October 15, 2015

DCB Bank is the canary in the coal mine

DCB Bank seems to be a canary in the coal mine, warning the smaller banks to buck up, or get cannibalized by other banks and payments banks that are backed by telecom majors or have tie-ups with existing large banks.

In fact, Murli Natarajan, managing director of DCB Bank in a conference call with analysts, said, “We are paranoid and are over reacting because we do not want to be in a situation where we have not reacted at all to increasing competition in the banking space.”
There are around eight microfinance institutions (MFIs) which have received small bank licences. These MFIs will give out loans above Rs.50 lakhs, which is exactly the lending space in which DCB Bank too is present, said Natarajan.

DCB Bank aims to double its branches to 300 and increase the number of employees by 50-60% in the next 12-14 months. This is a marked shift from earlier guidance of adding 25-30 branches every year.

The correction in the stock is because of the impact on profitability from their surprise shift in strategy. Analysts have cut FY16 earnings estimate by around 6-16% and by over 30% for FY17 leading to de-rating of FY17 price-to-book multiple to around 1.5 times from around 2 times before the earnings announcement.

The management has said that there will be a P&L (profit and loss) hit of around Rs.9-15 crore in FY16, Rs.50-65 crore in FY17 and by Rs.20-35 crore in FY18 from additional costs involved in the expansion.

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