DENA BANK Value Play; Risk-Reward favorable

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1 DENA BANK Value Play; Risk-Reward favorable Recommendation Reuters Code Bloomberg Code STOCK DATA SHARE HOLDING BUY DENA.BO DBNK IN BSE Code Face Value Shares Outstanding* Avg. Daily Volume (6m) Price Performance 1M 3M 6M (4) (29) (15) 200 Days EMA Rs. 102 * On fully diluted equity Shares Rs mn 21,63,222 shares Promoters FII FI/Bank 9.95 Body Corporate 2.75 Public & Others Market Cap. 52 Week H/L Risk CMP Target Price Rs.31,483 mn Rs. 128/80 Medium Rs.90 Rs.120 Dena Bank was established in 1938 and was nationalized in year 1969 along with 13 others banks. It is a mid sized public sector bank with business size of ~Rs.1.48 trillion. Government of India holds 55.2% stake while LIC holds 8.5% stake in the Bank. Dena Bank has pan India presence with 1431 branches and 576 ATMs largely concentrated in Gujarat and Maharashtra which accounts for majority of the business. The Bank has 56% of branches located in Rural & Semi-urban areas. The Bank wants to increase its presence outside Gujarat and Maharashtra going ahead. Strong Business growth and decent asset quality key to better performance: Dena bank has been consistently growing its business above industry average, with loans & deposits growing at CAGR of 25% and 22% respectively over FY Asset quality continues to stay steady despite challenging environment and held up quite well compared to the stress witnessed among its peers. Downside in NIMs capped as bank has repositioned focus on high yielding SME segment (now 15% of advances). The Bank has calibrated lending yields in MSME segment, as a resultant it has witnessed downfall in NIMs to 2.88% as cost of deposits remained sticky but yields reduced. The Bank targets to get its NIMs back above 3% and do not see any decrease in NIMs from hereon. Healthy return ratios provides better comfort as Tier I ratio continues to be above 8% on efficient capital utilization & infusion; while improved operating efficiency, sustained NIMs and steady asset quality has enabled the Bank to deliver higher ROAs of 1% & ROEs +19% historically, thus providing better comfort. Credit cost (60 bps of advances) has been lower for the bank due to lower accretion in fresh slippages due to lower exposure in stressed sectors and better recoveries/upgradation. Outlook and Valuation:- Historically, Dena bank has been trading at slight premium valuation compared to its peers. Going ahead it will continue to deliver on better operating metrics and steady asset quality which help sustain its premium valuations over its peers. At the CMP of Rs.90, the stock trades at an attractive valuation of 0.63x & 0.54x its FY14E and FY15E P/ABV respectively, which in our view should attract higher valuation on better performance in such challenging environment. We recommend BUY on the stock with a target price of Rs.120 based on 0.85x its FY14E P/ABV (5-Years Avg of 1 Year Forward P/ABV 0.87x) Y/E Mar EPS (Rs.) EPS (% Chg.) ROAA ROAE NIM Net NPL FY FY13E FY14E FY15E CASA P/ABV (x) PER (x) Div. Yield This report based on Techno Funda Research and our View / Target Price has been derived accordingly. Please refer to the disclaimer on the last page. 1

