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JM Financial Initiates New ‘Buy’ On DCB Bank, Federal Bank, City Union Bank

Its bullish on these lenders on healthy capital adequacy levels and low stressed assets.



A man holds a new Indian two thousand rupee banknote for photographs outside the Reserve Bank of India (RBI) headquarters in New Delhi, India, (Photographer: Anindito Mukherjee/Bloomberg)
A man holds a new Indian two thousand rupee banknote for photographs outside the Reserve Bank of India (RBI) headquarters in New Delhi, India, (Photographer: Anindito Mukherjee/Bloomberg)

Brokerage house JM Financial initiated coverage on three private sector banks -- DCB Bank Ltd., Federal Bank Ltd. and City Union Bank Ltd. -- with a ‘Buy’ rating citing healthy capital adequacy and lower stressed assets.

Federal Bank and DCB Bank have suffered accentuated pressure on core profitability over the past few years, driven by rapid branch expansion and asset quality pressures, respectively, which also manifested in slower loan growth.

But both banks are now past these challenges and should record improvement in operating profitability going forward, the report said.

The worst asset quality pains for Federal Bank and City Union Bank have now passed, and slippages as well as credit costs should trend lower going forward. DCB, on the other hand, has a fairly granular asset quality portfolio, which is primarily retail in nature.
JM Financial Research Report

Here’s what JM Financial had to say about these banks as it initiated coverage:

DCB Bank

  • Stock Rating: Initiated ‘Buy’
  • Target Price: Rs 230, implying a potential upside of 27 percent from yesterday’s close.
  • Cost ratios will improve meaningfully from current elevated levels as branch expansion completes and investments made in customer-facing and frontline-enabling technologies start paying off.
  • With consistent growth, healthy net interest margins, improving operating costs and strong asset quality, we believe DCB Bank can deliver robust earnings to grow at a compound annual growth rate of above 25 percent over the next 4-5 years.
  • Open ratios to trend meaningfully lower; asset quality stable.
  • Expect return on equity and asset to improve to 15 percent and 1.24 percent, respectively, by March 2020.
  • Positives: consistent growth, healthy net interest margins, improving operating costs and strong asset quality.

Federal Bank

  • Stock Rating: Initiated ‘Buy’
  • Target Price: Rs 140, implying a potential upside of 21 percent from yesterday’s close.
  • Federal Bank is a diversified lender that we believe could be at the cusp of a turnaround on return on assets.
  • Federal Bank has started delivering robust growth on the corporate front and we believe it is only a matter of time before benefits percolate into the bank’s fee and liability profiles.
  • Tapering of operating and credit costs to boost return profile.
  • Federal Bank focus remains on sweating existing assets.
  • Resurgence in growth led by corporate and retail.
  • Expect return on equity and asset to improve to 13 percent and 1.02 percent respectively by March 2020.
  • Net interest margins to remain range bound 3.06-3.14 percent for the financial years till March 2020.

City Union Bank

  • Stock Rating: Initiated ‘Buy’
  • Target Price: Rs 185, implying a potential upside of 13 percent from yesterday’s close.
  • City Union Bank is a region-focused bank in southern India with dominance in the state of Tamil Nadu.
  • It has displayed marked consistency in its return profile driven by its strategy of calibrated growth and focus on high yielding small and medium enterprise and trader book.
  • It was a huge beneficiary from falling funding costs over the last four financial years, which have led to its margins reaching 4.5 percent.
  • Stable performance to continue over the medium term.
  • Expect margins to come off slightly driven by competition.
  • Deposit accretion to remain stable; CASA (current account savings account) unlikely to show meaningful upside.
  • Credit cost to taper off any impact on loss of margins.
  • Returns to be driven by growth acceleration.
  • City Union is a healthy compounding play with greater bottomline visibility over the medium term.