Development Credit Bank - IPO

(Hindu Business Line 01.10.2006) Rating - Avoid Small Size Bank: DCB is a small bank with operations in Gujarat, Maharashtra and Andhra Pradesh. With a business volume of about Rs.5,500 core, it has a nework of about 70 branches. Capital constraints over the past few years have placed a check on its growth. Historically, the bank has had a high level of NPA (non-performing assets). Higher provisioning has resulted in the shortage of capital to fund its balance-sheet growth. Over the last two years, DCB recorded a negetive growth in its advances. From Rs.2,510 crore in 2004, advances fell to Rs.1,867 crore in 2006. As a result, the net interest income has been declining and the bank has been making losses since 2004. On the other hand, DCS's cost of funds, at about 5.5 percent has been on the high side owing to greater proportion of term deposits. This, perhaps, explains its low net interest margins at 0.2 percent. Revitalisation Plan: The public offer is part of the management's revitalisation plan to address issues of asset quality, and operating costs as also to foucs on core business. As on March 31, 2006, DCB had a net NPA level of 4.5 percent on its books. This is far higher than industry average of about one per cent. Bringing the NPA level to industry standards is likely to be an uphill task. DCB expects to expand its branch network grow to 100 by 2008 to garner low-cost deposits and step up its exposure to cosumer assets. Low-cost deposits make for 32 per cent of its total deposit mix. That the savings bank deposits have been growing at a CAGR of about 20 % over the last three years is an encouraging sign. Its loan book is also undergoing a change. Traditionally, DCB has been active in commercial and corporate lending. Exposure to this segment constituted 89 per cent of its outstanding loans in 2003. However, since than, this proportion has fallen gradually to 57 percent as on March 31, 2006. The bank has made up for the fall by increasing its exposure to the retail sector. From a low three per cent in 2003, the share of housing and retail loans has risen to 37 per cent in 2006. The last three years have seen the retail assets clock a CAGR of over 90 percent, It is unlikely that the bank will sustain this pace of growth. Further, for most new private sector banks, retail loans still account for 30-35 % of the total portfolio, though they have added assets at a scorching pace over the last few years. Given its already high pro- portion of retail loans, DCB is likely to see some stagnation in the segment. Liquidity and interest rate risk: The liquidity position of the bank also does not offer a great degree of comfort. Maturing liabilities of the Bank (short term) far exceed the assets. This means if the bank is not able to find new deposits or is unable to roll over existing deposits, the liquidity position may be affected. This has to be viewed particularly in the context of the bank's deposits falling 19 % in the last one year. The Bank has about 30 % of its investments under available for sale category. Although the larger view is that interest rates are likely to stabilise, any hardening in the cycle is likely to expose bond book to mark-to-market losses. Other Risks: According to the offer document, there is a contingent liability of Rs.1,953 crore towards forward exchange contracts. If this materialises, it is likely to have an adverse impact on its profitability. Though the management intends retaining the individual identity, the possibility of a merger with a larger bank cannot be ruled out in the long term. Although DCB has made a profit of Rs.4 crore in the June quarter, it remains to be seen whether this will be sustained. But for its branch network, which carries a scarcity premium, there may not be much value for the acquirer in the event of a merger\takeover. As such, the risk of an unremunerative deal for the shareholders also remains high. Richly Valued: DCB is offering 7.1 crore shares in the price band of Rs.22-26. At the upper end, the stock is valued at 1.4 times its book value. Although DCB is categorised as a new private sector bank, considering its size and business mix, we think it would be appropriate to compare it with old private sector bank. Karnataka Bank, City Union Bank and Federal Bank are quoting at a P/BV of about 1.3. DCB's valuation, thus appears steep, The risks are likely to outweigh the opportunities, thus limiting the upside. Offer Details: DCB proposes to mop up about Rs.157-186 crore through this issue and use the same to fund capital requirements. Post-issue, the promoters' stake would come down to 30% from 58% now. JM Morgan Stanley and Enam Financial Consultants are the lead managers to the issue, which opened on September 29 and closes on October 6.

SBI associates business

Bank, Deposits, Advances, Total Business SBH- 36,061 23,043 59,104 SBP- 32,718 23,951 56,669 SBT- 27,050 20,376 47,426 SBBJ- 22,735 17,107 39,842 SBM- 17,898 13,281 31,179 SBS- 14,375 9,090 23,465 (Rs.in crore by August-2006) (Business Line 30.09.2006)