Stock Pick From The Banking Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is from the banking sector. Even in uncertain times, the bank has seen an improvement in its asset quality, which set it apart from the other affected public sector banking companies.

Dena Bank - Promising Returns

Here is Why:

• Its asset quality is improving even in an uncertain environment.
• It is witnessing good business growth (deposits and advances) and has given a confident guidance with regard to maintaining its NIM.
• The stock is available at a fair valuation of 0.65x, and had an attractive dividend yield of around 3.5 per cent for FY12.

Asset quality is a very sensitive issue when it comes to public sector banks. However, in the case of Dena Bank, the situation seems to be slightly different. Even in uncertain times, the bank has seen an improvement in its asset quality, which set it apart from the other affected public sector banking companies. This, coupled with good business growth and the fact that the stock is available at lower valuations, makes Dena Bank a good buy at the current levels.

Dena Bank is currently witnessing handsome business growth. This is evident from the fact that as on June 30, 2012, its total deposits increased by 26 per cent to Rs 79736 crore and the advances increased by 39 per cent to Rs 59641 crore on a YoY basis. The robust growth in advances was due to high lending that resulted in growth of around 70 and 31 per cent in the agriculture and MSME segments respectively.

The asset quality of the bank strengthened as the gross and net NPAs of the bank contracted. Its gross NPAs decreased by six basis points to 1.8 per cent, while the net NPAs decreased by seven basis points to 1.01 per cent YoY. Even on a sequential quarter basis, the net NPAs remained stable, which is commendable. Further, the provision coverage ratio (PCR) stood at 75.62 per cent, which should be considered as decent enough.

The bank did face some sought of pressure on the margin front. On a sequential basis, the Net Interest Margin (NIM) of the bank decreased by 15 basis points to 3.06 per cent. However, this improved by 16 basis points on a YoY basis. The management has further guided they would maintain the NIM above three per cent. As of 30th June, 2012, the Capital Adequacy Ratio (CAR) stood at 12.35 per cent, with the Tier 1 CAR at 8.33 per cent. According to the management, the bank has no plans of raising capital to meet the Basel III norms as of now, as there is plenty of time before the deadline kicks in.

The bank opened 16 new branches in the June 2012 quarter, taking its total network to 1358 branches and 545 ATMs. The management plans to open 100 new branches during FY13. According to Nupur Mitra, Chairperson and Managing Director of the bank, the management is focussing on core banking activity, which will help the bank to grow further. In terms of guidance, Mitra expects an 18 per cent growth in deposits and a 20 per cent growth in terms of advances in FY13, which is above the RBI’s projection of 15 and 17 per cent respectively.

In the June 2012 quarter, the bank’s Net Interest Income (NII) increased by 37 per cent to Rs 446 crore and it posted a robust net profit growth of 42 per cent to Rs 238 crore on a YoY basis. As on June 30, 2012, the ratio stood at 39.26 per cent as against 46.10 per cent during the same period last year, which shows that the bank is operating in an efficient manner.

The board of directors recommended a 30 per cent dividend (Rs 3 per share) for FY12, which translates into a dividend yield of around 3.5 per cent. On the valuations front, the stock is available at a price to book value of around 0.65x, which should be considered a fair valuation. We believe that Dena Bank presents a good buying opportunity to garner better returns over a long-term horizon.