About DCB Bank
DCB Bank (erstwhile Development Credit Bank) started in 1995; is one of the emerging private sector banks in India, predominantly based in Maharashtra and Gujarat.
DCB has deep roots in India since its inception in the 1930s. Earlier it was called Development Credit Bank which was formed after merging a group of co-operative banks. In 1995, it got scheduled bank license from RBI. The bank network is now spread across Andhra Pradesh, Karnataka, New Delhi, Goa, Tamil Nadu, Haryana, West Bengal, Rajasthan, Union Territories of Daman and Diu and Dadra and Nagar Haveli.
Its promoter is the Aga Khan Fund for Economic Development (AKFED) which holds over 14% stake. AKFED had also co-promoted HDFC in India in the late seventies. AKFED operates as a network of affiliates comprising 90 separate project companies
In 2010, the new management set out a strategy to focus on niche segments and get NPA under control. Over time, DCB bank has created mortgage financing (currently accounts for 41% of total advances) with emphasis on small ticket loans (ticket size below Rs. 3 Cr) to self-employed in Tier II-VI cities. It has one of the best diversified loan portfolios with greater reliance on secured lending. It offers comprehensive range of products and services, contemporary technology and infrastructure including state of the art internet and mobile banking.
As of December 2018, DCB Bank had 334 branches and 501 ATMs. The branches are almost equal between metro, urban and rural areas. Other than that the network of the bank is spread at 35000+ points via direct selling agents.
Which segments does the bank operate in?
Over past seven years, the management team led by Mr. Murali Natrajan (Ex-Standard Chartered, Ex-CitiBank), steered the bank during challenging environment and reinvented business model with greater emphasis on Retail Banking i.e. on asset side focused on secure lending via products like Loan Against Property (LAP) (primarily for self-owned businesses), Gold loan, CV, Home loan etc. and on liability side greater reliance on Retail deposit (~81%). DCB Bank had inherited concentrated loan and deposit portfolio but now it has just 6% loans to top 20 borrowers and less than 12% of deposits from Top 20 depositors. It has completely revamped old business processes/technology and made it more customer and employee friendly to improve productivity and turnaround time which is critical in retail banking.
To pursue this mission, DCB has expanded its branches from 130 in FY14 to 331 at present. Due to lower ticket size of loans, the bank has to hire more employees per branch taking its cost higher. This led to drop in ROE from 14% in FY14 to mere 12% in FY19.
Who does it lend to?
From FY14 to FY19, DCB Bank has grown its loan book at 23% CAGR and currently stands at ~ 25,000 Cr. In the same period, Profit before tax went up by 27% CAGR.


As evident from the above chart, mortgage is the leading product of the bank. Mortgage loan book consists of Loans against Property (forming 70-75%) and Home loans (forming 30-25%). No loan exceeds 3 Crore. Median ticket size is around 35-40 Lakhs. Over the years, the bank has created niche in meeting credit requirement of self-employed people through mortgage in Tier 2 to Tier 6 locations with tremendous efforts on enhancing the products, improving processes and controlling portfolio quality.
DCB bank has tough competition from large banks in salaried and corporate segment. Due to this, it has limited product portfolio versus others. It doesn’t have Credit Card, Personal loans, etc. However, it has managed to find its feet in Agri and Mortgage loans. It also sells Agri loans to other banks to help them fulfil their Priority Sector lending thereby making fee income.
How does it source funds?

On the liabilities side, the bank is aiming to attract granular deposits from retail segment to reduce concentration of large value and NRI deposits. This would help the bank gain new customers in exchange of high interest outgo. Later DCB aims to cross-sell them other products or savings bank account shoring up its CASA. As on today, DCB’s CASA stands at just 23%. Its cost of funds is higher than average bank but at the same time, it has granular risky exposure helps it earn better yield. Despite this, its net interest margin is 3.7%.
Do all loans get repaid?
Asset quality has showed steady improvement post restructuring of balance sheet in FY10.

Gross NPAs have inched up lately due to weak economic environment. Hence, DCB bank has decided i) to trim corporate exposure, ii) reduced average ticket size in SME/MSME loan to achieve granularity, iii) focus on secured products with liquid collateral and iv) lowered Loan to Value for loans.
DCB’s recovery mechanism is relatively weak versus larger peers due to small scale, hence it transfers the bad loans to reconstruction company.
DCB has also shown good track record in recovery/upgrade of loans which has helped it reduce provisioning requirement. For example: In Q3FY20, it recovered/upgraded 130 Cr loans versus 200 Cr slippage. Likewise in previous quarter, it had 160 Cr in slippage but recovery/upgrade of 80 Cr. This gives us confidence that NPAs won’t be eating into profitability much.
What are the Risks?
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Exposure to high risk loan against portfolio, better loan to value and granularity of portfolio makes us less worried.
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High cost to income ratio (C/I) as it hires more employees versus average bank but increase in loan book may bring down C/I ratio.
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Being a small sized bank, DCB may find it tough to raise equity in bad times for provisioning/growth.
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Higher vulnerability versus larger bank due to economic slowdown as small businessmen get more affected in slow economy.
Is it a good price to buy?
Since DCB Bank has expanded its branch network recently, its ROA & ROE are subdued. As branches mature, ROE will come back to reasonable level over next 2 years. In recent quarters, despite lower profit margin, ROAs are maintained at 1%. The management is expecting to double its loan book by FY23-24. This growth would lead to favourable operating leverage and enhance return ratios.
With above industry growth rate in past 5 years including recent quarter (Q3FY20 DCB 11% vs Industry 7%), we expect DCB to clock loan book growth of 15-18% CAGR from FY20-FY24. We also expect ROE to improve to 14% by FY23-24. This makes us believe that DCB can be a good compounder over next 2-3 years.
DCB Bank trades at a very favourable valuation of P/E of 13x FY21 and P/B of 1.5x FY21.
Since this is a very small bank with market capitalization of just 5,300 Cr and loan book of mere 25,000 Cr, we recommend only aggressive investors (or only risk portion of portfolio for others) to invest in DCB Bank.
Note: Those who hold LIC Housing Finance can consider DCB Bank in place of LIC HF and reduce LIC HF as you get better selling price.