ICRA has reaffirmed the credit ratings on DCB Bank's Basel III compliant Tier II bonds programme of Rs 550 crore at '[ICRA] A+ (hyb)' with a stable outlook.
ICRA also reaffirmed "[ICRA] A1+" rating on the bank's short-term fixed deposit programme.
The credit ratings agency said that the ratings reaffirmation factors in the continued improvement in DCB Bank's liability profile with the increasing share of granular deposits and a corresponding decline in depositor concentration levels.
While the capitalisation profile remains comfortable with the Tier I at 14.3% as on 31 December 2020, the monitorable book (overdue loans and standard restructured) remains meaningfully large in relation to the core capital given the steady build-up in the overdue loan portfolio in the higher delinquency buckets because of the COVID-19 pandemic. The extent to which the asset quality will be impacted by the higher delinquencies will remain dependent on DCB Bank's ability to improve the recovery trends in future.
DCB Bank's cost profile remains comparatively weaker, which is reflected by the higher cost of funds and low noninterest income with the same translating into a relatively higher cost-to-income ratio in relation to the private sector banks' (PVB) average. An improvement in the cost metrics will also improve DCB Bank's ability improve the overall return on asset (RoA) levels.
However, given the expectation of asset quality pressure in the near term, ability of the bank to improve recoveries/upgrades will drive credit cost and the overall profitability, in absence of which RoA is likely to remain at sub-optimal levels in FY2021 and FY2022.
The stable outlook on the rating reflects that the bank will be able to reduce its overdue loan book by taking corrective actions and will keep the solvency (net non-performing loans/core capital) level above the negative rating triggers.
DCB Bank is a private sector bank with a network of 347 branches as on 31 December 2020.
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