Sector : Banking

Long Term Investment Call

Development Credit Bank Ltd.

CMP : 46 Rating : Buy Target : 64

24-Sep-11

Initiating Coverage

Development Credit Bank (DCB) is a small new generation private sector bank serving ~6 lakh customers with a network of 82 branches and 140 ATMs as of June 11. Its branches are concentrated in western India with 65% of branches located in Maharashtra, Gujarat and Goa. After strategic overhaul in FY09, bank has returned to profitability of INR 214 mn in FY11 from a loss of INR 785 mn in FY10. This remarkable growth was achieved with limited number of branches. Going ahead, on back of branch expansion and strong business growth of ~15% CAGR during FY1113E, we expect bank to continue its profitability run. The growth seems to be achievable due to diversified loan book, efficient retail deposits, reduction in overall costs.
Key Data Year End Face Value (INR) BSE Code Reuters Code Bloomberg Code Shares Outstanding (Mn) Market Cap (INR Mn) 52 Week High/Low BSE Sensex / CNX Nifty 1-Year Average Volume Key Financials NII Operating Profit Operating Profit (%) Net Profit Net Profit (%) Adj. Book Value Key Ratio P/E (x) P/BV (x) ROE (%) ROAA (%) Share Holding Pattern Promoters FII FI/MF/Other Institutes Others 23.08 11.67 1.93 63.32 FY10 1,416
483

Investment Rationale:
Mar

Business growth to pick up... With restructuring of balance-sheet largely in place, we expect a revival in business growth of 15% CAGR over FY11-13E. This will be achieved with management giving greater focus on diversification of its advances with secured retail book. In addition to a larger share of retail deposits (>70% CASA+term) in total deposits on liability front. Hence, NIMs to move to 3.3% in FY13E from 3.1% in FY11, is likely to be led by a better cost of deposits (higher CASA ratio) & focus on high yielding MSME sector in loan portfolio. Branch expansion to drive deposit growth going ahead With limited number of branches (80) management was able to bring back the bank to profitability (INR 214 Mn) & improved its CASA ratio (35%) in FY11. In 2011, DCB has received 10 branch licenses approval from RBI, which we believe to support DCBs business growth going ahead. The expansion of branch network is likely to improve deposit growth by 15% CAGR in FY11-13E and with banks focus on CASA - CASA ratio to improve to 36.46% by FY13E. With end of restructuring, profits are likely to improve further on... With revival in business, DCB's profit is expected to increase by ~57% CAGR during FY11-13E. This will be led by healthy topline growth driven by bank's focus on MSME, reduction in interest costs, improvement in non interest income (focus on increasing fee & trading income). Further bank is also keeping operating expenses in check (~10% CAGR over FY11-13E). We estimate cost-to-income to decline to 61% by FY13E from 71% in FY11, thereby improving profitability. Asset quality to improve on back of higher provisioning There has been a tremendous improvement in DCB's asset quality over the past five quarters, driven by significant reduction in slippages and substantial recoveries/upgradations. With restructuring coming to an end & 90% of total loan book is secured NPA risk has ebb sharply. GNPA is expected to decline further with minimal incremental slippages, healthy recoveries and secured loan growth. As a result, credit cost is estimated to dip sharply. With Tier-1 capital at 11.1%, DCB seems adequately capitalized for medium-term growth.

10
DCB DCBA.BO DEVB IN 200 9,190 76/38 16162 / 4868 5,758,570
(INR mn)

FY11 FY12E FY13E 1,891

861

2,281
1,202

2,985
1,765

-36
-784 -11

78
214 -127

40
490 129

47
828 67

25 FY10 -14.8 1.9 -13.1 -1.3

29

34

38

FY11 FY12E FY13E 54.2 1.9 3.5 0.3 22.6 1.3 6.8 0.6 13.4 1.2 9.6 0.9

Relative Price Performance

100 DCB NSE Nifty

Valuation:
The stock historically traded at higher than 4x its one year forward ABV till Jan 08, slid to 2.5x in mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business & returning to profitability, we expect the stock to command higher multiple going forward. At the CMP stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value (ABV) respectively. We expect return ratios to improve from hereon for the bank i.e. RoE to reach to 9.5% in FY13E from 3.5% in FY11. Thus, we value the bank's business at 1.7x FY13E P/ABV, thereby evaluating it at INR 64. We initiate coverage on DCB with a price

80

60

40

20 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Source: Bloomberg, Unicon Research

recommendation of INR 64, an upside of 40% from the current market price. Unicon Wealth Management www.unicon.in Shweta Rane | srane@unicon.in

Development Credit Bank Ltd.

