Dena Bank - Disappointment on many a fronts - ElaraCapital

High investment depreciation and increased operating costs dent profitability

While NII growth was marginally behind estimates, PAT fell sharply behind expectations on higher provisioning and increased employee expenses, with a larger portion of higher provisions coming from increased investment depreciation. Loan-book grew by 16% YoY and 4.5% sequentially, with MSME segment showing the highest traction this quarter. Our expectations on margins and NII and have come down from here on as credit growth gets weaker. The current branch strategy of opening 150 branches in FY14 doesn't fare too well with us as we believe the bank would be losing out on their key competitive advantage of high exposure to Gujarat and Maharashtra as incremental expansion is largely outside of the two states.



Slippages were higher than normal this quarter at 2.5% and 2% for the year compared to 1.6% for FY12. SME space was the key dampener this quarter with ~45% of the slippages coming from this space. Gross and net NPAs have resultantly increased by ~10 bps sequentially partly also on the back of weak sequential credit growth at 4.5%. Restructured book at INR 5.4 bn forms 8.2% of the portfolio, with slippages from the same at 5%.

Valuations: Return ratios under pressure

While asset quality still stands out in the PSU space, our confidence on the same to be sustainable going forward has come down. However, Dena remains amongst the very few picks in PSU space where ABV has grown YoY (by 7%). Nevertheless, with Tier 1 at 7.26% currently, the bank would require ~10 bn of capital this financial year, taking ROEs lower. ROE and ROA for FY14-15 are expected to be at 15.5% and 0.8% respectively, below our earlier expectations. We cut down our target price to INR 110, implying a FY15 P/ABV of 0.8, whereas the bank currently trades at a FY15 multiple of 0.65. We like the stock at INR 85 levels where most concerns seems priced in with dividend yields at 5.5% for FY13.

Source : Equity Bulls

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