Stock Market Update on Dena Bank for 1QFY2012

StockMarket  Update on Dena Bank for 1QFY2012 with a Neutral recommendation

For 1QFY2012, Dena Bank reported healthy growth of 21.1% yoy and marginal growth of 7.1% qoq in its net profit to `168cr, above our estimates, mostly due to lower provisioning built in by us. Slippages surprised positively, while NIM contracted by 19bp qoq to 2.9%. We recommend a Neutral rating on the stock.

Sequential contraction in business; slippages surprise positively: In 1QFY2012, on a qoq basis, advances and deposits declined by 4.4% and 1.5% to `42,871 and `63,253cr, respectively. On the deposits side, CASA deposits declined by 2.2% qoq (up 16.9% yoy). CASA ratio for 1QFY2012 stood at 35.2% (down 25bp qoq). Yield on advances increased by 78bp qoq to 11.3% in 1QFY2012; however, cost of deposits increased by 67bp qoq to 6.7% in 1QFY2012, leading to a sequential decline of 19bp in reported NIM to 2.9%. During 1QFY2012, non-interest income declined by 31.2% qoq to `124cr, primarily because of an 83.5% dip in recoveries from written-off accounts to `10cr. Slippages witnessed a sharp decline in 1QFY2012, with slippage ratio decreasing from 3.1% in 4QFY2011 to 1.3% in 1QFY2012. Sequentially gross NPA ratio and net NPA ratio remained stable at 1.9% and 1.1%, respectively. NPA provision coverage ratio including technical write-offs increased to 77.9% (from 74.6% in 4QFY2011).

Outlook and valuation: Dena Bank, with a strong CASA ratio of 35.2%, is better placed than its peers to protect its NIM in a rising interest rate environment.
After the equity capital infusion of about `540cr by the government, the bank's tier-I ratio has improved to 9.7%. At the CMP, the stock is trading at 0.6x FY2013E P/ABV, the cheapest among PSU banks. However, considering that NPAs could surprise negatively in the next quarter as all accounts below `50 lakh come under system-based NPA recognition system and the hefty exposure to the power sector (~20% of the loan book), which might lead to some chunky NPAs or large restructuring in the books in the coming quarters, we recommend Neutral, and would look to upgrade the stock only once the near-term headwinds subside.