DCB Bank reflects pain in small businesses but valuation remains attractive

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Small businesses were hit hard last year as a result of the pandemic and remain vulnerable this time around as a second wave grips the country. While lockdowns are localized and less stringent than last year’s national restrictions, small entrepreneurs have been disproportionately affected due to their vulnerability.

Considering that DCB Bank Ltd mainly caters to this segment and has a significant share of freelancers as borrowers, an increase in stress should come as no surprise. Indeed, collections were impacted in April and May due to curfews and lockdowns imposed to curb the second wave of covid.

Analysts fear the lender will see a disproportionate impact of the lockdowns on the quality of its assets in the first quarter, mainly due to its borrower profile. As such, bad debts remained high during the March quarter, with the gross bad debt ratio standing at 4.09%, higher than the previous quarter. In addition, the lender also restructured 4.3% of its loan portfolio, one of the highest among its peers. In addition, further slippages jumped in the March quarter 664 crore. “We believe the bank has a relatively higher reliance on the self-employed category which remains most affected in the second wave of covid,” analysts at Emkay Global Financial Services Ltd wrote in a note. bad debts and restructured stack may increase due to current disruptions.

Another concern is that DCB Bank’s provisions do not appear to sufficiently cover future risks. In fact, a reduction in provisions contributed to the 13% growth in the lender’s net income for the fourth quarter. Provisions decreased by 14% compared to the same period a year ago. The coverage rate was 62.35%, down from a year ago. Analysts expect additional provisioning needs to remain high in the coming quarters and, as a result, keep the return on assets under pressure.

While asset quality remains a concern, DCB Bank could also see headwinds on the growth front. Loan growth remained lukewarm at 2% for the March quarter. Despite these problems, analysts believe that DCB Bank could signal improvement once the economic recovery gains momentum. “Unlike previous cycles in the history of the bank and on a relative basis in this cycle, we believe DCB Bank has done well. As the macro stabilizes, we expect growth to accelerate and move towards higher RoE (Return on Equity), ”said a report from Kotak Institutional Equities Ltd.

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