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For 3QFY2011, Dena Bank reported moderate net profit growth of 15.4% yoy
while declining by 3.4% qoq to `155cr, below our estimates of `165cr mainly on
account of higher-than-expected provisioning expenses that partly resulted in
improvement in provision coverage. Strong business growth and improvement in
asset quality were the key positives of the results. We maintain Buy on the stock.
Strong business growth with asset quality improvement: On a sequential basis,
advances and deposits grew by strong 14.4% (34.0% yoy) and 13.0% (26.4%
yoy). CASA deposits registered strong 26.1% yoy (2.3% qoq) growth. The CASA
ratio declined to 35.4% from 39.1% as of 2QFY2011. On account of higher cost
of deposits and flat yields on advances qoq, the reported NIM declined by 25bp
qoq to 3.27%. Consequently, NII grew by marginal 0.3% qoq (up by strong
64.8% yoy) to `466cr. Non-interest income grew by sluggish 6.9% qoq (down
4.6% yoy) to `127cr. Absolute gross and net NPAs decreased by 2.7% and 3.5%
qoq. Gross NPA and net NPA ratios improved considerably to 1.94% and 1.26%
in 3QFY2011 from 2.26% and 1.49% in 2QFY2011, respectively. Slippages
improved further with a slippage rate of 1.2% in 3QFY2011 compared to 1.6% in
2QFY2011 and 2.2% in FY2010.
Outlook and valuation: Dena Bank, with a strong CASA ratio of 35.4%, is better
placed than peers to protect its NIM in a rising interest rate environment. After the
proposed equity capital infusion of about `500cr by the government, the bank's
tier-I ratio is expected to improve by ~100bp. At the CMP, the stock is trading at
4.8x FY2012E EPS of `21.0 and 0.9x FY2012E ABV of `115.1. We maintain Buy
on the stock with a Target Price of `127. We have assigned a target multiple of
1.1x FY2012E ABV, translating into a 24% upside from current levels.
Business growth above industry
In 3QFY2011, on a sequential basis, advances and deposits grew by strong 14.4%
and 13.0%, ahead of industry growth. On a yoy basis also, advances growth
(34.0%) and deposits growth (26.4%) was above that of the industry. On account
of strong traction in advances as well deposits on a sequential basis, the credit-todeposit
(CD) ratio increased marginally to 68.5% in 3QFY2011 from 67.7% in
2QFY2011. Growth in advances was driven by retail loans (28.6% yoy) and MSME
loans (20.7% yoy). Even agricultural loans showed strong traction (19.6% yoy).
On the deposits side, CASA deposits posted strong 26.1% yoy growth. However,
on a sequential basis, it grew marginally by 2.3%, due to which the CASA ratio
declined substantially by ~370bp to 35.4% from 39.1% as of 2QFY2011.
On the back of the decline in CASA ratio, increased cost of deposits from 5.54% in
2QFY2011 to 5.75% in 3QFY2011 and yield on advances remaining flat at
10.32% qoq, reported NIM declined by 25bp to 3.27% in 3QFY2011 from 3.52%
in 2QFY2011. Consequently, the bank’s NII grew marginally by 0.3% qoq (by
strong 64.8% yoy) to `466cr. Management expects to sustain NIMs at 3.2% levels
by 4QFY2011.
Non-interest income growth sluggish
During 3QFY2011, non-interest income grew by 6.9% qoq (down 4.6% yoy) to
`127cr. Core fee income declined by 6.8% qoq (up marginally 2.8% yoy) to `86cr
despite strong traction in advances qoq. Management indicated that fee income is
expected to rise in 4QFY2011 on account of processing fees in respect of loans
sanctioned during the quarter, which are not yet disbursed. Treasury income was
`14cr in 3QFY2011 (down 50.2% yoy) compared to minor losses in 2QFY2011.
Recoveries in written-off advances grew marginally by 1.1% qoq and by 26.3% yoy
to `27cr. Non-interest income excluding treasury was down by 5.0% qoq (up by
moderate 7.7% yoy) in 3QFY2011.
