Director and CEO of DCB effective from April 2009.
Earlier, he served as the Global Head for SME banking in Standard Chartered
Bank and as Director of cards business in Citibank India. Mr. Bharat Sampat,
with over two decades of experience in diverse industries viz. manufacturing
and banking, joined as the CFO effective September 2008.
Second line of management
Based on our interactions with DCB, we believe the banks second line is
reasonably experienced. Key managerial personnel have more than 20 years of
experience in their respective fields and most of them had prior associations
with reputed banks like Standard Chartered Bank, Citibank, etc.
Challenges still ahead
DCBs current management team has been instrumental in reducing losses and
getting the bank into profitability. However, growing the business to bring back
the bank into reasonable profitability ratios could be a challenge.
DCBs current
managements focus
includes moving away
from legacy issues of
unsecured lending which
has started reflecting in
FY11 performance
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 17
Development Credit Bank Ltd
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context, CRISIL Equities analyses the shareholding structure, board
composition, typical board processes, disclosure standards and related-party
transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a companys corporate governance.
Required corporate governance standards are reflected in the board constitution
and by the presence of audit and other committees, which support board
processes. Based on the balance sheet disclosures, attendance record of
independent directors and their level of engagement in company affairs, it
appears that the corporate governance is reasonably good and conforms to the
required standards.
Board composition
DCBs board consists of 10 members, seven of whom are independent directors
(70%), which is well above the minimum stipulated requirements under Clause
49 of SEBIs listing guidelines. DCBs promoter (Aga Khan Fund) has designated
Mr. Nasser Munjee as DCBs chairman. He also heads a couple of other Aga
Khan institutions in India and has served as chairman/ director in various banks
and financial companies viz. ICICI, HDFC and IDFC. He sits on 15 corporate
boards in India including Tata Motors, Voltas, ABB India, Cummins India,
Ambuja Cements, etc. Since Aga Khan Fund has a substantial 23% stake in
DCB, it has inducted four nominee independent directors.
Given the background of the directors, we believe the board is fairly
experienced and bring rich expertise to the board.
Boards processes
The boards processes appear to be well structured, with nine committees
including audit, nomination, and risk management in place, supporting good
corporate governance and decision making framework. Chariman Mr. Munjee
heads the nomination committee, executive committee and capital raising
committee while the others are chaired by an independent director each.
Reasonable standards of disclosures and transparency
DCBs quality of disclosure and transparency can be considered good, based on
the level of information and details furnished in the annual report, websites and
other publicly available data. The company also holds analyst conference calls to
discuss the quarterly results performance.
Adequate corporate
governance practices
followed at DCB
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 18
Development Credit Bank Ltd
Valuation Grade: 3/5
We have valued DCB using the justified price-to-book ratio (P/B) method using
FY14 as we expect the profitability of the bank to improve significantly from the
current level and get normalised in FY14. Accordingly, we arrive at a fair price of
Rs 70 for FY14. On discounting the fair value by 15.5% in FY14, we arrive at a
fair value of Rs 61 per share in FY13 and thereby our implied P/B works out to
1.6x on FY13E adjusted book value. We believe that the implied P/B of 1.6x is
higher and ROE of 10.3% in FY13E is lower than the comparable private sector
banks, however this is because we expect the profitability of DCB to normalise
after FY13. Accordingly, we initiate coverage with a valuation grade of 3/5,
indicating the current market price is aligned with the fair value.
Table 6: Peer Valuation table
M-Cap
(Rs bn)
Book Value (Rs) P/ BV (x) ROE (%) ROA (%)
FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13
Development Credit Bank 12 28 34 37 2.0 1.7 1.6 3.9 6.4 10.3 0.3 0.5 0.9
City union bank 18 25 31 38 1.8 1.4 1.2 22.6 22.4 21.0 1.6 1.6 1.6
Dhanlaxmi bank 10 93 117 133 1.3 1.1 0.9 4.5 7.4 9.2 0.3 0.5 0.5
IndusInd Bank 118 76 89 112 3.1 2.7 2.3 18.6 17.9 19.5 1.4 1.5 1.6
ING Vysya Bank 39 206 238 278 1.7 1.5 1.2 13.1 14.9 16.9 0.9 1.0 1.0
South Indian Bank 27 15 17 20 1.6 1.3 1.2 18.0 18.7 18.6 1.0 1.0 0.9
Median 1.7 1.4 1.2 18.0 17.9 18.6 1.0 1.0 1.0
Prices as on May 02, 2011
Source: CRISIL Equities for DCB, Industry
Fair value estimate of
Rs 61 based on justified
P/B method
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 19
Development Credit Bank Ltd
Company Overview
Development Credit Bank is a small private sector bank promoted by Aga Khan
Fund for Economic Development (AKFED) offering corporate banking,
SME/micro SME lending, ARMB and retail banking. As on FY11, the bank had a
network of 80 branches with loan book of Rs 43 bn and net worth of Rs 6 bn.
