Dena Bank. Inexpensive valuation

Transcription

1 BUY Inexpensive valuation Sector: Banking Sensex: 16,973 CMP (Rs): 97 Target price (Rs): 1 Upside : Week h/l (Rs): 14 / 48 Market cap (Rscr) : 3,383 6m Avg vol ( Nos): 3,465 No of o/s shares (mn): 35 FV (Rs): 1 Bloomberg code: DBNK IB Reuters code: DENA.BO BSE code: NSE code: DENABANK Prices as on 22 Jun, 12 Shareholding pattern March '12 Promoters 55.2 Institutions 23.2 Non promoter corp hold 5.2 Public & others 16.4 Performance rel. to sensex 1m 3m 1yr Dena Bank CBOI 4.8 (19.5) (26.7) Corporation Bank 1 (1) (13) BOI 7. (.7) (1.6) Share price trend Dena Bank Sensex 4 Jun-11 Oct-11 Feb-12 Jun-12 Well-diversified loan book; Mid-corporate & MSME to drive growth Dena Bank has a well-diversified loan book spread across multiple segments like Corporate & SME (4% of total advances), MSME (15%), Agriculture (15%) and Retail (12%). Loan book witnessed a robust growth over FY9-12, reporting a CAGR of ~25%, with Corporate and MSME lending being prime focus areas. Despite strong growth, the bank has not compromised over asset quality as reflected in the Gross NPA ratio. Management has targeted a credit growth of ~22% in FY13. According to the trend in past two years, Dena Bank has posted strong growth in H2 compared to H1. We build in a 22.5% CAGR in loan book over FY12-14E, backed by an impending improvement in macroeconomic conditions and better liquidity situation. Consistent improvement in asset quality; Infra & Power exposure to come-off further Asset quality has improved remarkably with delinquency ratio declining from 2.6% in FY9 to 1.4% in FY12, reflecting bank s efficient credit risk management. Dena Bank is deliberately reducing its exposure to the infrastructure space, and specifically to the Power sector. Management expects slippages to be in the range of Rs8-8.5bn in FY13 and restructuring at ~Rs12bn. With slowdown in restructuring, reduction in exposure to stressed sectors like infrastructure and increase in secured lending, we expect Gross NPA ratio to decline further to 1.3% in FY13. CASA ratio is likely to sustain at ~35%; NIM to remain above 3% CASA ratio witnessed a marginal decline, from 36% in FY1 to 34.6% in FY12. Dena Bank expects healthy growth in SA balance in FY13, driven by robust branch additions (1 branches) and maturing of branches added in recent years. Therefore, the CASA ratio is expected to remain stable. NIM improved significantly, from 2.7% in FY8 to 3.2% in FY12, owing to shifting of focus on high-yielding segments and improvement in Credit/Deposit ratio. NIM is likely to witness a compression of 1-bps in Q1 FY13 due to the increased lending to low-yielding Priority Sector in. Management expects NIM to remain above 3% in FY13. Multiple positives, cheap valuation make it an attractive BUY Dena Bank has held its own in the current challenging macro economic environment, providing comfort on multiple fronts robust asset quality, sturdy provisioning, lean operating structure, sustainable margins, healthy capitalization and RoA. We initiate coverage with a BUY rating and 9-month price target of Rs1, implying 24.2% upside from current levels. Financial summary Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E Total operating income 22,972 26,832 32,416 39,99 yoy growth Operating profit (pre-provisions) 12,238 15,284 19,21 24,318 Net profit 6,116 8,31 9,8 11,494 yoy growth Research Analyst Bhavna Sinyal Rajiv Mehta research@indiainfoline.com EPS (Rs) Adj.BVPS (Rs) P/E (x) P/Adj.BV (x) ROE ROA CAR June 25, 12

