Rating Rationale (2024)

Key Rating Drivers & Detailed Description

Strengths:

* Healthy capitalisation

DCB Bank’s healthy capitalisation is reflected in the comfortable capital adequacy ratios (CAR), considerable networth coverage for net non-performing assets (NPAs), and flexibility to raise capital. Capitalisation ratios were comfortable with CET 1 and Tier 1 CAR at 14.9% and overall CAR at 17.9% as on September 30, 2022 (15.8% and 18.9% respectively as on March 31, 2022). Reported networth as on September 30, 2022 stood at Rs 4,230 crore with networth coverage for net NPAs at 8.8 times (7.1 times as on March 31, 2022) 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 Ratings believes support will be available if needed. CRISIL Ratings 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 Ratings believes healthy capitalisation will be maintained over the medium term.

*Established market position in SME segment, driven by past record of sustainable and calibrated growth

The bank continues to remain SME focussed with an advances book of Rs 31, 291 crores as on September 30, 2022 with the SME book constituting over 50% ((mortgages (43%) and the SME/MSME book (9%)). The remaining was constituted primarily by Agriculture and inclusive banking (22%), Corporate banking (10%), commercial vehicle (2%), gold loans including co-lending (10%), and other segments (4%).

Post the pandemic waves the bank has seen strong rebound in growth with the net advances growing by 18% (year-on-year (y-o-y)) as on September 30, 2022 as against 13% for fiscal 2022 and 2% for fiscal 2021. The constitution of the portfolio however over the years has not changed much. The Bank continues to maintain its focus on the SME businesses in turn garnering expertise and establishing its market position in this segment. CRISIL Ratings believes that the growth momentum shall continue with the bank continuing to focus primarily on the SME segment.

* Modest asset quality

The gross non-performing assets (NPAs) for DCB Bank remained improved to 3.9% as on September 30, 2022 (4.3% as on March 31, 2022 and 4.1% as on March 31, 2021). The improvement stemmed post the reopening of the economy post the second wave which has resulted in an improvement in the collection efficiencies across segments. The improvement was witnessed across segments: mortgages (2 year lagged GNPA of 2.8% as on September 30, 2022 as compared to 3.2% as on March 31, 2022) , GNPA of SME/MSME book to 4.9% as on September 30, 2022 (4.9% as on March 31, 2022), that of Agriculture and Inclusive Banking (AIB) to 4.3% as on September 30, 2022 (4.6% as on March 31, 2022) whereas GNPA of gold loans improved to 1.3% as on September 30, 2022 (3.9% as on March 31, 2022).

Of the advances, the corporate advances formed 10% of total advances as of September 30, 2022, wherein the exposures are primarily to higher rated corporates, wherein the bank is also able to recover from difficult accounts and is focused on running a shorter tenure book which supports performance of this book.

While there was an increase in slippages of the bank in fiscal 2022 and first half of fiscal 2023, it was offset by substantial recoveries and upgrades. Thus, the bank has been able to improve on the recoveries with bulk of the recoveries being cash recoveries. Further, the bank’s funded SMA-0, 1 and 2 exposures combined (for exposures less than Rs 5 crores) too remained below 1% of gross advances as on September 30, 2022. Having said that, the bank has a track record of comfortably managing its asset quality. Therefore, experience of the management, coupled with secured and granular portfolio, should help to restore its asset quality metrics to the pre-pandemic levels. Nevertheless, slippages from the restructured portfolio (which constituted 6% of the gross advances as on September 30, 2022) could also impact asset quality as and when the book comes out of moratorium and remains a key monitorable.

*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. The management has since then sorted out the asset quality issues and adopted a policy of steady growth in secured asset classes, targeting SMEs. The management team has clearly demonstrated high levels of consistency in chalking out and executing policies and growth strategies.

Weakness:

*Moderate earnings profile, likely to remain muted in the near to medium term

The earnings profile has been moderate amidst high operating expenses in the past, following the branch expansion and investments in technological upgradation. The operating expenses (as a percentage of average total assets) increased to 2.4% in fiscal 2022 (from 2.2% in fiscal 2021) owing to increased hiring, resulting in subdued RoA of 0.7% in fiscal 2022 (0.9% in fiscal 2021). It further increased to 2.7% (annualised) in the first half of fiscal 2023, which was however offset by lower provisioning costs of 0.3% (annualised) resulting in RoA of 0.9% (annualised). The bank has Rs 59 crore of Contingency provision on restructured and stressed assets, Rs 129 crore of floating provisioning which can be used in emergency, Rs 19 crore of specific standard asset provision and Rs 104 crore of standard asset provision as on September 30, 2022.

Net interest margin (NIM) improved to 3.4% (annualised) in first half of fiscal 2023 (3.2% in fiscal 2022). Repricing of floating rate loan book provides cushion against the rising cost of deposits. However, rationalization of operating expenses, along with controlled credit cost in steady state scenario, are likely to improve DCB Bank's profitability over the medium to longer term and will remain key monitorables.

*Average resource profile with relatively lower share of CASA; focus on retail deposits

Deposits have grown at a compounded annual growth rate (CAGR) of 12.5% over fiscals 2017 to 2022, corresponding to 13.0% CAGR in the net advances. The deposit base grew by 16.3% Y-o-Y to Rs 36,960 crore as on September 30, 2022. This was majorly driven by growth in the savings accounts, resulting in improved CASA ratio of 29.3% as on September 30, 2022 (25.4% as on September 30, 2021), which however is still lower than the peer banks.

The retail term deposits of the bank have grown at a CAGR of around 11% over fiscals 2017 to 2022. Also, the top 20 depositors’ ratio has also improved to 6.9% as of September 30, 2022, as compared to 14.9% as on March 31, 2018. Furthermore, the retail deposits ratio (defined as Savings Accounts + term deposits with ticket size below Rs 2 crore as a proportion of total deposit base) stood healthy at 67% as on September 2022 (70% as on March 31, 2022). With the newly opened branches achieving scale and the bank’s focus on making its retail deposit base more granular, CRISIL Ratings expects an increase in CASA and small ticket retail deposit base over the medium term.

* Modest scale of operations

Scale of operations remains modest, with the bank accounting for a small share of deposits and advances in the banking system, as on September 30, 2022. Amidst the branch expansion in the recent years, the bank now has a network of 410 branches as on September 30, 2022 as compared to 262 as on March 31, 2017.

About the bank

DCB Bank was incorporated in 1995, by reconstituting the Development Co-operative Bank Ltd (DCBL) to Development Credit Bank Ltd 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 combined stake at 14.85% as on September 30, 2022. DCB Bank had 410 branches as on September 30, 2022.

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 65,000 people, with revenues of USD 4.5 billion in 2019. AKFED had co-promoted Housing Development Finance Corporation Ltd in India in the late 1970s.

For fiscal 2022, DCB Bank’s profit after tax (PAT) was Rs 288 crore on a total income (net of interest expense) of Rs 1,810 crore, as compared to Rs 336 crore and Rs 1,732 crore, respectively, in the previous fiscal.

For the half year ended September 30, 2022, the bank’s PAT was Rs 210 crore on total income (net of interest expense) of Rs 977 crore compared with Rs 99 crore and Rs 851 crore, respectively, in the corresponding period of the previous fiscal.