Prabhudas Lilladher has reaffirmed its BUY rating on DCB Bank, setting a target price of Rs 155, representing a 33% upside from the current price of Rs 116. Despite a mixed Q2FY25 performance, marked by a lower-than-expected net interest margin (NIM) and heightened provisions, the bank reported stable asset quality and promising growth in loans. Management remains optimistic, with a goal to double the balance sheet in the next 3–4 years, driven by targeted loan growth in key sectors, a shift towards high-ticket loans, and tighter cost control. As NIM appears to have bottomed out, Prabhudas Lilladher anticipates margin improvement and a sustainable recovery path.

Financial Highlights for Q2FY25

Revenue and PAT: DCB Bank's profit after tax (PAT) was Rs 1.6 billion, 9% below Prabhudas Lilladher's expectations, primarily due to lower NIM and elevated provisions. Despite this, the bank reported growth in non-interest income, with total income rising 22.4% YoY to Rs 7.1 billion.

Net Interest Income (NII) and NIM: NII came in at Rs 5.1 billion, below the estimated Rs 5.3 billion, due to a lower-than-expected NIM of 3.38% (against an anticipated 3.54%). The bank cited reduced loan yields and stable funding costs as contributing factors.

Loan Growth: Loan growth exceeded expectations, expanding 19.3% YoY, driven by strength in the mortgage and gold loan segments. Deposits grew in tandem by 19.9% YoY, maintaining a stable Loan-to-Deposit Ratio (LDR) of 81.5%.

Strategic Focus on High-Growth Sectors

Targeted Sector Expansion: The bank aims to double its balance sheet over the next 3–4 years by expanding loans in sectors such as mortgages, MSMEs, gold, co-lending, and agriculture infrastructure business (AIB). Mortgage loans showed sequential growth of 5.2%, while gold loans surged by 11.8% QoQ.

Increase in Ticket Size: DCB Bank is raising its loan ticket size from Rs 3 million to Rs 4–5 million, enhancing the bank’s focus on larger loans in its portfolio.

Reduction in Microfinance Institution (MFI) Exposure: The MFI portfolio, contributing 4% to total loans, is expected to decline as the bank shifts focus to higher-quality, low-risk segments.

Margin Outlook and Efficiency Enhancements

NIM Recovery Guidance: The management expects NIM to recover in the coming quarters, supported by a favorable loan mix, optimized liquidity management, and stable funding costs. NIM is projected to reach 3.65–3.75% as the bank increases the proportion of higher-yielding loans.

Efficiency Gains and Cost Control: Operating expenses at Rs 4.6 billion exceeded expectations by 1.7%, with an operating leverage focus to optimize the cost-to-income (C/I) ratio below 55% in the short term.

Fee Income Expansion: Fee income, a component of non-interest income, increased to Rs 1.39 billion, exceeding estimates. This growth is attributed to enhanced cross-selling and an increased focus on repeatable income streams.

Asset Quality and Provisioning

Stable Asset Quality: Asset quality metrics remained steady, with Gross NPA at 3.29% and Net NPA at 1.17%. Improved recoveries of Rs 3.2 billion further strengthened the bank’s position.

Provisions: Provisions increased to Rs 456 million, higher than expected, due to continued investments in high-growth but risk-sensitive sectors. Management targets a credit cost of 45–55 basis points for FY25.

Future Growth Outlook

Balance Sheet Expansion: DCB Bank’s goal to double its balance sheet within 3–4 years remains intact, supported by strategic growth in high-yielding sectors. Additionally, promoter equity infusion of $10 million in Q3FY25 is anticipated to bolster capital reserves and support expansion.

Revenue Projections and Valuation: Prabhudas Lilladher anticipates revenue and PAT growth rates of 14.7% and 20.4%, respectively, over the FY24–27 period. With stable growth projections, the target price of Rs 155 is based on a P/BV multiple of 0.9x FY27E, reinforcing a BUY call for long-term investors looking for balanced growth in the Indian banking sector.