2 Higher than industry advances growth; Mid-corporate remains the strength, repositioning itself on SME segment Dena bank in past few years has consistently grown its business higher than the industry growth. Its loans witnessed a CAGR of 25% over FY07-12, which was led by strong growth in Large & Mid-corporate segment (30% of advances) which are majorly working capital requirements. Mid-corporate segment will continue to be the strength but the Bank has repositioned its focus towards SME (15% of advances) which are high yielding in nature. All the Bank loans under SME are covered in CGTMSE scheme which in turn helps conserving capital along-with risk cover. It has also upgraded its rating systems which would help it sanction loans to less risky borrowers and enable tight monitoring of slippages. The Bank is keen on improving its Retail lending share (12.2% of advances) by expanding its product profile with launch of innovative products (like Doctor plus loans for doctors) which will give it a diverse product profile. Other income to remain sluggish; excellent improvement in Cost-Income Dena Bank Ltd. Dena bank s other income has remained sluggish as focus on retail loans has remained lower giving it lower fee income, while treasury income has been steady and is expected to improve going ahead as rate cycle moves downward. We have factored in muted fee income growth as Bank will rationalize charges to improve competitive advantage and improve retail lending. The Bank s Cost-Income has improved drastically over the past few years from 55% in FY10 to ~42% in 9MFY13 showing improvement in operating efficiencies. We believe C/I will remain steady as it is expanding its branch footprint while improvising CASA business. 1,450 1,250 1, (Rs.mn) Advances Loan Growth Deposits Deposit Growth (Rs.mn) Q3FY Q3FY13 Large Inds SME Agri Retail Food Credit Others 60% 7% 4% 5% 14% 9% Retail Segment 0% 1% - Housing - Vehicle - Education - Mortgage - Personal - Dena Trade - Doctor + - Others 2

3 In Percentage Dena Bank Ltd. Improving Liability Franchise The Bank deposit grew by 23% CAGR in FY07-12 led by strong growth in term deposits, while CASA share has witnessed steady erosion to 31% in 9MFY13 from 36% in FY10 on low accretion in current account segment. The Bank has emphasized to give major thrust to CASA by more branch additions (also upgrading branches & improving service level at branches) and deploying more staff to attract low cost deposits. The Bank is on the path of reducing its reliance on high cost bulk deposit from 30% in FY12 to 19% in 9MFY13 by replacing it with low cost core deposit which would strengthen deposit franchise and lower cost of funds. NIMs calibrate on rationalization in lending spreads but downside largely capped NIMs were under pressure in the last few quarters as the bank calibrated yield spreads by ~150 bps in MSME & Retail loan segments to increase competitive advantage over peers. During 9MFY13 NIMs fell 25 bps to 2.92% against 3.17% in FY12 as cost of deposits remained sticky but lending yields declined. The Bank has guided NIM of ~3% in FY13 aided primarily by decline in cost of funds and incremental yields owing to further shift towards SME & Retail segments. Over the short term, we expect NIMs upside would be limited and to remain under pressure as Bank would rush to cover its PSL portfolio in Q4FY13 which is low yielding. While we also believe NIMs to stay steady at ~3% in FY14E as Bank s strategy of improving liability franchise and calibrating spreads to increase competitive advantage on some portfolios like SME & Retail starts paying off in medium term % % 32% 30% 50 (Rs Bn) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 CASA Deposit Term Deposit CASA % 28% FY10 FY11 FY12 FY13E FY14E FY15E YOA YOI COF NIM 3

4 Dena Bank Ltd. Asset quality to stay steady, strengthening in credit monitoring & improved rating system Dena Bank s asset quality has held up quite steady in a challenging environment despite some of its peers witnessing stress over past few quarters. Gross NPAs have increased from 1.80% in FY10 to 2.09% in Q3FY13 while Net NPAs have increased from 1.19% in FY10 to 1.31% in Q3FY13. Change in monitoring & rating system kept a strict vigil on fresh slippages which has helped it to lend to better corporates having comparatively low risk credit profile. Also, external credit appraisal has helped the Bank to keep asset quality steady. Delinquencies in 9MFY13 were at 1.52%, which were mainly from small accounts in Mid-corporate and Agri segments. The Bank also has good recovery track record showing its strength towards maintaining asset quality. Although the PCR has come off to ~70% (reported), it is quite better compared to its peer banks. Restructuring portfolio stood at Rs.47.9 bn (7.6% of advances) as on Dec. 13 of which Rs.21 bn being from SEBs (44% of restructured) which are Govt guaranteed while others comprise of Textiles (10.2%), Iron & Steel (5.2%), Telecom (7.5%) etc. The Bank restructured loans of Rs.8.52 bn in Q1FY13, Rs.3.0 bn in Q2FY13 and Rs.2.63 bn in Q3FY13, showing deceleration in fresh restructuring and expects the trend to continue going ahead. Delinquencies from the restructuring portfolio was at ~3.5%, the lowest among PSU Banks. Going ahead, the Bank targets Gross NPA below 2% and Net NPAs below 1.25%. Less surprises in asset quality has helped it get premium valuations compared to its peers. By strengthening its credit monitoring and improving its rating system the Bank will be able to maintain a steady asset quality. Gross NPAs Net NPAs PCR 3.0 Calculated FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 2.3% 2.4% 2.6% 2.1% 1.9% 1.7% 1.96% 2.1% 1.7% 1.5% 1.51% 1.4% 1.4% 1.29% 1.5% 1.6% 1.3% 1.1% 1.1% 0.6% 0.9% 0.7% 0.1% Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Gross NPAs Net NPAs Fresh Deliquencies 4

