DCB posts Rs 4.3 crore net profit

Development Credit Bank (DCB), promoted by the Switzerland-based Aga Khan Fund for Economic Development (AKFED), today reported profit in the first quarter of 2006-07 after four years of losses.

The Mumbai-based bank said it earned a net profit of Rs 4.3 crore in April-June 2006 against a loss of Rs 24.2 crore a year earlier.

The bank had made a loss of Rs 9.77 crore in 2002-03, Rs 43.18 crore in 2003-04 and Rs 68.31 crore in 2004-05 and Rs 85.3 crore in 2005-06. It had reported a profit of Rs 28.54 crore in 2000-01 and Rs 36.47 crore in 2001-02.

Despite the net profit reported, rating agency Fitch Ratings has downgraded the long-term rating of DCB to A minus (ind) from A (ind). During 2005-06, DCB's net NPAs (non-performing assets) as a percentage of net advances fell to 4.5 per cent from 6.3 per cent a year earlier.

The bank is planning to tap the capital market through an IPO and has already raised private equity capital of Rs 51.9 crore in February 2006.

Fitch said the downgrade reflects the deterioration in DCB's financials during the last two years coupled with the delay in recapitalising the bank through an IPO, which has been in the works for over six months now.

Most of the pending regulatory and legal issues for the IPO appear to have been sorted and there is greater visibility now on its timing.

Last year, Fitch had downgraded the long-term rating by a notch to reflect the delay in consummating DCB's business plan that sought to write-off the legacy NPAs and also diversify and grow its income streams.

The evolving outlook recognises the credible efforts being made by the new senior management to revive the bank's operations, and could change to stable if the planned equity infusion is completed during 2006-07 and the business plan is back on track.

Rapid loan growth in the late-1990s together with inadequate risk management systems led to rising NPAs, and DCB's gross NPL ratio was 16 per cent at the end of September 2005.

As operating profits were inadequate to provide for the NPAs, the bank's promoter, AKFED, and other shareholders infused Rs 180 crore equity in 2003-04 and 2004-05, with a further infusion of Rs 200 crore planned through the IPO. The bank's net NPL to equity ratio was high at over80 per cent at end-September 2005.

DCB reduced its assets in 2004-05 and 2005-06 to conserve capital. The bank's 67 branches are primarily located in western India, where lending opportunities are relatively high.

DCB's small size, however, limits its competitiveness in corporate lending, and it would likely remain focused on its traditional business of SME lending while diversifying into consumer loans.