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Dena Bank: Buy for an upside potential of 39%

SPA Securities | Published: 03 Aug, 2012  | Source : | Follow Author | Add to my Favourites

Investment Rationale:

- Growth from core activities to remain strong: Strong presence in two highly industrialized states viz. Gujarat & Maharashtra (~61% of total branches) and changing product mix towards high yielding MSME & Retail segment should aid DNBK to continue growing at a steady pace.

- Excellent liability franchise to provide stability to NIMs: DNBK has one of the lowest cost of deposits (CoD) among its peers due to its excellent liability profile (owing to its dependence on low cost deposits instead of bulk deposits). Strong presence in the rural and semi-urban areas (~56% of total branches), has enabled it to maintain its CASA ratio at ~35% levels over the past few years, which is amongst the best in industry. Its increasing focus to control cost of funds coupled with higher CD ratio and consistent reprising of portfolio, would assist the company in maintaining its margins at ~3.1% over the next two years.

- Improving operational efficiency: DNBK has consistently improved its operating efficiency by keeping operating cost under check while expanding the core operating revenue. Its C/I ratio has improved significantly from 51.5% in FY09 to 43.0% in FY12 (Q1FY13 - 39.3%) due to better employee productivity (profit per employee has doubled to Rs8 mn over the last three years).

Outlook: The bank has grown its business at a CAGR of 24% in the last five years to Rs1339 bn in FY12. With a strong deposit franchise, strengthening balance sheet, improving operational efficiency, stable asset quality and higher return ratios, SPA Securities initiates coverage on Dena Bank with a buy recommendation for a price target of Rs127

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