5 Unwavering asset quality compared to peers over the last five years; gives additional comfort on valuations Dena Bank Ltd. Dena Bank s asset quality has been solid over the last five years when compared to its peers who have witnessed drastic deterioration especially in recent two years. From FY07 to 9MFY13, on absolute basis Dena Bank cumulatively added Rs.5.7 bn on GNPA compared to peer average of Rs.17.8 bn while it added Rs.4.5 bn on NNPA compared to peer average of Rs.10.8 bn. On percentage basis, Dena Bank saw a rise of 77% in GNPA & 124% in NPA which is quite lower compared to peers like United Bank of India and UCO Bank who were victims of high accretion in bad loans and have seen manifold rise in cumulative NPAs (refer below chart and graph). Although asset quality issue has been of concern in recent years for banking sector, Dena bank has clearly managed to keep its head above the water. Rs. (in Mn) Year UCO Bk United Bk BOM Vijaya Bk PSB Dena Bk % Increase in NNPAs % Increase in GNPA G N P A N N P A FY ,062 8,170 8,203 5,643 2,908 7,445 9MFY13 67,113 29,017 12,970 18,889 12,989 13,173 FY ,061 3,330 2,774 1, ,648 9MFY13 39,270 14,162 4,696 10,981 9,382 8,169 Pun. & Sind Bank United Bank (I) Vijaya Bank Dena Bank BOM UCO Bk 0% 200% 400% 600% 800% 1000% 1200% FY07-9MFY13 5

6 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Valuations attractive on improving profitability, risk-reward quite favorable Dena Bank Ltd. Dena bank s improving profitability profile along with stable asset quality has helped it historically to achieve ROAs of 1% & ROEs of ~19%. It has consistently delivered on performance by improving core operating metrics. Going ahead, it expects sequentially lower slippages, stronger upgrades/recoveries and deceleration in restructuring to continue. Despite factoring muted fee income growth, earnings is likely to grow in-line with NII over FY13-15 aided by relatively modest growth in provisioning. Dena bank has been trading at a slight premium compared to its peers which are beaten down substantially. The Bank is under high growth phase and will be able to continue to perform quite better with steady asset quality, strong business growth, adequate provisioning, efficient capital adequacy and stable management. These factors provide us comfort and convince us on a favorable risk-reward on the stock. At the CMP of Rs.90, the stock trades at an attractive valuation of 0.63x & 0.54x its FY14E and FY15 P/ABV respectively. We recommend BUY on the stock with a target price of Rs.120 based on 0.85x its FY14E earnings (5-Years Avg of 1 Year Forward P/ABV 0.87x) FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E ROAE ROAA Bottom (x) Peak (x) Avg. P/ABV P/ABV 6

