Development Credit Bank Ltd

Q2FY12 first cut Healthy NIMs lift bottom line

Fundamental Grade Valuation Grade Industry 2/5 (Moderate fundamentals) 5/5 (CMP has strong upside) Commercial banks

October 13, 2011

Fair Value Rs 61 CMP Rs 41

CFV MATRIX
Excellent Fundamentals

Development Credit Bank Ltds (DCBs) Q2FY12 earnings were above CRISIL provisions despite muted performance in non-interest income. Advances and deposits of the bank grew 12% and 14% y-o-y to Rs 43 bn and Rs 63 bn, respectively. Even though the banks Q2FY12 results were better than our expectations, we will most likely retain our estimates as we expect earnings to moderate due to the challenging business environment. We maintain the fundamental grade of 2/5. Q2FY12 result analysis DCBs Q2FY12 net interest income grew 13.9% q-o-q (up 27.4% y-o-y) to Rs 591 mn primarily driven by healthy net interest margins of 3.4% (up 30 bps q-o-q). NIMs grew due to yield repricing despite high cost of funds. However, non-interest income of the bank remained subdued, down 1.3% q-o-q and 14.0% y-o-y. Driven by the growth in net interest income, the total income of the bank grew 9.2% q-o-q and 12.2% y-o-y to Rs 822 mn. Operational costs grew 4.3% q-o-q (up 16.9% y-o-y) to Rs 614 bn led by increase in staff costs (up 3.7% q-o-q and 26.1% y-o-y). However, the cost to income declined to 75% in Q2FY12 from 78% in Q1FY12 on account of strong growth in total income. Despite growing its advance book by 2% q-o-q (12% y-o-y), the bank has been able to report lower provisions and contingencies, which were down 2.0% q-o-q (down 49.5% q-o-q). The bank has been able to steadily improve its asset quality viz. gross NPAs of 5.8% and net NPAs of 1.0%. Profit after tax grew 50.9% q-o-q (up 176.5% y-o-y) to Rs 133 mn due to healthy net interest income and lower provisions. The bank had a nil tax outgo in Q1FY12 compared to tax of Rs 11 mn in Q2FY11. EPS for Q2FY12 was Rs 0.67 compared to Rs 0.44 in Q1FY12.

Strong Downside

Fundamental Grade

Researchs expectations due to healthy net interest margins (NIM) and lower

5 4 3 2 1

Poor Fundamentals

Valuation Grade
Strong Upside

KEY STOCK STATISTICS

NIFTY/SENSEX NSE/ BSE ticker Face Value (Rs per share) Shares outstanding (mn) Market cap (Rs mn)/(US$ mn) 52-week range (Rs) (H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) (Rs mn) 5099/16958 DCB 10 200.2 8,178/167 77/38 1.6 77% 1,893,757 82.0

SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 3.5% 8.3% 23.1% 1.9% 8.3% 23.1% 1.9% 11.7% 23.1% 2.1% 11.1% 23.1% 65.2% 66.7% 63.3% 63.7%

Total deposits grew 5% q-o-q (up 14% y-o-y) to Rs 63 bn led by 3% q-o-q growth in retail deposits (consists of retail CASA and retail term deposits), which contributed ~81% to total deposits. The banks CASA ratio declined 14 bps q-o-q and 144 bps y-o-y to 33.2% in Q2FY12.

Valuations: Current market price has strong upside We continue to use the justified price-to-book ratio (P/B) to value DCB and maintain our fair value of Rs 61 per share. The valuation grade is 5/5. Our implied P/B works out to be 1.7x on FY13E adjusted book value.

30% 20% 10% 0%

Dec-10 Promote r

Mar-11 FII

Jun-11 DII

Sep-11 Othe rs

KEY FORECAST
(Rs mn) Total income Profit after tax Net interest margins Capital adequacy ratios Net NPAs to net advances (%) EPS (Rs) Adjusted book value (Rs) PE (x) P/ABV (x) RoE (%) FY09 3,173 (881) 2.9 13.4 3.9 -5.1 23.6 NM 0.8 -15.1 FY10 2,491 (785) 2.8 14.9 3.1 -3.9 21.7 NM 1.5 -14.5 FY11 3,012 214 3.1 13.3 1.0 1.1 26.2 42.8 1.8 3.9 FY12E 3,527 420 2.9 15.3 0.9 1.9 31.7 21.9 1.3 6.4 FY13E 4,275 820 3.1 14.6 0.8 3.6 34.9 11.2 1.2 10.3

PERFORMANCE VIS--VIS MARKET

Returns 1-m DCB NIFTY -18% -5% 3-m -35% -15% 6-m -23% -17% 12-m -36% -20%

ANALYTICAL CONTACT
Chetan Majithia (Head) Vishal Rampuria Elizabeth John Client servicing desk +91 22 3342 3561 clientservicing@crisil.com chetanmajithia@crisil.com vrampuria@crisil.com ejohn@crisil.com

NM: Not meaningful; CMP: Current Market Price Source: Company, CRISIL Research estimate

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