During FY03-05, DCB lent mostly to big corporates along with small ticket loans.
The bank suffered heavy losses as these turned delinquent. The bank was re-
capitalised in FY05 through private equity investments and also got a new
management on board. In 2006, the bank came up with an Initial Public
Offering (IPO) and raised Rs 1.86 bn. In FY07, DCB started focusing on retail
loans, especially high-yield unsecured personal loans and commercial loans to
grow its asset book. The share of unsecured personal loan as a percentage of
loan book peaked at 32% in FY08. However, the unsecured loans turned
delinquent during the economic downturn, resulting in huge losses. The
management team operating then was replaced by a team lead by Mr Murali
Natrajan. The bank began to revamp its strategy with complete closure of
personal loans and commercial loans. The bank now focuses on secured,
balanced and diversified loans funded by low-cost CASA and retail deposits.
After two consecutive years of losses, the bank did a turn around with a profit of
Rs 214 mn in FY11.
Figure 25: Series of losses in DCBs past, now back to profit
Source: Company, CRISIL Equities
300 341 345
174
-1,629
-853
74
383
-881-785
214
-2,000
-1,500
-1,000
-500
0
500
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(Rs mn)
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 20
Development Credit Bank Ltd
History and major developments
Year Key events
1930 Incorporation of Masalawala Co-operative Bank Limited and Ismailia
Co-operative Bank Limited
1981 Amalgamation of Masalawala Co-operative Bank Limited and Ismailia
Co-operative Bank Limited into Development Co-operative Bank Limited
1995 Conversion from a co-operative bank to scheduled commercial bank,
promoted by Aga Khan Fund for Economic Development
2004 Classified as a new private sector bank by RBI
2006 * PE Investment of Rs 520 mn @ Rs 45 per share in February
2006 IPO of Rs 1.86 bn @ Rs 26 per share in September
2007 # Preferential allotment of Rs 2,800 mn @ Rs 105 per share in August
2009 Issued lower tier II subordinated bonds aggregating Rs 650 mn
2009 QIP - raised 810 mn of tier I capital @ Rs 34 per share
*PE investors - HDFC, Khattar Holdings, Amtel Finance, etc aggregating 15% stake
# Tata Capital, India Capital Opportunities, Al Bateen Investment Company
(Abu Dhabi), Tata Investment Corporation, etc.
Source: Company
The banks 80 branches are concentrated in Gujarat, Maharashtra and Andhra
Pradesh.