Slippages fell further
On the asset quality front, the bank displayed improvement with absolute gross
NPAs decreasing by 2.7% qoq to `803cr and net NPAs decreasing by 3.5% qoq to
`519cr. Gross NPA and net NPA ratios improved considerably to 1.94% and
1.26% in 3QFY2011 from 2.26% and 1.49% in 2QFY2011, respectively. Fresh
slippages amounted to `106cr compared to `143cr in 2QFY2011. Slippage ratio
improved considerably from 1.6% in 2QFY2011 to 1.2% in 3QFY2011.
The NPA provision coverage ratio including technical write-offs improved to 76.1%
(from 75.4% as of 2QFY2011). The bank’s cumulative restructured advances stood
at `1,323cr and formed 3.2% of advances and 48.9% of net worth.
Improved cost-to-income ratio
During the quarter, total operating expenses increased by 7.2% qoq and 26.8%
yoy to `277cr, driven by an 11.3% qoq increase in employee costs and marginal
0.3% rise in other operating expenses. As a result of faster growth in operating
expenses compared to operating income, the bank’s cost-to-income ratio
increased to 47% from 44% in 2QFY2011. Management indicated that the overall
pension liability had been estimated at `465cr, which is to be amortised in five
years. This translates into an annual provisioning of ~`95cr. Since the bank had
not made any provision towards this in 1HFY2011, the entire nine months
requirement of `70cr was provided by the bank in this quarter. Going forward,
further ~`25cr provision will be made in this regard during 4QFY2011
During 3QFY2011, Dena Bank added 27 more branches, expanding its branch
network to 1,284. Currently, the bank has 19 branch licenses pending, and
management has conveyed that all of them will be utilised by 4QFY2011.
During the quarter, the bank also opened 32 new ATMs during 3QFY2011, taking
its ATM network to 473.
Capital infusion expected in 4QFY2011
During the quarter, Dena Bank’s CAR stood at 11.1%, with tier-I capital of 7.2%
(forming 65% of the total CAR). The bank’s CAR is expected to increase with the
likely capital infusion of `500cr in the form of equity share capital from the
government by 4QFY2011.
Investment arguments
Structurally strong CASA
Dena Bank has maintained its CASA ratio at healthy 35%+ levels on account of
having higher concentration of its branches in rural and semi-urban areas (mainly
in Gujarat and Maharashtra). In the last two years, the bank has maintained a
CASA market share of 1.1% despite intense competition from private banks.
This structural advantage is reflected in the bank's cost of funds at 5.9% in FY2010,
which is one of the lowest amongst peers.
Capital infusion to enable further growth
Dena Bank's CAR at 11.1% comprising only 7.2% of tier-I capital is below optimum
levels (reflected in 22x leverage of the bank for FY2010). Moreover, the
government’s holding at 51% had prevented the bank from further diluting the
government stake. This constraint on raising equity for growth was an overhang on
the stock. However, Dena Bank is expected to receive `500cr in the form of equity
share capital over the next three months. Post the capital infusion, the bank's tier-I
ratio is expected to improve by ~100bp, enabling it to grow its advances
more-or-less in line with peers in the medium term.
Lower provisioning to aid bottom-line growth
Dena Bank's gross and net NPAs stood at 1.9% and 1.3%, respectively, in
3QFY2011, with cumulative restructured advances at `1,323cr (3.2% of loans).
The bank's effective provision coverage, including technically written-off portfolio,
is 76.1% as against the mandatory 70%. Further, the bank’s ~`1,500cr fully
written-off advances are expected to yield outsized income from recoveries relative
to peers. Given the improving economic outlook, we believe lower incremental
provisioning costs will aid the bank in maintaining its profitability levels.
Outlook and valuation
Dena Bank, with a strong CASA ratio of 35.4%, is better placed than peers to
protect its NIM in a rising interest rate environment. After the proposed equity
capital infusion of about `500cr by the government, the bank's tier-I ratio is
expected to improve by ~100bp. At the CMP, the stock is trading at 4.8x FY2012E
EPS of `21.0 and 0.9x FY2012E ABV of `115.1. We maintain Buy on the stock
with a Target Price of `127. We have assigned a target multiple of 1.1x FY2012E
ABV, translating into a 24% upside from current levels
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Dena Bank – 3QFY2011 Result Update
Angel Broking maintains a Buy on Dena Bank with a Target Price of Rs. 127.
