 "DCB Bank: Fast expansion plan to hit profitability")
Ambitious targets set forth by the DCB Bank management when the September quarter results missed the Street’s estimates saw the stock of the bank hit the lower-circuit limits (only sellers in the counter) within an hour of trade on Wednesday.
The results and business expansion details were made public after market hours on Tuesday. Analysts now fear that the aggressive expansion plan will hurt the bank’s profitability and return ratios in the current financial year as well as in FY17. And, this could keep a tab on the stock price of the bank.
From 160 branches currently, the bank plans to add 150 branches, taking the tally to 300 branches by December 2016. Compared to its earlier projections of adding 25-30 banks a year, this announcement is aggressive. DCB Bank is taking on this massive expansion in anticipation of competition from micro finance institutions who have been awarded small bank licences as well as newer types of banks that will become a reality.
As a result, analysts have lowered their estimates for the bank. Those at Anand Rathi have cut their net interest income estimate by 9.6-10.9 per cent, PAT (profit after tax) by 27-53 per cent and return on equity by 337-783 basis points for FY16 and FY17, respectively.
Guidance from the DCB Bank’s management indicates that its profits could be negatively impacted till FY18 due to largescale branch expansion. The bank expects its profit after tax to decline by Rs 9-15 crore in FY16 and by as much as Rs 50-65 crore in FY17 and Rs 20-35 crore in FY18, indicating that its net interest margins might also come under stress during these periods. Currently, the bank operates with manpower capacity of 3,674 and this could go up to 5,800 in the next year if it must expand by 150 branches.
Though the management has indicated the overall cost of setting up new branches to be anywhere around Rs 40 lakh for small branches and Rs 1-1.5 crore for large branches, the cost-to-income ratio (now maintained at 61 per cent) might deteriorate by five-11 per cent in the next two-three years and payback from this expansion plan might start flowing in between FY20 and FY22.
Meanwhile, compared to the June'15 quarter, DCB Bank’s net interest income registered six per cent growth in September 2015, while total income was flat at Rs 464.87 crore. However, PAT declined by 21 per cent due to increase in provisioning for bad loans. Gross non-performing assets (NPAs) were up by nine per cent, on account of stressed Small and medium-sized enterprises and mortgage loan portfolios.
Gross slippage ratio (reflects incremental stress), however, stood at 2.41 per cent indicating that the bank’s asset quality was stable. While retail operations remained intact in Q2’FY16 and some of the broader indicators such as current and savings account ratio and NIMs also remained strong at 24.1 per cent and 3.8 per cent; operations of treasury and corporate and wholesale banking divisions came under pressure in Q2’FY16.
Compared to the June quarter performance, operating profits of these segments declined by 56 per cent and 37 per cent, respectively.
On the whole, analysts do not seem much in favour of the aggressive expansion plans.
While downgrading the stock to 'sell', Kotak, in its report, said, “Downgrade essentially reflects our disappointment on the change in the investment hypothesis, which earlier rested on steady loan growth, healthy capital structure, cost control and management execution leading to better return ratios.”
The results and business expansion details were made public after market hours on Tuesday. Analysts now fear that the aggressive expansion plan will hurt the bank’s profitability and return ratios in the current financial year as well as in FY17. And, this could keep a tab on the stock price of the bank.
From 160 branches currently, the bank plans to add 150 branches, taking the tally to 300 branches by December 2016. Compared to its earlier projections of adding 25-30 banks a year, this announcement is aggressive. DCB Bank is taking on this massive expansion in anticipation of competition from micro finance institutions who have been awarded small bank licences as well as newer types of banks that will become a reality.
As a result, analysts have lowered their estimates for the bank. Those at Anand Rathi have cut their net interest income estimate by 9.6-10.9 per cent, PAT (profit after tax) by 27-53 per cent and return on equity by 337-783 basis points for FY16 and FY17, respectively.
Guidance from the DCB Bank’s management indicates that its profits could be negatively impacted till FY18 due to largescale branch expansion. The bank expects its profit after tax to decline by Rs 9-15 crore in FY16 and by as much as Rs 50-65 crore in FY17 and Rs 20-35 crore in FY18, indicating that its net interest margins might also come under stress during these periods. Currently, the bank operates with manpower capacity of 3,674 and this could go up to 5,800 in the next year if it must expand by 150 branches.
Though the management has indicated the overall cost of setting up new branches to be anywhere around Rs 40 lakh for small branches and Rs 1-1.5 crore for large branches, the cost-to-income ratio (now maintained at 61 per cent) might deteriorate by five-11 per cent in the next two-three years and payback from this expansion plan might start flowing in between FY20 and FY22.
Meanwhile, compared to the June'15 quarter, DCB Bank’s net interest income registered six per cent growth in September 2015, while total income was flat at Rs 464.87 crore. However, PAT declined by 21 per cent due to increase in provisioning for bad loans. Gross non-performing assets (NPAs) were up by nine per cent, on account of stressed Small and medium-sized enterprises and mortgage loan portfolios.
Gross slippage ratio (reflects incremental stress), however, stood at 2.41 per cent indicating that the bank’s asset quality was stable. While retail operations remained intact in Q2’FY16 and some of the broader indicators such as current and savings account ratio and NIMs also remained strong at 24.1 per cent and 3.8 per cent; operations of treasury and corporate and wholesale banking divisions came under pressure in Q2’FY16.
Compared to the June quarter performance, operating profits of these segments declined by 56 per cent and 37 per cent, respectively.
On the whole, analysts do not seem much in favour of the aggressive expansion plans.
While downgrading the stock to 'sell', Kotak, in its report, said, “Downgrade essentially reflects our disappointment on the change in the investment hypothesis, which earlier rested on steady loan growth, healthy capital structure, cost control and management execution leading to better return ratios.”
Though the 20 per cent decline in stock price of DCB Bank could be a one-off event, with operations likely to be under pressure till FY18- FY20, investors may take a cautious approach on the stock.