Stock Pick From The Banks

• The Bank is at expansion stage and hence poised for a growth. 
• The bank showed marked improvement in cost to income ratio and is expected to bring it down further. 
• Gross NPAs have showed considerable improvement during the year.

Banking sector has always been a favourite destination for fund managers and retail investors as an investment option. Banking is one such sector that is directly linked to the fortunes of the economy. As the economy is showing signs of recovery, this can be a good time to bet on banking sector, especially the private sector banks because of their good asset quality. Hence in this issue we are recommending a bank to our readers that has a high growth potential, strong financial performance, better asset quality and valuations.

The bank about which we are talking is DCB Bank, a modern emerging new generation private sector bank which has strong presence in Andhra Pradesh, Gujarat and Maharashtra with a distribution network of 130 branches across 80 locations and 238 ATMs. Further the bank is increasing its presence in Madhya Pradesh, Odisha, Punjab and Rajasthan. During FY’14 the bank opened 36 new branches which are performing as per expectation. Further the bank has planned to open 40 more branches in couple of years. The new branches will not only increase customer base for the bank but also help to raise low cost fund in the form of CASA deposit.

The bank’s financial performance during FY’14 was good. On the balance sheet side, the bank’s deposit grew by 23.4 per cent yoy and crossed Rs.10,000 crore in FY’14. Further CASA growth of the bank had been 13.6 per cent mainly due to strong relationship with over 80 Co-operative Bank’s and that has contributed to the balance sheet about Rs.1500 crore this year. Moreover, advances of the bank also grew by 24 per cent and reached at `8140 crore in FY’14 compared to last year.

On income statement side , net interest income (NII) grew by 29.5 per cent yoy to Rs.369 crore and fee income also went up by 18.5 per cent to `139 crore in FY14’. Moreover, net interest margin (NIM) for FY14’ stood at 3.56 per cent against 3.34 per cent in FY’13 while cost of funds remains constant at 7.78 per cent in the year on due to strong CASA deposit (low cost fund) of the bank.

The bank has recorded strong improvement in asset quality and its gross NPA ratio came down to 1.69 per cent in FY14 from 3.18 per cent in FY’13.Further net NPAs improved to 0.75 percent in FY’14 from 0.91 percent in FY’13. As on 31 March 2014 the bank’s capital adequacy ratio stood at 13.71 per cent under Basel III, norms which is above the mandatory ratio and further the bank has plans to raise up to Rs.300 crore in 9 to 12 months through QIP/preferred allotment.

On valuations front the bank is trading at 1.45 times of its adjusted book value, which is much cheaper as compared to other listed peers. Going forward, we believe the expansion plan, cost optimization and strong assets quality makes a convincing case for having this stock in one’s portfolio. Thus, we recommend a ‘buy’ on the stock with one year time horizon.