Dena Bank

THE buzz in the banking industry on a likely consolidation among state-owned banks, after a meeting between finance minister Pranab Mukherjee and PSU bank chiefs, appears to have been the driver for the rise in stock price of Dena Bank. The scrip has gained 31% in November 2009 compared to just 6% gained by the Nifty, with the market viewing the bank as a potential acquisition target for one of the large state-owned banks.

Despite the recent upsurge in price, the stock still remains one of the cheapest banking stocks in terms of valuations. The Dena Bank stock is trading at a price-to-book value (P/BV) ratio of 1.1. Most of the banks are trading at a much higher price than their book values. In fact, top state-owned banks such as State Bank of India, Punjab National Bank, Bank of India and Bank of Baroda are trading at an average valuation of roughly two times their book value. However, Dena Bank, historically, has traded at much lower valuations.

What is disconcerting is the huge fluctuations in Dena Bank’s performance from quarter-to-quarter. For instance, in the past four quarters, the year-onyear growth in profit ranged from 68%, at best in the June 2009 quarter, to 0% in the March 2009 quarter. In fact, on other parameters, the bank’s performance has been better than many of its peers. For instance, in FY09, it posted a net interest margin (NIM) of 2.9%. Even in earlier financial years, its NIM hovered close to 3%, which is considered as a benchmark in the banking industry.

The bank posted a return on assets (RoA) of 1.02% in FY09, which is roughly close to the banking industry average. It reported a capital adequacy ratio of 11.6% at the end of September 2009 which is in line with regulatory norms.

At around 1% of its net advances, its net non-performing assets or bad loans’ asset quality is satisfactory, if not the best in the industry. In a nutshell, the bank’s performance on the basis of these parameters is not a cause for concern. However, its growth rate is one of the lowest in the industry. In the past five financial years, its profit has not even doubled, which makes it one of the slowest-growing banks.

From a strategic investor’s perspective, Dena Bank can offer value with a branch network of 1,120 branches. But from retail investor’s point of view, it seems that, at current levels, the price has factored in synergies of consolidation, to an extent, which makes the current rise in price speculative.

City Union Bank (CUB)

City Union Bank may be small in size, but it has scaled the heights in terms of performance. Investors can consider buying it for long term

CITY Union Bank is one of the most efficient banks in the country. With a network of 202 branches, it is present in many parts of the country but its operations are primarily concentrated in southern India. City Union Bank (CUB) ranked among the top 10 banks in three of the four main parameters. Of the 39 listed Indian banks, CUB stood 7th on efficiency, 10th on growth and 10th in terms of return to shareholders. It is well known that CUB is one of the strongest banks in the country. Our study showed that it is equally good in terms of rewarding its shareholders. The bank has consistently reported net interest margin (NIM) in excess of 3% in the last nine financial years. Only a handful of Indian banks have managed to achieve this feat.

In FY 2009, the bank posted the second highest return on assets (RoA) across listed banks. Only Indian Bank did better. While CUB clocked a RoA of 1.5% in FY 2009, the average RoA of Indian banks was only 1%. This is a key ratio in the banking industry because it explains how efficiently a bank is utilising its assets.

The current fiscal year has been the most challenging for the banking industry since the start of the boom in 2003. For starters, the pick-up in credit slowed down. As per latest Reserve Bank of India data, the growth in aggregate bank credit has slowed to 10.6% year-onyear. Moreover, bankers are still grappling with shrinking spreads, which is an offshoot of tight monetary conditions in the last months of calendar year 2008. Despite such headwinds, CUB managed to grow its loan book at 19% y-o-y at the end of Sept ’09 quarter. Though, its net interest income fell down by 4% y-o-y, it still managed to grow its net profit by 21% in the six months ending Sept ’09. Net interest income is calculated by deducting interest expense from interest earned and is a measure of spread between cost of deposits and yield on advances. In the absence of growth in net interest income, non-interest income, which grew by 59%, came to the bank’s rescue. Meanwhile, the bank has come out with a rights issue in the ratio of one share for every four shares held. The price of one rights share will be Rs 6. The current market price is Rs 25 per share. This shows that there is significant discount embedded in the rights issue. So, it makes lot of sense for investors to subscribe to rights issue. The issue closes on December 16, 2009

VALUATION:

The stock is trading at 1.4 times its book value. Compared historically, the stock is just inches short of its all-time high valuations, as it was trading at 1.6 times its book value in March 2008. However, the banking sector, and CUB in particular, have shown resilience in tough times. Going forward, investors are likely to give more premium to the banking sector in general and efficient banks like CUB in particular. Its peers like Federal Bank, South Indian Bank, Karur Vysya Bank and Indian Bank are trading at an average price to book value multiple of 1.3 times. This shows that City Union Bank’s stock, at 1.4 times price to book value, is reasonably priced. Moreover, the bank consistently pays dividend to its shareholders. At the current price, the dividend yield stands at 2.4%, which shows that the stock offers value to conservative investors as well.