Multi Bagger - Dena Bank

[UAE Exchange Etrade]

NSE ID : DENABANK

CMP - Rs. 87/-

Target price - Rs.120/-

Dena Bank was established in 1938 and was nationalized in year 1969 along with 13 others banks. It is a mid sized public sector bank with business size of Rs.1.48 trillion. Government of India holds 55.2% stake while LIC holds 8.5% stake in the Bank.

Dena Bank has pan India presence with 1431 branches and 576 ATMs largely concentrated in Gujarat and Maharashtra which accounts for majority of the business. The Bank has 56% of branches located in Rural & Semi-urban areas. The Bank wants to increase its presence outside Gujarat and Maharashtra going ahead.

Strong Business growth and decent asset quality key to better performance

Dena bank has been consistently growing its business above industry average, with loans and deposits growing at CAGR of 25% and 22% respectively over FY07-12. Asset quality continues to stay steady despite challenging environment and held up quite well compared to the stress witnessed among its peers.

Downside in NIMs capped as bank has repositioned focus on high yielding SME segment (now 15% of advances). The Bank has calibrated lending yields in MSME segment, as a resultant it has witnessed downfall in NIMs to 2.88% as cost of deposits remained sticky but yields reduced. The Bank targets to get its NIMs back above 3% and do not see any decrease in NIMs from hereon.

Healthy return ratios provides better comfort as Tier I ratio continues to be above 8% on efficient capital utilization & infusion; while improved operating efficiency, sustained NIMs and steady asset quality has enabled the Bank to deliver higher ROAs of 1% & ROEs +19% historically, thus providing better comfort. Credit cost (60 bps of advances) has been lower for the bank due to lower accretion in fresh slippages due to lower exposure in stressed sectors and better recoveries/upgradation.

Outlook and Valuation

Historically, Dena bank has been trading at slight premium valuation compared to its peers. Going ahead it will continue to deliver on better operating metrics and steady asset quality which help sustain its premium valuations over its peers. At the CMP of Rs 85.60, the stock trades at an attractive valuation of 0.63x & 0.54x its FY14E and FY15E P/ABV respectively, which in our view should attract higher valuation on better performance in such challenging environment. We recommend 'BUY' on the stock with a target price of Rs.120 (appreciation of 37%)