Asset quality pressure mounts… • Dena Bank :: ICICI Securities, link

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Asset quality pressure mounts…
• Dena Bank’s Q2FY15 PAT came in much below our expectation at
| 51.5 crore (I-direct estimate: | 100 crore) primarily on account of
higher provisions. The bank has reversed | 63 crore of income tax
provision, excluding which it would have been a loss of | 11.5 crore
• NII growth was flat YoY at | 625 crore better than our estimate of
| 612 crore with credit and deposit growing better that our estimates
at 14% YoY to | 73855 crore (I-direct estimate : | 73015 crore) and
| 106460 crore (I-direct estimate : | 103670 crore), respectively
• It provided | 95 crore against Malabar Hill Fraud in Q2FY15 while |
218 crore was added to slippages. Q2FY15 slippages (as expected)
were higher at | 1223 crore leading GNPA to surge to | 3861 crore
(5.1% of credit) & NNPA jump to | 2648 crore (3.6% of credit)
Business traction strong in past; expect moderation, going head
Dena Bank is a mid-sized PSU bank with over 1600 branches. Around
60% of the network is in the well industrialised states of Gujarat and
Maharashtra, enabling the bank to clock healthy business growth in the
past. Credit increased at a CAGR of 22% in and deposit increased at
CAGR of 21% in the past five years. As on HIFY15 advances stood at
| 73855 crore and deposit at | 103670 crore. The credit book has been
mainly skewed towards corporate (37%) followed by priority sector
(35%), SME (14%) & retail (13%). In the past couple of years owing to a
weak economy the business growth has moderated. We have built in
credit & deposit CAGR of 15% & 16%, respectively. The management
guidance is 300-400 bps higher than factored by us.
Edge on liability front diminishing; margins to remain below 3%
One of the key strengths of Dena Bank used to be its strong CASA
franchise due to its higher presence in the cash rich western states with
60% of the branches in rural and semi urban areas wherein then the
competition was less. The CASA ratio was at ~35% in FY09-12, which
was one of the highest among peers. This enabled it to maintain healthy
margins of 2.9-3%. However, in the past two years there has been a
marked decline in its CASA ratio to 30% due to heavy competition. A
declining CASA ratio combined with heavy deterioration in asset quality
(slippages of ~| 4000 crore in the past 2.5 years) took its toll on margins,
which have now fallen to as low as 2.3%. Going ahead, we have factored
in NIMs of 2.4% for FY15E considering lingering asset quality pressure.
No major respite in asset quality expected in near term
Dena Bank was able to manage its asset quality well during FY10-12
wherein the GNPA ratio ranged between 1.7% and 1.9%. However,
during FY13-14, the ratio rose to 3.3%. The reasons include higher infra
exposure of ~20% and higher corporate segment, which has been worst
affected in the past two years of the economic down cycle. Further, by
H1FY15 GNPA has surged to 5.12% and RA to 10% of credit. We have
revised our FY16E GNPA estimates up to | 4789 crore (4.7% of credit)
Deterioration in asset quality to impact profitability, reduce target
Dena Bank’s operational performance has weakened in the past two years
(margins declining to the lowest ever, cost-to-income ratio rising and
asset quality is deteriorating sharply). Consequently, return ratios have
declined significantly (RoE, RoA at 4.16% and 0.27%- Q2FY15). We have
further increased our FY16E GNPA estimates to 4.9% (| 5045 crore) and
thereby lowered FY16E ABV to | 72 from | 82 earlier. We maintain our
HOLD rating while revising down target price to | 60 (0.8% of ABV FY16E)
from | 66 led by worsening of asset quality and return ratios in FY14-16E.

LINK
http://content.icicidirect.com/mailimages/IDirect_DenaBank_Q2FY15.pdf