2 Loan book has been consistently growing above the systemic credit growth 61% of the branches are in the states of Gujarat and Maharashtra Loan book reported a CAGR of ~25% over FY9-12 Management has targeted the credit growth of ~22% in FY13. Mid-corporate & MSME to be the main growth drivers We build in 22.5% CAGR in advances over FY12-14E Well-diversified loan book; Mid-corporate & MSME to drive growth Dena Bank has a well-diversified loan book spread across multiple segments like Corporate & SME (4% of total advances), MSME (15%), Agriculture (15%) and Retail (12%). Its loan book has been consistently growing above the system credit growth. 85% of the loan book is based on floating rates, resulting in immediate re-pricing once the bank changes its Base Rate. In terms of coverage, 61% of the branches are in Gujarat and Maharashtra - accounting for majority of the business. Consequently, the loan book is concentrated geographically. However Gujarat and Maharashtra being major industrialised states, management is confident of maintaining asset quality. Loan book witnessed a robust growth over FY9-12, reporting a CAGR of ~25%. Corporate and MSME lending have been the key focus areas. Retail book recorded relatively sluggish growth, notching 16.3% CAGR over FY1-12 versus 26.5% CAGR in advances over the same period. Despite strong growth, Dena Bank has not compromised over asset quality as reflected in the Gross NPA ratio declining from 4% in FY7 to 1.7% in FY12. Management has targeted a credit growth of ~22% in FY13. The main growth drivers will be Mid-corporate and MSME segments. MSME advances grew by ~44% in FY12 and this momentum is expected to continue. Interest rate on MSME has been reduced to make it more competitive. Also, Dena Bank has 95 specialized branches to provide better servicing to MSME clients. Growth in Advances is expected to be sluggish in a range of 2-3% qoq in Q1 FY13 owing to migration of few interest rate sensitive accounts (~Rs1bn) to other banks offering lower rates, as Dena Bank s base rate remained unchanged until May 12. According to the trend in past two years, Dena Bank has posted strong growth in H2 compared to H1. Foreseeing an improvement in macro-economic situation and liquidity, we build in 22.5% CAGR over FY12-14E. Loan book has grown consistently above the system System Dena Bank FY8 FY9 FY1 FY11 FY12 FY13E Company Report 2

3 Well-diversified loan book mix Corporate+SME MSME Retail Agriculture Others 18% 15% 4% Of the y-o-y segmental growth, MSME has been the main growth driver in FY % 15% Total Advances MSME Priority Sector Retail Direct Agriculture Reports strong credit growth in H2 compared to H () (4) (Rs bn) Advances growth picked up the pace in H2 FY Advances Deposits Loan book witnessed a robust CAGR of ~25% over FY9-12.we expect 22.5% CAGR over FY12-14E 6 (Rs bn) 9 (Rs bn) 5 CAGR ~25% 8 CAGR 22.5% FY9 FY1 FY11 FY12 5 FY12 FY13E FY14E Company Report 3

4 Delinquency ratio declined from 2.6% in FY9 to 1.4% in FY12 Deliberately reducing exposure to infrastructure and specifically power Foresees challenges in steel and textile sector Management expects slippages to be in the range of Rs8-8.5bn in FY13 Net NPA/Networth ratio declined from 21.6% in to 1.9% in Q4 FY12 O/s restructured advances stood at 6% of total advances as on 31st Mar 12 Dakshin Haryana and UPEB to be restructured in Q1 FY13 We expect Gross NPA ratio to decline further to 1.3% in FY13 Consistent improvement in asset quality; Infra & Power exposure to come-off further Asset quality improved remarkably with delinquency ratio declining from 2.6% in FY9 to 1.4% in FY12, reflecting bank s efficient credit risk management. Consistent monitoring and increased focus on better quality assets led to a decline in gross NPA ratio from 4% in FY7 to 1.7% in FY12. Dena Bank is deliberately reducing its exposure to infrastructure segment and especially to the Power sector. Out of the total Power exposure, ~Rs5bn is to SEBs. As on Mar 12, the bank has loaned funds to 21 power projects, of which five projects are facing delay in commercial operation date (COD). Dena Bank had an Infrastructure exposure of 25.3% of total advances and Power exposure of 19.9% in FY11; this has been reduced to 18.6% and 15.4%, respectively in FY12. Management targets to further reduce this exposure to 15% (infrastructure) and 11% (power) by Mar 13. Bank also foresees challenges in Steel and Textile sectors. With an aim to achieve the desired exposure, management has pruned new disbursals and renewal of existing short-term loans in these areas. Significant reduction in slippages run-rate has also resulted in improvement in asset quality. Management expects slippages to be in the range of Rs8-8.5bn in FY13. Credit cost rose significantly in H2 FY12. However, on year-on-year basis it declined, from.7% in FY11 to.5% FY12. With increased restructuring in, bank had to provide Rs455mn for NPV loss on restructured accounts. Also, it provided Rs57mn for its Funded-Interest Term Loans in FY12, further impacting its bottom line. Higher provisioning led to an improvement in PCR from 74.6% in FY11 to 75.5% in FY12. Provisioning is expected to remain elevated in FY13, as Bank is looking forward to maintain its PCR at 75%+. We estimate credit cost to be high at ~.7% in FY13, bearing in mind the challenges confronted by the industry. Consistent rise in profitability and higher provisioning resulted in reduced NPL; that in turn improved Net NPA/Networth ratio, from 21.6% in to 1.9% in. Like other banks, Dena Bank witnessed significant restructuring in H2 FY12. Outstanding restructured advances stood at 6% of total advances as on 31 st March 12. During, major SEB account that was restructured was Rajasthan SEB (Rs12bn). Restructuring of ~Rs12bn is expected in FY13, out of which ~Rs7.5bn could be reported in. Large accounts that have been restructured in Q1 FY13 are Dakshin Haryana SEB (Rs2.4bn) and Uttar Pradesh SEB (Rs3.75bn). Dena Bank also has exposure to other SEBs like Maharashtra (Rs7bn), Tamil Nadu (Rs4.8bn), Gujarat (Rs2.25bn), etc. TNEB is being closely monitored by the bank and is likely to be restructured soon. There have been delays in payment from TNEB, but bank has not received any restructuring request yet. Dena Bank has not faced any challenges with respect to Gujarat and Maharashtra SEBs. With slowdown in restructuring activity, reduction in exposure to stressed sectors and increased secured lending, we expect Gross NPA ratio to decline further to 1.3% in FY13. Company Report 4