For 3QFY2011, Dena Bank reported moderate net profit growth of 15.4% yoy
while declining by 3.4% qoq to `155cr, below our estimates of `165cr mainly on
account of higher-than-expected provisioning expenses that partly resulted in
improvement in provision coverage. Strong business growth and improvement in
asset quality were the key positives of the results. We maintain Buy on the stock.
Strong business growth with asset quality improvement: On a sequential basis,
advances and deposits grew by strong 14.4% (34.0% yoy) and 13.0% (26.4%
yoy). CASA deposits registered strong 26.1% yoy (2.3% qoq) growth. The CASA
ratio declined to 35.4% from 39.1% as of 2QFY2011. On account of higher cost
of deposits and flat yields on advances qoq, the reported NIM declined by 25bp
qoq to 3.27%. Consequently, NII grew by marginal 0.3% qoq (up by strong
64.8% yoy) to `466cr. Non-interest income grew by sluggish 6.9% qoq (down
4.6% yoy) to `127cr. Absolute gross and net NPAs decreased by 2.7% and 3.5%
qoq. Gross NPA and net NPA ratios improved considerably to 1.94% and 1.26%
in 3QFY2011 from 2.26% and 1.49% in 2QFY2011, respectively. Slippages
improved further with a slippage rate of 1.2% in 3QFY2011 compared to 1.6% in
2QFY2011 and 2.2% in FY2010.
Outlook and valuation: Dena Bank, with a strong CASA ratio of 35.4%, is better
placed than peers to protect its NIM in a rising interest rate environment. After the
proposed equity capital infusion of about `500cr by the government, the bank's
tier-I ratio is expected to improve by ~100bp. At the CMP, the stock is trading at
4.8x FY2012E EPS of `21.0 and 0.9x FY2012E ABV of `115.1. We maintain Buy
on the stock with a Target Price of `127. We have assigned a target multiple of
1.1x FY2012E ABV, translating into a 24% upside from current levels.
Business growth above industry
In 3QFY2011, on a sequential basis, advances and deposits grew by strong 14.4%
and 13.0%, ahead of industry growth. On a yoy basis also, advances growth
(34.0%) and deposits growth (26.4%) was above that of the industry. On account
of strong traction in advances as well deposits on a sequential basis, the credit-todeposit
(CD) ratio increased marginally to 68.5% in 3QFY2011 from 67.7% in
2QFY2011. Growth in advances was driven by retail loans (28.6% yoy) and MSME
loans (20.7% yoy). Even agricultural loans showed strong traction (19.6% yoy).
On the deposits side, CASA deposits posted strong 26.1% yoy growth. However,
on a sequential basis, it grew marginally by 2.3%, due to which the CASA ratio
declined substantially by ~370bp to 35.4% from 39.1% as of 2QFY2011.
On the back of the decline in CASA ratio, increased cost of deposits from 5.54% in
2QFY2011 to 5.75% in 3QFY2011 and yield on advances remaining flat at
10.32% qoq, reported NIM declined by 25bp to 3.27% in 3QFY2011 from 3.52%
in 2QFY2011. Consequently, the bank’s NII grew marginally by 0.3% qoq (by
strong 64.8% yoy) to `466cr. Management expects to sustain NIMs at 3.2% levels
by 4QFY2011.
Non-interest income growth sluggish
During 3QFY2011, non-interest income grew by 6.9% qoq (down 4.6% yoy) to
`127cr. Core fee income declined by 6.8% qoq (up marginally 2.8% yoy) to `86cr
despite strong traction in advances qoq. Management indicated that fee income is
expected to rise in 4QFY2011 on account of processing fees in respect of loans
sanctioned during the quarter, which are not yet disbursed. Treasury income was
`14cr in 3QFY2011 (down 50.2% yoy) compared to minor losses in 2QFY2011.
Recoveries in written-off advances grew marginally by 1.1% qoq and by 26.3% yoy
to `27cr. Non-interest income excluding treasury was down by 5.0% qoq (up by
moderate 7.7% yoy) in 3QFY2011.