Figure 26: Branch network (FY11) Figure 27: Break-up of loan portfolio (FY11)
Source: Company Source: Company
Gujarat , 17%
Maharashtra, 44%
Andhra Pradesh, 12%
New Delhi, 8%
Other regions, 19%
Corporate loans, 26%
SME & Micro SME
Loans, 24%
Retail loans, 30%
AMRB loans, 20%
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 21
Development Credit Bank Ltd
Annexure: Financials
Source: Company, CRISIL Equities estimate
Income Statement Balance Sheet
(Rs mn) FY09 FY10 FY11 FY12E FY13E (Rs mn) FY09 FY10 FY11 FY12E FY13EInterest Earned 6,452 4,594 5,363 6,723 8,251 Share capital (FV - Rs10) 1,743 2,000 2,002 2,252 2,252
Interest Expended 4,480 3,174 3,471 4,438 5,407 Reserves 3,642 3,425 3,624 5,293 6,082
Net Interest Income 1,973 1,420 1,891 2,285 2,845 Shareholders Funds 5,385 5,425 5,625 7,545 8,333
Non Interest Income 1,201 1,071 1,121 1,241 1,430 Deposits 46,469 47,873 56,102 66,200 78,116
Fee Income 768 664 661 747 871 Borrowings 4,455 5,035 8,607 8,870 10,682
Trading Gains 20 178 253 288 332 Other Liabilities & Provisions 2,523 2,447 2,800 2,006 4,319
Total Income 3,173 2,491 3,012 3,526 4,275 Deferred tax liability 146 0 0 0 0
Total Operating Expenses 2,269 1,854 2,020 2,196 2,389 Sources of funds 58,978 60,780 73,134 84,621 101,451
Staff Costs 1,049 885 1,064 1,191 1,334 Cash & Balances with RBI 2,869 2,914 4,286 4,235 4,997
Other Operating Expenses 1,220 969 957 1,004 1,055 Balances with Banks & money at Call 3,733 410 585 585 690
Pre- provisioning profit (PPP) 904 636 992 1,331 1,886 Investments 16,217 20,179 22,950 26,149 30,465
Provision & Contingencies 1,619 1,210 568 619 631 Advances 32,740 34,597 42,715 50,656 61,788
Profit before depn and tax (715) (574) 424 712 1,255 Net Fixed Assets 891 771 608 789 921
Depreciation On Fixed Assets 150 154 132 197 250 Other Assets 2,287 1,831 1,912 2,130 2,512
PBT (866) (727) 293 514 1,006 Deferred tax asset 241 78 78 78 78
Provision for tax 15 57 78 95 186 Application of funds 58,978 60,780 73,134 84,621 101,451
PAT (881) (785) 214 420 820
Du pont analysis (%)
Ratios As a % of average assets FY09 FY10 FY11 FY12E FY13E
Return Ratios (%) FY09 FY10 FY11 FY12E FY13E Net Interest Income 2.9 2.4 2.8 2.9 3.1
Net Interest Margin (NIM) 2.9 2.8 3.1 2.9 3.1 Non Interest Income 1.8 1.8 1.7 1.6 1.5
Yield on Advances 13.6 12.3 11.1 10.9 11.3 Fee Income 1.1 1.1 1.0 0.9 0.9
Return on Average Assets -1.3 -1.3 0.3 0.5 0.9 Trading Gains 0.0 0.3 0.4 0.4 0.4
Return on Average Networth -15.1 -14.5 3.9 6.4 10.3 Total Income 4.7 4.2 4.5 4.5 4.6Operating ROAA 3.4 3.1 3.0 2.8 2.6
Efficiency ratios (%) Staff Costs 1.6 1.5 1.6 1.5 1.4
Net Interest Inc/ Total Inc 62.2 57.0 62.8 64.8 66.5 Pre-provisioning profit 1.3 1.1 1.5 1.7 2.0
Non Interest Inc/ Total Inc 37.8 43.0 37.2 35.2 33.5 Provision & Contingency 2.4 2.0 0.8 0.8 0.7
Cost to income 76.3 80.6 71.4 67.9 61.7 Loan Loss Provisions 2.2 1.9 0.7 0.7 0.5
Opex/ Avg. assets 3.6 3.4 3.2 3.0 2.8 Pre-tax ROAA (1.3) (1.2) 0.4 0.7 1.1
Loan growth -19.5 5.7 23.5 18.6 22.0 Provision for tax 0.0 0.1 0.1 0.1 0.2
Deposit growth -23.5 3.0 17.2 18.0 18.0 ROAA (1.3) (1.3) 0.3 0.5 0.9
Equity/ Assets 2.6 3.3 3.0 2.9 2.4
Valuation ratios ROAE (15.1) (14.5) 3.9 6.4 10.3
P/E (x) -11.0 -14.2 52.1 29.9 15.3
P/BV (x) 1.8 2.1 2.0 1.7 1.5 Per share Data FY09 FY10 FY11 FY12E FY13E
P/ABV (x) 2.4 2.6 2.1 1.8 1.6 Equity Shares outstanding (Rs mn) 174.3 200.0 200.2 225.2 225.2
