Worth Banking On

The best way to invest during uncertain times is to play safe and when we think of safe bets the first sector that comes to our mind is public sector banking (PSB). Despite the entire financial world facing one of the worst crises of their existence in which various banks either collapsed or were at the brink of collapse, Indian banks, in general, and public sector banks, in particular, came out of the situation largely unscathed. Dena Bank is one of such PSBs which has shown a decent performance in recent years and has taken the initiative to strengthen its position among other Indian banks. Now apart from safety there are certain other compelling factors for recommending Dena Bank. Good business growth despite odds, improved asset quality, expansion of branch network and fair valuations are some of them. Further, the bank has shared its growing business with its shareholders by paying dividend. It has been paying dividend since the last three years and its dividend yield stands at 2 per cent. On the valuation front, the scrip seems to be placed well as its price to book value stands at 0.89x (after adjusting for non-performing assets) which is much lower as compared to 1.20x of its peers. Further, the CMP of Rs 50 discounts its FY09 earnings by 3.50x which is also lower as compared to its peers. Hence we recommend that investors should buy the scrip at its current levels with a target price of Rs 65 in the next one year. As regards growth, Dena Bank has seen its gross advances increasing by 23 per cent to Rs 28,301 crore as on June 2009 over June 2008. Similarly, deposits have also increased by 36.43 per cent to Rs 42,744 crore as on June 2009.
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As regards the deposits’ growth, the best part is that currently its low cost CASA deposits are at 36.43 per cent, thus showing a marginal increase. Here one should know that while other banks could not manage to sustain the earlier CASA levels, Dena Bank has managed to show improvement. In FY10 the bank is planning to open 100 new branches which will help the bank to further increase the CASA deposits. With improvement of CASA the NIM is also expected to improve. Its NIM for Q1FY10 declined to 2.21 per cent as compared to 2.45 per cent in Q1FY09. The management has stated that it occurred due to a sharp reduction in prime lending rates. Another factor is that the bottomline is also expected to get a boost from growth in other income. The other income showed good growth in Q1FY10 and stood at Rs 155.35 crore as compared to Rs 66.94 crore in Q1FY09.
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On the credit front, while the gross NPAs have declined as a per cent of gross advances, its net NPAs have gone up. But again the NPAs have gone up on account of some single sector defaults and these accounts are expected to improve in the coming quarters. Further, the bank is carrying out an aggressive recovery drive for NPAs. As regards its financial performance, after putting in a strong performance for FY09 the bank has delivered another round of good performance in Q1FY09. While its total income for Q1FY10 stood at Rs 1,123.82 crore, its bottomline stood at Rs 115.02 crore as against Rs 834.40 crore and Rs 68.30 crore in Q1FY09. At its current market price of Rs 50 the bank discounts its FY09 earning by three times. The bank’s price to book value stands at 0.89x and seems cheaper. Therefore, our advice to readers is to take exposure to the counter with expected capital appreciation of 20-25 per cent in the next couple of quarters.