DCB: Promising prospects Development Credit Bank continues to perform well since its strategic turnaround in the previous fiscal year.

 Development Credit Bank (DCB), a Mumbai-based small, private-sector bank, has surprised the Street by performing well yet again. During the first quarter of 2012-13, its net profit increased by 114% on a year-on-year (y-o-y) basis, and 9.2% on a quarter-over-quarter (q-o-q) basis. In addition to the fall in provisioning expenses, a jump in net interest income, which increased by 23% y-o-y, and the increase in fee income, which went up by 19% y-o-y, play a significant role in this achievement. 

Improvement in operations The business is showing continued improvement, with its deposits growing by 14% y-o-y and 8% q-o-q, advances growing by 29% y-o-y and 3% q-o-q. The net interest margin (NIM) also improved to 3.18% in this quarter, a gain of 8 basis points y-o-y and 6 basis points q-o-q. This is mostly because of the positive impact of funds raised in the previous quarter. The NIM is expected to stabilise around this level in the future. Though the cost to income ratio moved up a bit to 72.8% in this quarter after witnessing a continuous fall in the past several quarters, the management aims to bring it down to 70% by the end of 2013 and to 60% in the next three years. 
Better asset quality DCB also managed to show a significant improvement in asset quality during the quarter. Its gross non-performing assets (NPA) in absolute terms declined further by 10% y-o-y and 2.3% q-o-q. Though the historical asset quality issues are pending—gross and net NPA ratios remain at 4.18% and 0.75%, respectively—analysts are hopeful that these will come down in the coming years. Despite the lower provisioning in this quarter, the provision coverage ratio is placed comfortably at 83%. Since the capital adequacy ratio is 14.49%, there is no need for DCB to raise additional capital in the immediate future. 
Bright outlook The strong growth in this quarter is a continuation of its improving operational performance in the past two years, triggered primarily by the loan diversification, improvement in NIM and sharp reduction in credit costs. With the management's turnaround 
    strategy of focusing on well-managed growth in mortgage and small and medium enterprises segment, pruning down non-staffrelated costs and improving asset quality by yielding results, DCB is expected to raise its profitability profile in the coming years. A continued earnings momentum, strong balance sheet and the dream of becoming a big bank in the future should help this bank to sustain its current valuations. 
Selection methodology We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. The consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell). Any improvement in 
    rating indicates that the analysts are 
    becoming more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks that have been covered by at least 10 analysts. You can see similar consensus analyst rating changes in the last one week in ETW 100 table (page 23).