Stock pick from the banking sector
2/9/2012 9:30 PM Thursday
With interest rates expected to reverse, the banking sector seems to be getting back in the limelight. One simple reason for this is that the Net Interest Margin (NIM) for banking players will improve, and their bond portfolio will probably reflect a mark-to-market profit. Most of the PSU banks were beaten down significantly in CY2011, but some of them have bounced back in 2012 and we believe that these provide a good buying opportunity. However, one has to be cautious while selecting the scrips.
Dena Bank is one banking company that is well placed to capitalise on the positive vibe currently surrounding the sector. The bank has seen good business growth (loans and advances) and an improvement in its asset quality. Apart from this, it is also available at a price-to-book value of 0.78x versus it peers like Corporation Bank (0.98x), Vijaya Bank (0.84x) etc. The stock also fetches a good dividend, which helps investors to get additional returns over the usual capital appreciation. Its average dividend yield over the past two years is 2.67 per cent, which is very good.
In a high interest rate regime, the asset quality of banks usually gets impacted. Contrary to this though, Dena Bank’s asset quality has shown an improvement, which is commendable. For the December quarter of FY11, the net NPAs of the bank contracted by 16 basis points to 1.1 per cent on a YoY basis.
Further, in the December 2011 quarter, the Net Interest Margin (NIM) increased by six basis points on a YoY basis to 3.30 per cent. This was primarily because the cost of deposits increased by 134 basis points, while the yield on advances increased by 186 basis points. We believe that the NIM of the bank will further improve going ahead, as the interest rate cycle is expected to reverse in the coming quarters. Despite making a higher provision, which increased by 28 per cent to Rs 206 crore, it posted a 20 per cent growth in net profits to Rs 186.68 crore.
As on 31st December, 2011, Dena Bank’s Capital Adequacy Ratio (CAR) stood at 11.58 per cent, while the Tier 1 CAR stood at 8.54 per cent. Recently, the bank reported to the exchange that its board has approved an issuance of equity shares to a maximum of 5 per cent of the post issue capital of the bank to LIC. We believe that this will soon go through and the bank will get fresh funds, which will further help in maintaining a good CAR and further expansion activity.
The bank’s advances grew by 15.70 per cent to Rs 47928 crore as on 31st December, 2011, while the deposits grew by 13 per cent to Rs 68339 crore on a YoY basis. The advances are growing in line with the RBI’s projection of a 16 per cent growth for FY12. Its exposure to the aviation and telecom sectors put together is less than 2 per cent of the total advances, which will further benefit the bank.
It is currently available at a P/E of 4.40x and a price-to-book value of 0.78x, which is a very decent level. Fair valuations and a good dividend yield, coupled with improving asset quality and good business growth makes Dena Bank a good buy at the current levels. We believe that the scrip would generate handsome returns over a period of time.
|LAST FIVE QUARTERS (Rs / Cr)|
| ||Dec ' 11||Sep ' 11||Jun ' 11||Mar ' 11||Dec ' 10|
|Sales ||1,676.24 ||1,633.82 ||1,528.18 ||1,407.49 ||1,289.89 |
|Total interest expense ||1,135.04 ||1,118.93 ||1,081.63 ||936.3 ||823.47 |
|Gross profit ||393.17 ||352.01 ||307.74 ||343.12 ||316.43 |
|Provisions Made ||124.33 ||81.33 ||65.49 ||123.82 ||85.69 |
|Net profit/Loss ||186.68 ||193.58 ||168.09 ||157 ||155.21 |
|Equity capital ||333.39 ||333.39 ||333.39 ||333.39 ||286.82 |
|SHARE HOLDING PATTERN AS ON: || 31/12/11|
|Indian Promoters ||58.01 |
|FII/DII ||19.43 |
|Individual ||17.21 |
|Bodies Corporate ||4.84 |
|Others ||0.53 |
|Total ||100 |
|Best of Last One Year|
|Name of Company||Reco.||CMP (Rs)||Gain |
|Amar Remedies ||87.00 ||151.00 ||73.56% |
|Bengal Tea & Fabrics ||58.00 ||26.00 ||58.00% |
|Ind-Swift Laboratories ||79.10 ||120.00 ||51.71% |
|Tera Software ||48.50 ||73.50 ||51.55% |
|Himalya International ||20.00 ||25.80 ||29.00% |
|JK Lakshmi Cement ||48.50 ||61.50 ||26.80% |
|Chambal Fertiliser & Chemicals ||69.00 ||86.50 ||25.36% |
|Power Grid Corp. of India ||96.00 ||108.00 ||12.50% |
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