Rationale
The ratings
reaffirmation factors in DCB Bank Limited's (DCB) comfortable capital cushions
with Tier-I and CRAR at 15.1% and 18.2% (excluding profits for 9M FY2022),
respectively, while deposit granularisation has continued to progress
satisfactorily, leading to lower concentration levels from the significantly
higher levels seen in the past. Further, the Covid-19 pandemicinduced slippages
witnessed a sharp rise in 9M FY2022, leading to elevated credit costs and
weaker profitability levels. The weakening in the asset quality was partly due
to the bank's customer profile, mainly comprising small-ticket borrowers in the
self-employed segment, that was more severely impacted by the pandemic.
Nevertheless, collections and recoveries were satisfactory and helped offset
the impact of high slippages to a certain extent. Moreover, the overall book
remains well collateralised, thereby lowering DCB's credit losses. The overall
standard restructured book remains high at ~8% of standard advances as on
December 31, 2021. This, together with the sizeable overdue book (special
mention account (SMA)-1 & SMA2), remains materially high in relation to the
capital. These monitorable pools of loans could remain a potential source of
incremental stress, which could delay the improvement in the asset quality and
profitability from the current levels over the near term. Further, DCB's cost
profile remains relatively weak, with the cost of funds as well as the
cost-to-income ratio remaining comparatively higher than the private sector
banks' (PVB) average. While the bank's stated growth guidance of doubling the
book over the next 3-4 years may help derive operational leverage over the long
term, the operating expenses necessary for expanding the franchise are likely
to remain high in the near term. Additionally, the bank's ability to match the
book growth by mobilising deposits at competitive rates, thereby narrowing the
differential with the PVB average while sustaining granularity, will remain key
for building a stable franchise and improving the cost metrics. The Stable
outlook on the rating reflects the expectation that the bank will be able to
maintain high recoverability from its pool of non-performing advances (NPAs)
while ensuring that the solvency levels (net non-performing loans/core capital)
and capital cushions remain above the negative rating triggers. The possibility
of near-term asset quality challenges from a sizeable monitorable book and higher
operating expenses could keep the profitability at sub-optimal levels (<1%) in the near term.>
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