Avoid Development Credit Bank IPO: Angel

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Development Credit Bank, DCB, one of India's private sector bank promoted by the Switzerland-based Aga Khan Fund for Economic Development, AKFED, headquartered in Mumbai, is open for subscription with an initial public issue of 7,15,00,000 equity shares of Rs 10 each. The price is to be determined through a 100% book build process. The issue will close on October 6, 2006.

It has fixed the price band for its initial public offering, IPO of equity shares of Rs 10 each between Rs 22 and Rs 26 per share.

The book running lead managers to the issue are JM Morgan Stanley Private Limited and Enam Financial Consultants Private Limited. Intime Spectrum Registry Limited has been appointed as the registrar to the issue.

The Angel Broking report on DCB IPO:

Objects of the issue

• To augment the bank's Tier-I capital base to meet its future capital requirements for loans/advances and investment portfolio
• To fund other general corporate purposes including meeting the expenses of the issue

Background

Post the RBI directive in the 1990s, Development Co-operative Bank Limited, converted itself into a scheduled commercial bank, SCB in 1995. Since its conversion, over the years, Development Credit Bank Limited, DCB has expanded its operations beyond the states of Maharashtra, Gujarat and Andhra Pradesh. The bank currently has 72 interconnected branches including five extension counters spread over 26 cities in the country and plans to increase the number of branches to 100 by FY2008.

Total business of the bank stood at Rs 4,991 crore (Rs 49.91 billion) comprising deposits of Rs 3,124 crore (Rs 31.24 billion) and advances of Rs 1,867 crore (Rs 18.67 billion). Over FY2003-FY2006, the bank clocked a CAGR de-growth in advances and deposits of 9% and 5%, respectively.

Post IPO, the bank will have a net worth of Rs 325 crore (Rs 3.25 billion) (at the price of Rs 26) and the promoters' stake will stand reduced to 30% from 58%. As per the RBI guidelines for private sector banks, promoters cannot hold more than 10% in a bank. Hence, AKFED, the promoter of DCB, will have to reduce its stake to 10% by end of FY2007. We see this as one of the main reasons for the IPO.

Revitalization plan

The bank has put in place a new management team and board of directors committed to improve the bank's business, balance sheet and financial performance as part of its revitalization plan. The bank proposes to distinguish itself as a niche player with a strong western region presence in Maharashtra, Gujarat and Goa.

Key features of revitalization plan

Revamp of board; new members inducted

The bank reconstituted its board in 2004. The board comprises eminent persons like Dr Vijay Kelkar, an economist, who was formerly an advisor to the Finance Minister and also the Finance Secretary to the Government of India and currently Chairman of IDFC Assets Management Company Limited. The bank brought in former IDFC, CEO, Naseer Munjee as the non-executive chairman of the bank and Gautam Vir, former CEO of Hebros Bank and who has previously worked with Citibank.

Raising Capital

The management has pursued new capital infusions from private investors since constraints on the bank's capital have restricted its ability to grow its business including its advances book.

In February 2006, the bank issued 1,15,53,334 equity shares at Rs 45 per share, constituting 15.18% of its equity share capital to the private equity investors. This issue also addresses the Tier 1 capital needs of the bank.

Addressing the legacy of historically high levels of NPA

The bank has a legacy of high NPAs and has adopted a conservative policy to actively recognize these NPAs, providing for them in its accounts. After provisioning, the bank's net NPAs stood at Rs 83.96 crore as at March 31, 2006 i.e., 4.50% of net advances.

Lowering cost of funds through consumer deposit products

The bank's main focus will remain on growing CASA to further lower its cost of funds and growing term deposits to facilitate liquidity to beef up its balance sheet.

Reducing operating expenses

The bank has adopted strong measures to reduce its staff and non-strategic operating costs. It has extended its voluntary retirement scheme, VRS in 2005 and has a rigorous programme to identify and reduce non-strategic costs.

Focusing on core business

The bank intends to maintain its position as a customer-focused institution that extends comprehensive banking and related services in its core consumer banking, commercial banking and treasury businesses. In the past, the bank had very high exposure to the corporate segment due to which its NPA levels were high.

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Concerns