DCB Bank Ltd shares plunged 3.8% after its bad loans increased more than expected in the June quarter as a result of higher slippages from the retail portfolio. Gross non-performing assets as a percentage of the loan book rose to 1.96% from 1.78% in the March quarter.
The increase in soured loans was primarily on account of slippages worth Rs.57 crore, although they were down by a third from the March quarter. Slightly less than two-third of the slippages (good loans turning bad) were from the retail business—mainly the mortgage portfolio—and the rest were from corporate and gold loans.
That isn’t a surprise, as more than half the lender’s loan book is made up of retail loans, of which 45% is mortgages. The rest are gold loans and commercial vehicle loans. Corporate banking makes up around 21% of the loan book.
Murali Natrajan, DCB Bank’s managing director and chief executive, said the management is not much worried about the slippages from the retail portfolio, but if economic growth continues to be challenging, over time the retail portfolio will also see a higher proportion of bad loans in the banking system.
A seven-eight-year-old corporate account that provides structural support to telecom in the infrastructure segment, worth Rs.10 crore, turned bad during the quarter.
Slippages amounting to Rs.13 crore were also seen from the gold loan portfolio because some branches—which gave gold loans for the first time—were unable to collect interest from customers due to operational reasons, said Natrajan.
Restructured standard assets saw a marginal drop to Rs.49 crore compared with the March quarter. However, overall stressed assets—the sum of restructured assets and bad loans—increased marginally to 2.4% of loans, which is still low compared with many other banks.
The management is confident of growing its loan book at 25% a year for the next two years by focusing mainly on growing the retail book, while moderately growing its corporate and SME (small and medium enterprises) book.
In the June quarter, both deposits and advances grew at 26% compared with a year ago.
Net interest margins may dampen further by 25-30 basis points from 3.81% in the June quarter due to the growing loan book. A basis point is one-hundredth of a percentage point.
There will be pressure on margins due to competition in the retail space and as the bank has to meet its priority sector lending target, pointed out Natrajan.
Overall adjusted operating profit continued to grow at a robust pace of 33% to Rs.68 crore, adjusting for one-time treasury gain and interest on income-tax refund related to past assessment years.
Overall reported net profit grew marginally by 5% to Rs.47 crore compared with a year ago due to an increase in the effective tax rate.
DCB Bank shares trade at 2.3 times one-year estimated price- to-book. They have beaten the banking index in the past three months and may have priced in the robust loan growth outlook.
The writer does not own shares in the above-mentioned companies.
