| Development Credit Bank should surely turnaround thanks to the new management. But the issue is not for people looking for quick gains.
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| The public issue of Development Credit Bank (DCB) could not have been better timed, given the improving sentiment for banks. Sliding oil prices and a pause to the two year rate hiking spree by the US Federal Reserve has eased concerns of higher inflation and interest rates, which is great news for banks.
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| For DCB, it is critical to raise money right now because its capital adequacy ratio (CAR) is fairly low at 9.39 per cent and just above the statutory limit of 9 per cent. Post-issue the bank's CAR would improve to 19 per cent. The issue comes at a price band of Rs 22-26.
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| At the upper end of the band, the issue is valued at 1.1x and 0.96x price-adjusted book value (P/ABV) for FY07E and FY08E respectively.
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| Says Ajit Dange, UTI Securities, "The aggressive pricing of the issue could be justified only if one is willing to look beyond FY09 by which time the bank could see substantial improvement in performance."
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| This issue may thus may not be worth betting on for quick listing gains. Since the bank is still loss making and will take time to turnaround, the issue may not be worth betting on if one is looking for quick gains.
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| If there is one reason why analysts feel the issue may be worth a shot it is because of the credibility that the new management brings to the table.
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| Chairman Naseer Munjee served in IDFC and HDFC earlier while managing director Gautam Vir had his stint at Citi Bank, Bank of America and Standard Chartered. That bank counters are buzzing after going through turmoil over the past few months is also another positive.
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| After having converted itself into a private sector bank from a co-operative bank in 1995, DCB is trying to do all that new generation private sectors banks do.
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| Currently, the banks runs 72 branches on core banking solutions, has 101 ATMs and offers mobile and internet banking. DCB plans to increase its number of branches to 100 by FY08.
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| Already DCB has a strong regional branch network concentrated in Maharashtra, Gujarat and Andhra Pradesh, which makes it a strong candidate for take-over, when consolidation gathers pace.
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DCB was profit making till FY02, but has been consistently making losses since then due to a combination of factors. Capital constraints, high cost bulk deposits, higher proportion of corporate advances and high non-performing assets sank the company into losses.
| SUNNY DAYS AHEAD? | | Operational parameters | FY05 | FY06 | % chg | | Business (Rs crore) | 6046.60 | 4991.30 | -17.45 | | CASA ratio (%) | 22.70 | 32.10 | "� | | Net NPA(%) | 6.16 | 4.50 | "� | | NII (RS crore) | 69.70 | 75.15 | 7.80 | | NIM (%) | 2.14 | 2.38 | "� | | Other Income (Rs crore) | 91.28 | 80.29 | -12.04 | | Cost-Income ratio (%) | 102.60 | 112.70 | "� | | Operating profit (Rs crore) | -4.10 | -19.67 | "� | | Net profit (Rs crore) | -72.99 | -80.59 | "� |
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| But thanks to the new management, the bank is showing signs of turnaround. In Q1FY07, the bank posted as a profit of Rs 4.3 crore.
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| The new management has decided to focus on current and savings bank accounts (CASA) to bring down its cost of funds, which are currently high at about five per cent. The bank will focus on high yielding SME clients and consumer banking.
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| Says Gautam Vir, "Our strategy is to offer superior customer service and have efficient and trained people in order to achieve higher CASA ratio, more SME clients and an aggressive NPA reduction program." CASA ratio improved from 22.71 per cent in FY05 to 32.06 per cent in FY06, resulting in improvement of spreads from 2.14 per cent to 2.38 per cent in the same period.
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| While the management is saying and doing all the right things, one may not see results in a hurry. The bank continues to hold a very high proportion of gross and net non-performing assets (NPAs) of 14.5 and 4.05 per cent respectively as on June 2006, despite write-offs and recovery.
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| Thus, in the medium term, higher provisioning for NPAs could eat up its profits. Further, the bank still holds a higher proportion of its investments in the "available for sale" and "held for trading" category, which requires to be marked to market exposing it to volatility in interest rates. This does not seem to be a concern for now since the interest rate trend is no longer bearish.
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| Since there is a lot of headroom for the bank to raise capital further, there is a possibility of dilution in future. High attrition in the top management is another threat to the growth of the bank. Nevertheless, "Improved credit risk management system would help control and bring down NPA levels going forward, while the new capital would help the bank to grow its assets size," points out Gulati.
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| The Mumbai-based bank, DCB, promoted by Aga Khan Fund for Economic Development (AKFED) is offering 7.1 crore shares to the public and its employees, to raise Rs 157-185 crore.
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| In February 2006, the company had placed 1.1 crore shares at Rs 45 each, amounting to Rs 52 crore to HDFC, Khattar Holdings and Amtel Finance. Now the bank plans to issue another 2.43 lakh shares at Rs 10 each to the above investors.
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| Post issue, the promoters' stake will come down from 58.43 per cent to 30.13 per cent. In order to abide by the RBI guidelines, wherein shareholding by any individual entity/group in a bank should not be in excess of 10 per cent, AKFED will have to dilute its stake to 10 per cent. This augurs well since there is a distinct possibility of roping in a strategic investor.
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To subscribe to DCB, one must take a giant leap of faith in the management and be willing to wait till performance comes through. The market has rewarded turn around and concept stories like Centurion Bank of Punjab and Yes Bank in the past. The same may be the case with DCB as well. The issue looks cheaper than its peers.
| PEER PRESSURE | | Price to Adj Book Value(x) | FY07E | FY08E | | DCB | 1.08 | 0.96 | | Centution BOP | 2.90 | 2.50 | | Federal Bank | 1.30 | 1.10 | | South Indian Bank | 1.00 | 0.80 |
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| However, DCB may not be the best way to play the optimism in the banking sector as such. Kannan Shah of Networth Stock Broking recommends ICICI Bank, Bank of Baroda and Allahabad Bank instead, to play the pure growth story in banking.
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| Issue closes: October 6, 2006 |
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