Development Credit Bank - Fundamentally weak but technically sound

Development Credit Bank [ DCB ] raised INR 1.86 billion @Rs.26/ per share via its IPO in 2006. The issue was over subscribed 36 times.

DCB is a new generation private sector bank, DCB is the preferred banking services provider across 80 state-of-the-art branches across 10 states and two union territories. The bank opened its 1 st micro – finance branch in Gujarat during 2008. In 2009, DCB was adjudged the fastest growing Bancassurance Channel of Birla Sun Life Insurance. Very recently the bank has received permission to open two semi-urban/rural branches namely –one in Netrang, Bharuch and another one at Mandvi, Surat.

Strong Promotor
DCB has deep roots in India since its inception in the 1930’s. Its promoter the Aga Khan Fund for Economic Development (AKFED) holds 23.10 per cent stake.- BSE site. AKFED is an international development agency dedicated to promoting entrepreneurship. It had co-promoted HDFC in India in the late seventies

The men behind the money

• Mr.Nasser Munjee – the track record of DCB’s Chairman is simply fantastic. He was the Ex-Executive Director of HDFC and was instrumental in setting up IDFC.
• Mr. Murali, CEO has been recently inducted and he’s an Ex- Stanchart Executive
• Mr.Bharat Sampat, CFO has 24 years rich banking experience.
• Mr.K.S. Ramdas, He is Head of Corporate Banking & SME -30 yrs experience.

Not just a Bank, a Financial Supermarket
Apart from traditional banking products, DCB offers Investment Banking [ like demat, mutual funds, general/life insurance etc ], Forex Services, Housing Loans, Personal Loans, Corporate Banking & Trade Fin ance.and thus making the product offering complete

Adequately Capitalized
The Capital Adequacy under Basel II norms stood at 13.80 per cent for the quarter 30 June 2010 as compared to 13.22 per cent for quarter ended 30 June 20009. Since Basel II takes into account credit risk, market risk and operational risk, we may safely consider DCB’s capital to be adequate considering the fact that the minimum prescribed norm for private sector banks is 10 per cent.

As per RBI guidelines no entity or group can hold over 10 per cent stake in a private sector bank. Accordingly, DCB had submitted a detailed roadmap to the Reserve Bank to minimize the promoter holding to 10% by March, 2014.

Fast Forward
Now if we ponder over the following aspects, one can pretty well conclude that there is a lot of hidden potential that can get translated into higher share price if the targets envisaged by the bank are hit :

• Aiming to return to the profit path by the third quarter of FY 11
• Restrategising its business model by giving more thrust to SME and retail business
• It has targeted a 20% growth in both deposits and advances in the current fiscal as against 4% and 6% respectively in last year.
• The bank has a gross non-performing asset level of around 8.7% and a net NPA ratio of 3.1%. It aims to reduce these numbers to 6% and 2%respectively by the end of this financial year,
• DCB has a CASA of 36 % which is good as Axis has a CASA of 40 per cent!

Proposed re-alignment of Loan book [ figures in % ]

Segment	Current	Proposed
Retail	40	33
Corporate	33	25
SME	20 plus	40 plus

Dismal performance
The bank posted a lower net loss of Rs eight crore in the quarter ended 31 March as against a loss of around Rs91 crore in the same period in Q4 of previous year while its losses for the full financial year stood at Rs 78 crore as against Rs88 crore in FY 09.

I Q results – fiscal 2010-11
DCB has just announced I Q results for fiscal 2010-11. The total income was at Rs.149.86 crores for Quarter ended 30.6.2010 against Rs. 147.05 crores for previous Quarter ended 30.6.2009. The Net Profit [ Loss ] was [ Rs.2.90 crs ] for the quarter ended 30.6.2010 against [ Rs.35.27 crs ] for quarter ended 30.6.2009.

The small-cap private sector bank's current equity is Rs 199.98 crore. Face value per share is Rs 10. The CMP as at the time of writing this was Rs.50.40 / share, up by Rs.1.65 / 3.38 per cent. The 52 week range was Rs.53 – 27.50.

US alone accounted for as many as 60 banks failures during 2008-09, costing the FDIC Deposit Insurance Fund a whopping USD 25 billion.

Be rest assured that despite SLR of 25 per cent, CRR of 6 per cent and stringent Capital Adequacy norms, the Indian banking sector will grow from strength to strength. And DCB will soon turn from red to black.

Conclusion :

Going forward the share price will probably continue to rise as the expected good news starts to ooze out gradually and half the party will be over by then. So, why not participate in the party before all the guests start crowding in! After all, the markets punish late entrants by doling out just the left overs.

Indeed, DCB cannot be considered a buy on fundamentals but the fundamentals are gradually and radically undergoing a change that is bound to change the sentiments for this scrip in due course of time.

The techinicals of DCB are pretty good. The scrip is trading above its 200 DMA of Rs.39 Besides, DCB reflects an uptrend on a 2, 5 and 20 day basis. The scrip has just crossed its Resistance I level of Rs.49.64. The scrip finds support at Rs.47.51/share.

Incidentally, Sundaram BNP Paribas Equity Multiplier Fund just bought 1,677,436 shares of DCB at Rs 48.19 a share..

So, based on technicals, one may take up a small position in this scrip but going forward one would be able to optimize returns by buying on dips and holding on for the medium/long term. And let’s not forget that not too far off Indus Ind Bank was not doing well and the shares were trading in the range of Rs.35--40 for a long time but today you need to shell out Rs.208.65 per share to be precise!

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd