Stock Review: Dena Bank

Despite an impressive financial performance in the last few quarters, Dena Bank's stock has underperformed. The depressed stock movement can be attributed to the recent market turmoil, which saw most smaller bank scrips fall rather sharply compared with their bigger counterparts.

The government's recent decision to infuse fresh capital would help Dena Bank grow its credit base, which should help it sustain the current growth momentum in its earnings in the near term.

The government recently announced that it will infuse . 539 crore of equity capital into Dena Bank. This should help the bank restore its Tier-I capital adequacy ratio to the mandatory 8% from 7.2% in FY10. In FY10, its loan assets grew faster than its equity base, thereby hampering the future growth potential. Its leverage shot up 22 times by March 2010, which necessitated an expansion of the equity base.

The government's initiative to infuse fresh capital will enable the bank to contain its leverage, without affecting its loan book growth. The growth in Dena Bank's advances and deposits was better than its peers during the December 2010 quarter on a year-on-year basis. The Net Interest Margin (NIM) of the bank improved by 80 bps year-on-year to 3.3% in the quarter. This is better than the average NIM of 3% for other banks.

Dena Bank has a high current and savings account ratio (CASA) and is, therefore, well placed to deal with the rising interest rate regime. Further, it has maintained a high asset quality over the last 10 quarters. In the last four quarters, it has trimmed its assets by aggressively writing off bad debts from its balance sheet. As a result, its gross non-performing assets have fallen from 2.5 % to 1.9%
At a price-to-book value of 0.9, the bank's stock trades cheaply, given the average P/B of 1.5 for its peers. The return on asset (ROA) of the bank is 1%, which is in line with most other Indian banks. The only concern for the bank is the relatively lower capital base and its inability to raise capital from other sources. This is expected to improve given the recent capital infusion and the budget announcement of an additional infusion of . 6,000 crore in public sector banks in FY 12.