Saturday, June 13, 2009


Valuation still compelling after recent rally…

Dena Bank is one of leading PSU banks having a dominant position in the CASA rich western region of the country. With majority of branches in Maharashtra and Gujarat, we believe it has a strong low-cost liability franchise, which provides a good hedge for NIMs. We estimate the core

business of the bank will grow at a CAGR of 20% over FY09-FY11E. The risk reward lies in the compelling valuation at which it is currently trading. Even on a stress case scenario the bank is available at 0.9x FY11E stressed ABV. Hence, we are initiating coverage on the stock with a
PERFORMER rating and a target price of Rs 65 over 12-15 months.

CASA @ 36%: Still one of the best
At the current CASA levels of 36%, Dena Bank is one of the best and most competitive banks in the PSU banking space. A majority of its branches are located in the western region especially in Gujarat and Maharashtra with a tally of 480 and 242 branches, respectively which are CASA rich by nature out of a total of 1184 branches in FY09.

Value buy
In our stress case scenario, we assume the whole GNPA will turn bad. Assuming the GNPA to be at 2.6% for FY10E and 2.2% for FY11E at Rs 890 crore and Rs 953 crore respectively, the adjusted net worth of the bank stands at Rs 2521 crore for FY11E, resulting in ABV of Rs 65 per
share after considering a dilution in FY10E. We believe the stock can command 1.0x ABV (stress case) of Rs 65 and value the stock at Rs 65 per share.

Dena Bank is currently trading at 3.4% of market capitalisation to balance sheet size, which is still below the average of the past three years. We expect the balance sheet to grow at 17% CAGR over FY09 - FY11E and credit-deposit ratio to stabilise around 70%, NIM around 2.8% and CASA around 39%. We expect the bank to bring 100% of its branches under CBS by FY10, which will enable it to generate more fee income and better its operating efficiency. Thus, we value the bank at Rs 65 (0.8x FY11E ABV of Rs 82). Therefore, we have arrived at a target price of Rs 65 by giving equal weightage to both the above scenarios. Hence, we rate the stock as PERFORMER.

To see full report: DENA BANK