5 Consistent improvement in GNPA ratio Gross NPA ratio Net NPA ratio We expect it to decline further to 1.3% in FY Q1 FY1 Q2 FY1 Q3 FY1. FY7 FY8 FY9 FY1 FY11 FY12 FY13E Steady improvement in slippage ratio expected to continue Higher provisions resulted in reduced NPLs, thereby improving Net NPL/Networth ratio FY9 FY1 FY11 FY12 FY13E Credit cost perked up in H2 FY12 PCR to remain 75% Company Report 5

6 Exposure to sensitive sectors Total Exposure Infra Pow er Textiles Telecom CASA ratio witnessed marginal decline, from 36% in FY1 to 34.6% in FY12 From metros and urban, the focus is now shifted to Semi-urban and Rural areas CASA to grow in-line with total deposits CASA ratio likely to sustain at ~35%; Branch additions to be concentrated in rural & semi-urban areas CASA ratio witnessed marginal decline, from 36% in FY1 to 34.6% in FY12, owing to competitive environment and migration of certain Savings accounts to Retail TDs offering higher rates. Savings account (SA) balance reported 11.5% growth in FY12, as compared to 25.4% growth in the previous year. Bank expects healthy growth in SA balance in FY13. This growth will be driven by robust branch additions and maturing of branches added in previous years. Dena Bank plans to add 1 new branches in FY13, out of which it has already obtained licenses for 56 branches. Over the past 2-3 years, Dena Bank was focused towards Metros and Urban areas. However, it has now shifted its focus to Semi-urban and Rural areas that offer better opportunities for savings deposit mobilization. With significant branch openings in areas offering high CASA potential, Dena Bank is confident of sustaining its CASA ratio at current levels. It is expected to grow in line with total deposits that are targeted to grow by ~-22% in FY13. CASA ratio has declined marginally over past few quarters 4 36 Branch additions to be concentrated in Rural and semi-urban areas 1 8 (Nos.) FY8 FY9 FY1 FY11 FY12 FY13E Company Report 6

7 NIM improved significantly from 2.7% in FY8 to 3.2% in FY12 Management expects NIM to remain above 3% in FY13. Core fee income growth is expected to be in the range of 15-% We expect further improvement in C/I ratio to ~41% NIM (reported) to remain above 3%; C/I ratio witnessed consistent improvement NIM (reported) improved significantly, from 2.7% in FY8 to 3.2% in FY12, owing to shifting focus on high-yielding segments and rise in Credit/Deposit ratio. Net Interest Income (NII) registered robust CAGR of 38.2% over FY1-12, vis-à-vis 26.4% CAGR for Advances over the same period, thereby resulting in margin improvement. Dena Bank reduced its base rate to 1.45% in May % of loans being based on floating rate will result in immediate re-pricing, thereby impacting Yield on Advances. To offset the impact of falling YoA, the bank also reduced deposit rates across various maturities. However, the Cost of Deposit will not come down immediately but with a lag. Also, increased lending to low-yielding Priority sector in in order to meet PSL target will further impact NIM in Q1 FY13. As a result, NIM will witness a compression of 15-bps in Q1 FY13. Management expects NIM (reported) to remain above 3% in FY13. We expect NIM (calculated) to remain stable in FY13 and thereafter improve marginally in FY14. Bank has significantly improved its operational efficiency as indicated by its C/I ratio that declined from 51.4% in FY9 to 43% in FY12. Bank is in the process of recruiting 5 Probationary Officers, 193 Specialist Officers, 19 clerks and 491 sub staff in FY13, thereby increasing operating expenses. Core fee income growth is expected to be healthy in the range of 15-%. We forecast ~21% and ~16% growth in total income and operating expenses respectively in FY13. C/I ratio is expected to further improve to ~41%. NIM (reported) held up firmly in FY we expect NIM (calculated) to remain stable in FY FY9 FY1 FY11 FY12 FY13E FY14E Company Report 7