7 Dena Bank Ltd. PROFIT & LOSS STATEMENT (Rs.mn) BALANCE SHEET STATEMENT (Rs.mn) Y/E March FY12 FY13E FY14E FY15E Interest Income 67,941 84,103 98, ,866 Interest Expense 46,931 59,979 70,146 82,023 Net interest Income 21,010 24,125 28,398 33,842 NII Growth % Other Income 5,822 6,224 6,679 7,107 - Treasury profits Total Income 26,832 30,349 35,078 40,949 Operating Expenses 11,547 12,894 14,763 17,062 Pre-provision Profit 15,284 17,454 20,315 23,887 Total Provisions 5,625 5,273 5,396 5,149 - NPL & Stnd Provision 2,621 2,857 2,943 3,061 PBT 9,659 12,181 14,919 18,739 Tax 1,628 3,776 4,849 6,090 PAT 8,031 8,405 10,070 12,649 PAT Growth % PPP (Ex Treasury) 14,937 17,073 19,857 23,338 PPP Growth % As on 31 st March FY12 FY13E FY14E FY15E Cash Balances 55,512 59,194 64,697 70,323 Advances 566, , , ,055 Investments 230, , , ,656 - Govt. Securities 194, , , ,165 Fixed assets 4,066 4,188 4,356 4,574 Current assets 17,099 18,296 19,211 20,171 Total Assets 873,879 1,040,339 1,229,421 1,448,778 Equity Cap 3,501 3,501 3,501 3,501 Reserves and Surplus 41,273 48,362 57,034 68,242 Shareholders Funds 44,773 51,862 60,534 71,743 Deposits 771, ,500 1,094,308 1,302,103 - Demand deposits 266, , , ,067 - Term deposits 505, , , ,036 Borrowings 29,149 37,894 40,926 38,880 - Subordinated debt 9,660 9,660 9,660 9,660 Current Liabilities 18,628 21,423 23,993 26,393 Total Liabilities 873,879 1,040,339 1,229,421 1,448,778 7

8 Dena Bank Ltd. FINANCIAL RATIO STATEMENT Y/E March FY12 FY13E FY14E FY15E Profitability Ratios EPS (Rs) Earnings growth CEPS (Rs) PPP / Share (Rs) ROAA ROAE* DPS (Rs) Dividend Payout Efficiency Ratios C-I ratio (Excl Treasury) Salary / Non Int. Cost Other Inc (Ex tr.) / Net Total Inc (Ex Tr.) Cost Asset Ratio CASA Tax Rates Asset Quality Ratios Gross NPLs Net NPLs Coverage Provision / Loans Y/E March FY12 FY13E FY14E FY15E Asset-Liab. Profile Capital Adequacy Ratio Tier I CAR Adv. / Deposit Ratio Loan Growth Deposit Growth Balance Sheet Growth Equity / Assets Equity / Loans Spreads Analysis Yield on Advances Yield on Investments Cost of funds Net Interest Margin Valuation Dividend Yield BV / Share* Adjusted BV / Share* P/E (x) P/PPP (x) P/ABV (x) *Excluding Revaluation Reserve 8

9 Rating Scale ANALYST Pritesh Bumb SALES Devang Shah /61 This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating. RISK DESCRIPTION Low Risk (High predictability / Low Volatility) Medium Risk (Moderate predictability / Volatility) High Risk (Low predictability / High Volatility) Total Expected Return Matrix Rating Low Risk Medium Risk High Risk Buy Over 15 % Over 20% Over 25% Accumulate 10 % to 15 % 15% to 20% 20% to 25% Hold 0% to 10 % 0% to 15% 0% to 20% Sell Negative Returns Negative Returns Negative Returns Neutral Not Applicable Not Applicable Not Applicable Not Rated Not Applicable Not Applicable Not Applicable Please Note : Recommendations with Neutral Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points. Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent. This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk. This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice. Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof. The Investment horizon of this report is approximately 1 year. Any calls which lapse the time duration of a year would be auto closed without any further notifications/updates. Clients are requested to keep track of the same. Sushil Financial Services Private Limited Member: BSEL, SEBI Regn.No. INB/F NSEIL, SEBI Regn.No.INB/F Regd. Office : 12, Homji Street, Fort, Mumbai Phone: Fax: info@sushilfinance.com 9