DCB Bank shares fall by 20% on expansion plan announcement

An announcement to double the number of branches pulled down shares of DCB Bank by 20%, sparking concerns that higher expenditure would lower returns. While the expansion augurs well in the long term, the stock may indeed underperform due to lower profitability in the next couple of years. Investors' preference for steady earnings over volatile growth may find the stock trading at lower multiples compared to its peers. By December 2016, DCB Bank, which has a network of 160 branches, plans to take it to 300. This is a dramatic change in strategy, considering the bank has opened not more than 25-30 branches a year.

Given the significant increase of investment in manpower, technology and infrastructure, the bank's return on equity will be lower for the next couple of years. The management has indicated that the planned expansion could negatively impact profits by Rs 9-15 crore in FY16, Rs 50-65 crore in FY17 and Rs 20-35 crore in FY18; only after that, it could start paying off.


In FY15, the bank reported a profit after tax ofRs 192 crore. Given the investments in expansion, the management expects the return on equity (or RoE) to be below 10% for the next 24-30 months. Most private sector banks have generated RoE of about 14-16% in recent quarters. Also, a rapid expansion can throw up challenges. In September 2009, DCB's gross NPA reached 11.2% after aggressive expansion in unsecured lending. But the bank turned around subsequently after a new management took charge.

The current expansion, however, may not be as risky as the earlier one as the focus is to set up branches in tier 2 to tier 6 cities.

The focus on beefing up presence in unbanked and semi urban areas may help the bank enhance its CASA deposits and priority sector loans. This augurs well for the bank.

In the September quarter, DCB's profits fell 10% owing to higher provisions and lower treasury income.