EPS (Rs) -5.1 -3.9 1.1 1.9 3.6
Asset quality Book Value (Rs) 30.9 27.1 28.1 33.5 37.0
Gross NPA (Rs mn) 2,900 3,192 2,636 2,471 2,409 Adjusted Book value 23.6 21.7 26.0 31.5 34.7
Net NPA (Rs mn) 1,271 1,077 413 446 511
Gross NPA ratio (%) 8.4 8.7 5.9 4.7 3.8 Quarterly financials
Net NPA ratio (%) 3.9 3.1 1.0 0.9 0.8 (Rs mn) Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
Provision Coverage (%) 56.2 70.0 87.6 82.0 78.8 Net Interest Income 420.0 433.0 464.0 493.0 502.0
Change (q-o-q) 31% 3% 7% 6% 2%
Asset-Liability (%) Operating Profit 190.0 226.0 208.0 206.0 220.0
Credit-Deposit ratio 70.5 72.3 76.1 76.5 79.1 Change (q-o-q) 138% 19% -8% -1% 7%
Investment/Deposit 34.9 42.2 40.9 39.5 39.0 Profit after tax -82 -29 48 82 113
Proportion of CASA deposits 31.0 35.4 35.2 35.5 34.7 Change (q-o-q) 55% 65% 266% 71% 38%
Capital adequacy ratio 13.4 14.9 13.3 15.4 14.7 Net interest margin (%) 3.27 3.12 3.14 3.13 3.15
Tier-I ratio 11.6 12.0 11.1 13.4 13.0 EPS (Rs) -0.4 -0.2 0.2 0.4 0.6
CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 22
Development Credit Bank Ltd
Focus Charts
Loan book composition Break-up of total income
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
DCBs balance sheet - smallest among listed private
sector banks (FY10)
DCBs stock movement vis-a-vis Bank Nifty
-indexed to 100
Source: Company, CRISIL Equities Source: NSE, CRISIL Equities
Shareholding pattern Top institutional shareholders (FY11)
Name of the shareholder % holdings
Al Bateen Investment Co L L C 3.69
Tata Capital Ltd 3.29
DCB Investments Ltd 2.65
The India Fund INC 2.17
Housing Development Finance Corporation Ltd 2.02
Sundaram BNP Paribas Mutual Fund 1.47
Macquarie Bank Ltd 1.13
Source: Company, CRISIL Equities Source: NSE
46%
28% 32% 26% 25% 25%
4%
14%17% 24% 26% 28%
42%
40% 26% 30%30% 29%
8%17%
25% 20%19% 18%
0%
20%
40%
60%
80%
100%
FY08 FY09 FY10 FY11 FY12E FY13E
Corporate loans SME & Micro SME Loans Retail loans AMRB loans
50.0% 62.2%57.0% 62.8% 64.8%
43.6% 50.0%37.8% 43.0% 37.2%
0%
20%
40%
60%
80%
100%
FY08 FY09 FY10 FY11 FY12E
Net interest income Non interest income
62 81
105 116 220 255 271 339 354
364 374 425 438
1,807 2,226
3,639
0 1,000 2,000 3,000 4,000
DC BDhanlakshmi Bank
Lak Vilas BankCity union bank
Karur Vysya bankSouth Indian Bank
Karnataka bank
ING Vysya BankIndusInd Bank
Yes bankKotak Mahindra bank
J&K BankFederal Bank
Axis bank
HDFC BankICICI Bank
(Rs b
n)
0
50
100
150
200
250
300
350Ap
r-09
Jun-
09
Aug-0
9
Oct
-09
Dec-
09
Feb-
10
Apr-
10
Jun-
10
Aug-1
0
Oct
-10
Dec-
10
Feb-
11
Apr-
11
Jun-
11
DCB NIFTY
23.1% 23.1% 23.1% 23.1% 23.1%
2.7% 4.9% 3.6% 8.3% 8.3%8.1% 3.4% 6.2%
3.5% 1.9%
66.1% 68.6% 67.1% 65.2% 66.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
Promoter FII DII Others
CRISIL Limited. All Rights Reserved.
CRISIL Independent Equity Research Team
Mukesh Agarwal Senior Director +91 (22) 3342 3035 [email protected]
Tarun Bhatia Director, Capital Markets +91 (22) 3342 3226 [email protected]
Chetan Majithia Head, Equities +91 (22) 3342 4148 [email protected]
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CRISIL Limited. All Rights Reserved.
About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are
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and leading corporations.
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