Buy Dena Bank; target of Rs 127: SPA Research

SPA Research is bullish on Dena Bank (DNBK) and has recommended buy rating on the stock with a target of Rs 127 in its November 7, 2012 research report.

“DNBK's total business registered a robust growth of 33.1% to INR 1424 bn on the back of 30.1% growth in deposits to INR 836 bn & 37.8% surge in loan book to INR 588 bn. Advances growth was led by 41.4% surge in priority sector lending and 36.2% increase in MSME lending. We expect DNBK to maintain its growth momentum and continue outperforming the system growth rates over the next couple of years (expected CAGR – 16.0% Deposits & 17.5% Advances). Traction in agriculture segment is likely to remain strong given its obligation to meet PSL targets. Additionally SME and Retail will continue to remain primary drivers of growth.”

“DNBK witnessed a sequential decline of 20 bps in NIMs to 2.9% due to 14 bps decline in YoA to 12.0% mainly due to rationalisation of interest rates on loans to SME, agriculture and retail segments in order to boost growth and avoid slippages. We expect NIMs to remain strong at +3% levels due to its excellent liability profile (due to its dependence on low cost deposits such as CASA, CP & retail term deposits instead of bulk deposits) and increasing focus on high yielding segments like MSME and Retail. Asset quality witnessed a marginal deterioration with 17 bps sequential increase in GNPA to 2.0% & 21 bps surge in NNPA to 1.2%. Total slippages during Q2FY13 at INR 2.9 bn (accounting for 2.0% of advances vs 1.3% in Q1FY13) mainly comprised of infrastructure and telecom sector. DNBK is seeing robust NPL recoveries and upgrades which provides comfort on the asset quality front (total recoveries, upgradation and write off rose 58% YoY to INR 2.5x to INR 1.9 bn).”

We remain positive on the PSB sector and DNBK with healthy operational parameters, strong deposit mix, stable asset quality, strong return ratios and earnings visibility, is well positioned to capture the uptick. We expect asset quality concerns to recede for the entire banking industry with the expected macro economic recovery in the next financial year. Excellent liability profile due to strong CASA coupled with higher CD ratio and increasing focus on high yielding segments would assist DNBK to maintain its margins at +3% levels. Improving core operating metrics with the strengthening of balance sheet and lower operating costs will drive the growth going forward. Further higher exposure of ~22% in AFS book will aid profitability in a declining interest rate scenario. We retain our buy rating on the stock with a target of INR 127. At our target price, the stock would trade at FY14E P/ABV of 0.9x,” says SPA Research report.

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