The Turnaround story of Development Credit Bank

Stocks

oi-Shoaib MD

By Shoaib Md

Published: Thursday, June 2, 2011, 15:07 [IST]

Development Credit Bank witnessed a turnaround story as it has evolved from a high stressed asset laden, loss making bank in FY08 to a profitable bank in FY11. It has been strategically led for two years of restructuring, revamping and consolidation of business.

So far the bank has presence across 10 states and two union territories. Its promoter the Aga Khan Fund for Economic Development (AKFED) holds over 23% stake.

To its credit the AKFED had co-promoted HDFC in India in the late seventies. The HDFC Bank is now a primere bank in the country across areas such as retail, sme and corporate banking market segments in chosen geographies.

A closer look of details reveal that retail deposits increased from 51.95% in FY 08 to 81.17% in FY 11. For the same period, the loan book increased from INR 33.8 crore in FY08 to INR 129.3 crore in FY 11, registering 56.23% CAGR.

The bank was also successful in reducing their non-performing assets (NPA). DCB saw its net NPA reduce from INR 127 crore in FY 09 to INR 41.2 crore in FY 11. An excellent control over bad assests.

DCB had reported a loss of Rs 78.45 crore profit in FY10, where as for the full year of FY11 it reported Rs 21.43 crore profit. The net interest margin (NIM) for the whole year stood at 3.13% against the expectation of 2.8%.

The bank was under distress for two years and has now turnaround from its prevuious precarious situation.

With such signs of improvement, the bank could be seen as the could easily been considered as a dark horse amongst the roaring bulls.

The high promoter stake, more than the allowed limit, has resulted in a face-off between the regulator and the bank. The AKFED holds around 23% of DCB meanwhile RBI has set the limit of 10%.

On this count DCB's management has promised that AKFED will lower it gradually when the bank will raise more funds this year.

Valuations

The company is currently trading at P/E of 55.84x of FY 11 earnings which is extremely costly. The company is trading at the current price of Rs 58.20.

Nonetheless it is turnaround story and hence should be followed closely on a quarterly basis for next few quarters. So that a good opportunity is not missed. The biggest proof that it has a growth story is the fact that Reserve Bank of India (RBI) has allowed the bank 10 branch licences.

If you already hold the stock, then maintain your position but buy new stock only at a better price and valuation.

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