Dena Bank, primarily based in Gujarat and Maharashtra (accounting ~70% of business), is estimated to clock a better-than-system loan CAGR of 23.2% over FY13-15. Notwithstanding brisk growth in the past few years and challenging business conditions, bank’s asset quality has held-up much better than most PSU Banks. This could be partially attributable to strengthening of credit appraisal and monitoring systems. Dena Bank has been averse to lending to corporate having a low credit rating, all MSME loans above Rs10mn are sanctioned post external due diligence and the bank has instituted stringent checks and balances in appraisal/sanction process.
While NIM could decline in the medium term on account of base rate cuts, it would receive support in longer run from improvement in CASA, re-pricing of term deposits and lower share of high-cost bulk deposits. Dena Bank has become aggressive with respect to branch additions; added 89 branches during 9M FY13 and plans to 100 each year. While core fee income remains weak, potential higher treasury gains could support the cost/income ratio. Slippages are less likely to surprise on the negative side (has been in the range of 1.5-2% in past seven quarters) with the bank having low or no exposure to some known stressed corporates. Credit cost is estimated to be 50/45bps (56bps in FY13E) in FY14/15 underpinning sustenance of RoA near 1%.
Amidst tough macro environment, where most public banks witnessed significant deterioration in operating metrics, Dena Bank’s performance has been resilient and reassuring. The bank has seen limited accretion in gross NPAs, sustained healthy provisioning cover, exhibited lower volatility in margins, improved operational efficiency and delivered a resilient RoA performance. Current valuation of 0.67x one year rolling forward P/Adj.BV is materially lower than five year mean of 0.82x. Also, valuation is cheap in comparison with more vulnerable peers. Therefore, the risk-reward looks more favorable for Dena Bank. In our view, the stock has the potential to offer substantial upside over a longer investment horizon. We retain BUY with a 9-month price target of Rs115, implying 26.5% upside from current levels.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|Total operating income||26,832||31,139||36,830||43,968|
|Yoy growth (%)||16.8||16.1||18.3||19.4|
|Operating profit (pre-provisions)||15,284||18,552||22,040||26,665|
|yoy growth (%)||31.3||14.1||19.7||24.0|
|Adj. BVPS (Rs)||106.3||117.8||136.1||164.5|
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