Slippages fell further
On the asset quality front, the bank displayed improvement with absolute gross
NPAs decreasing by 2.7% qoq to `803cr and net NPAs decreasing by 3.5% qoq to
`519cr. Gross NPA and net NPA ratios improved considerably to 1.94% and
1.26% in 3QFY2011 from 2.26% and 1.49% in 2QFY2011, respectively. Fresh
slippages amounted to `106cr compared to `143cr in 2QFY2011. Slippage ratio
improved considerably from 1.6% in 2QFY2011 to 1.2% in 3QFY2011.
The NPA provision coverage ratio including technical write-offs improved to 76.1%
(from 75.4% as of 2QFY2011). The bank’s cumulative restructured advances stood
at `1,323cr and formed 3.2% of advances and 48.9% of net worth.
Improved cost-to-income ratio
During the quarter, total operating expenses increased by 7.2% qoq and 26.8%
yoy to `277cr, driven by an 11.3% qoq increase in employee costs and marginal
0.3% rise in other operating expenses. As a result of faster growth in operating
expenses compared to operating income, the bank’s cost-to-income ratio
increased to 47% from 44% in 2QFY2011. Management indicated that the overall
pension liability had been estimated at `465cr, which is to be amortised in five
years. This translates into an annual provisioning of ~`95cr. Since the bank had
not made any provision towards this in 1HFY2011, the entire nine months
requirement of `70cr was provided by the bank in this quarter. Going forward,
further ~`25cr provision will be made in this regard during 4QFY2011
During 3QFY2011, Dena Bank added 27 more branches, expanding its branch
network to 1,284. Currently, the bank has 19 branch licenses pending, and
management has conveyed that all of them will be utilised by 4QFY2011.
During the quarter, the bank also opened 32 new ATMs during 3QFY2011, taking
its ATM network to 473.
Capital infusion expected in 4QFY2011
During the quarter, Dena Bank’s CAR stood at 11.1%, with tier-I capital of 7.2%
(forming 65% of the total CAR). The bank’s CAR is expected to increase with the
likely capital infusion of `500cr in the form of equity share capital from the
government by 4QFY2011.
Investment arguments
Structurally strong CASA
Dena Bank has maintained its CASA ratio at healthy 35%+ levels on account of
having higher concentration of its branches in rural and semi-urban areas (mainly
in Gujarat and Maharashtra). In the last two years, the bank has maintained a
CASA market share of 1.1% despite intense competition from private banks.
This structural advantage is reflected in the bank's cost of funds at 5.9% in FY2010,
which is one of the lowest amongst peers.
Capital infusion to enable further growth
Dena Bank's CAR at 11.1% comprising only 7.2% of tier-I capital is below optimum
levels (reflected in 22x leverage of the bank for FY2010). Moreover, the
government’s holding at 51% had prevented the bank from further diluting the
government stake. This constraint on raising equity for growth was an overhang on
the stock. However, Dena Bank is expected to receive `500cr in the form of equity
share capital over the next three months. Post the capital infusion, the bank's tier-I
ratio is expected to improve by ~100bp, enabling it to grow its advances
more-or-less in line with peers in the medium term.
Lower provisioning to aid bottom-line growth
Dena Bank's gross and net NPAs stood at 1.9% and 1.3%, respectively, in
3QFY2011, with cumulative restructured advances at `1,323cr (3.2% of loans).
The bank's effective provision coverage, including technically written-off portfolio,
is 76.1% as against the mandatory 70%. Further, the bank’s ~`1,500cr fully
written-off advances are expected to yield outsized income from recoveries relative
to peers. Given the improving economic outlook, we believe lower incremental
provisioning costs will aid the bank in maintaining its profitability levels.
Outlook and valuation
Dena Bank, with a strong CASA ratio of 35.4%, is better placed than peers to
protect its NIM in a rising interest rate environment. After the proposed equity
capital infusion of about `500cr by the government, the bank's tier-I ratio is
expected to improve by ~100bp. At the CMP, the stock is trading at 4.8x FY2012E
EPS of `21.0 and 0.9x FY2012E ABV of `115.1. We maintain Buy on the stock
with a Target Price of `127. We have assigned a target multiple of 1.1x FY2012E
ABV, translating into a 24% upside from current levels
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