Dena Bank – BUY ‘Inexpensive valuation’: IIFL

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 (40% of total advances), MSME (15%),
Agriculture (15%) and Retail (12%). Loan book witnessed a robust
growth over FY09-12, 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.

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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 FY09 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 FY10 to 34.6%
in FY12. Dena Bank expects healthy growth in SA balance in FY13,
driven by robust branch additions (100 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 FY08 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 10-20bps in Q1 FY13 due to the increased lending to
low-yielding Priority Sector in Q4 FY12. 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 Rs120, implying 24.2% upside
from current levels.