8 YoA declined marginally in owing to lower-yielding PSL CoD increased on account of the impact of past deposit hikes and tight liquidity With advances growing ahead of deposits, C/D ratio is trending upwards (x) Net Interest Income reported a steady growth (Rs bn).5 7 FY9 FY1 FY11 FY12 FY13E FY14E 85% of loan book is linked to floating interest rate, resulting in immediate re-pricing Floating 15% Fixed Improved operational efficiency as reflected in falling Cost/Income ratio % Q2 FY1 Q3 FY1 Company Report 8

9 CAR and Tier I ratio stands at 8.9% and 11.5%, respectively Return on Assets to remain around 1% Capital adequacy comfortable; RoA to remain ~1% With infusion of ~Rs1.5bn in Mar 12, via preferential allotment to LIC, bank s Tier-I and CAR ratio rose to 8.9% and 11.5%, respectively. Bank has also raised Rs8.5bn of Tier II capital in Q1 FY13, further boosting its CAR. With strong capitalization, bank is well-poised to support its planned balance sheet growth in the medium term. Dena Bank has been consistently reporting a RoA of 1%+, compared to some of its peers that have witnessed a steep decline in RoA in FY12 owing to asset quality deterioration. Stable asset quality and NIM and lean operating structure would support bank s RoA around 1%. Capital adequacy is comfortable CAR Tier I Current CAR provides adequate headroom for growth CAR Tier I FY1 FY11 FY12 FY13E FY14E RoA has always remained above.9% to remain around 1% in FY Q1 FY1 Q2 FY1 Q3 FY1.6 FY1 FY11 FY12 FY13E FY14E Company Report 9

10 Multiple positives, cheap valuation make Dena Bank an attractive BUY Amidst tough macro-economic scenario, most mid-cap PSBs have witnessed deterioration in operating metrics. Dena Bank, on the other hand, have delivered resilient performance and therefore offers comfort on multiple fronts sturdy asset quality, high provisioning cover, lean operating structure, stable margins and healthy capitalization and RoA. We estimate an earnings CAGR of 19.6% over FY12-14E. At current P/Adj.BV of.6x, Dena Bank seems significantly undervalued and is likely to offer a substantial upside in case of improvement in macro conditions. We initiate coverage with a BUY rating and 9-month price target of Rs1, implying 24.2% upside from current levels. 1-yr rolling fwd P/adj.BV at.6x; extremely attractive (Rs) 1.5x 1.2x.9x.6x.4x Current valuation materially below historical mean (x) 1-yr Fw d P/adj.BV Mean Fw d P/adj.BV Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 - Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12, Bloomberg Company Report 1

11 Financials Income statement Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E Interest income 5,335 67,941 81,746 95,577 Interest expense (32,72) (46,931) (56,199) (63,693) Net interest income 17,634 21,1 25,547 31,884 Non-interest income 5,338 5,822 6,87 8,16 Total op income 22,972 26,832 32,416 39,99 Total op expenses (1,734) (11,547) (13,395) (15,672) Op profit (preprov) 12,238 15,284 19,21 24,318 Provisions for loan losses (2,813) (2,621) (4,45) (5,398) Other provisions (1,445) (3,66) (2,5) (2,5) Profit before tax 7,98 9,57 12,116 16,4 Taxes (1,864) (1,26) (2,98) (4,926) Net profit 6,116 8,31 9,8 11,494 Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E Total cash & equivalents 54,88 55,512 6,38 63,129 Investments 187,689 23, ,332 33,216 Advances 448,28 566, ,649 85,728 Total int-earning assets 69,58 852,714 1,28,289 1,244,74 Fixed assets 4,37 4,66 4,798 5,71 Other assets 14,289 17,99,177 24,1 Total assets 78, ,879 1,53,264 1,273,794 Net worth 36,559 44,773 52,343 62,262 Deposits 642,96 771, ,718 1,134,468 Borrowings 16,917 38,89 45,47 52,218 Total int-bearing liabs 659,13 81, ,125 1,186,686 Non-int-bearing liabs 12,812 18,628 21,795 24,847 Total liabilities 671, ,16 1,,921 1,211,532 Equity + Total liabilities 78, ,879 1,53,264 1,273,794 Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E Growth matrix Net interest income Total op income Op profit (preprovision) Net profit Advances Deposits Total assets Profitability Ratios NIM Non-int inc/total inc Return on Avg Equity Return on Avg Assets Per share ratios (Rs) EPS Adj.BVPS DPS Valuation ratios (x) P/E P/Adj.BV Other key ratios Credit/Deposits Cost/Income CASA CAR Tier-I capital Gross NPLs/Loans Credit Cost Net NPLs/Net loans Tax rate Dividend yield Company Report 11

12 Recommendation parameters for fundamental reports: Buy Absolute return of over +1% Market Performer Absolute return between -1% to +1% Sell Absolute return below -1% Published in 12. India Infoline Ltd 12 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on