Dena Bank-Core operations improving; valuations attractive:: Religare

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Dena Bank
Core operations improving; valuations attractive


We initiate coverage on Dena Bank (DBNK) with a BUY rating and a target price
of Rs 170/sh. We like DBNK for its strong presence in western India and robust
liability franchise, marked by a CASA ratio of ~39%. Core operations have
remained weak historically due to poor asset quality, higher reliance on the
wholesale business and capital constraints. Going forward, though, we expect a
stronger performance with an NII and earnings CAGR of 29% and 16%
respectively over FY10-FY13, driven by (1) NIM expansion with a change in asset
mix and thrust on CASA mobilisation, (2) improving asset quality, (3) a pick-up in
fee income, and (4) a likely capital infusion. We expect core ROA (adjusted for
trading gains) to improve from 0.7% over FY07-FY10 to 0.9% over FY11-FY13.


The stock is trading at attractive valuations of 1.1x BV and 6x EPS on FY12E,
and is our preferred pick among mid-cap PSU banks. DBNK expects a
government-led capital infusion of Rs 13bn through FY13, of which Rs 6bn is
likely to come in the form of equity in FY11. Capital infusion, though not
factored into our estimates, would be highly positive in the long run.

Stronger NIMs ahead: DBNK reported a subdued NIM (calc) of 2.1% in FY10
despite high CASA due to surplus liquidity and a higher dependence on the
wholesale business. We expect margins to improve in FY11 to 2.7% driven by a
shift towards higher yielding assets, a re-pricing of corporate advances and the
management’s focus on raising low-cost deposits. This strategy has already
delivered results in Q2FY11 when DBNK’s reported NIMs improved ~70bps QoQ.

Healthy fee income to boost ROE: After achieving 100% CBS implementation,
the management has sharpened its focus on fee income. We expect fee income
to grow at a 22% CAGR over FY10-FY13 (up 32% YoY in H1FY11).

Asset quality set to improve in H2FY11: While slippages have remained high in
H1FY11 at 2.5% of advances (annualised), we believe this would improve
meaningfully in H2. We also expect recoveries to pick up and note that DBNK has
a written-off portfolio of Rs 13.7bn, a large chunk of which comprises corporate
lending. Provision coverage (incl. technical write-offs) stood at 75% in Q2FY11
and the restructured assets portfolio was comfortable at 3.5% of advances. The
bank’s MFI exposure stood at Rs 1.2bn (0.3% of advances) in Q2FY11.

Capital infusion a strong long-term positive: DBNK’s balance sheet growth was
constrained in the past due to lower capital, resulting in a higher proportion of large
corporate advances in its loan mix. However, with expected equity infusion of Rs
6bn, the core tier I ratio would improve to ~8.5% from 7.3% in FY10. The bank
would thus be free to expand its balance sheet and realign asset composition
towards higher yield loans. A higher government stake following the infusion (~58%
from 51% now) would also allow the bank to raise further equity capital in future.