CONTENTS
Particulars Page

Company Background ..............................................................................................................................................3 Investment Rationale ..................................................................................................................................................5 Concerns ...................................................................................................................................................................10 Financial Analysis .....................................................................................................................................................11 Peer Comparison ......................................................................................................................................................12 Valuation & Outlook ................................................................................................................................................12 Financial Statements ................................................................................................................................................13

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Development Credit Bank Ltd. COMPANY BACKGROUND

Development Credit bank (DCB) is small modern emerging new generation private sector bank. Present since 1930s, DCB is the only co-operative bank in India to have been converted into a private sector commercial bank in 1995. DCB has distribution network of 82 branches across 28 cities and 138 ATMs (as on June 30, 2011). Its branches are concentrated in western India with 65% branches located in Maharashtra, Gujarat and Goa. Its promoter and promoter group, the Aga Khan Fund for Economic Development (AKFED) and Platinum Jubilee Investments Ltd, hold over 23% stake. In 2005 when the bank was recapitalised and new leadership took charge under the aegis of Nasser Munjee as Chairman and Gautam Vir as CEO new strategic decisions were taken which changed the course of the bank. DCB went public in FY06 and has taken a more aggressive stance to grow its business with heavy investment in infrastructure and technology. As a part of new strategy to ramp up the loan portfolio, the bank grew its unsecured loan portfolio with heavy exposure in personal loans, commercial vehicle and construction equipment. During FY09, the adverse economic conditions mounted NPAs for the bank (in unsecured loan portfolio), that affected the profitability during FY09-10. In April 2009, Mr. Murali Natrajan took charge as a CEO & MD & under his aegis entire business was revamped & consolidated to run down the mounting NPAs & to bring DCB to profitability. This was achieved by a change in business strategy with focus on secured lending garnering more CASA & diminution of costs. Since then DCB has evolved itself from loss making bank in FY08 to a profitable bank in FY11. With this positive change in banks growth parameters rating agencies have upgraded their rating guidelines for DCB. Crisil assigned the rating for Long term of BBB + / Stable & for Short term P1 and Fitch assigned the rating of BBB / Stable.

In Existence Since 1930s

1981 Amalgamation of Masalawala Cooperative Bank and Ismallia Cooperative Bank Ltd.

1984 Multi State Cooperative Bank

1988 Acquired Schedules status from Reserve Bank of India

1995 (A)Conversion to Development Credit Bank Ltd. (B)Secured Foreign Exchange Licences & became an Authorized Dealer

2004 Classified as a New Generation Private Sector Bank by the RBI

2006 IPO

Tier | Capital Raising

2005 Private Equity Investment by AKFED (Principal Promoter) of INR 1.38 bn IN March 2005.
Source: Company, Unicon Research

2006 Private Equity Investment of INR 519.9 mn by HDFC and Khattar Holdings and others in February 2006.

2006 Raised INR 1.86 bn through IPO. Issue oversubscribed 35 times.

2007 Preferential Allotment of INR 2.8 bn in Aug 2007 to Al Bateen, TATA Capital, DCB Investments (SVG Capital) and Others

2009 Reised INR 810 mn through QIP in Nov 2009 subscribed by Life Insurance Companies, mutual funds and FIIs

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Development Credit Bank Ltd.

About AKFED
AKFED is an international development enterprise dedicated to promoting entrepreneurship and building economically sound companies. It has around 150 companies and employs over 30,000 people with a turnover of approximately USD 2 bn. AKFED needs to dilute its stake in the bank which stands at 23% at present to less than 10% as per the RBI norms for scheduled commercial banks. The bank has been given time till 2014 by the RBI to reduce its promoter's stake in a phased manner.

Robust Promoter Background and Strong Investor Profile - Shareholding Pattern (June 30, 2011) Key non-promoter shareholders
Promoter & Promoter Group 23% Institutions 14% Bodies Corporate 13% Others (NonInstitutions)* 11%

Shareholding Pattern
Individuals 39%

*Includes Clearing Members (1.27%), Non Resident Indians (2.87%), Foreign Corporate Bodies (6.34%), Directors and their relatives (0.02%)

Al Bateen Investment Co LLC: 3.69% The India Fund, INC: 3.58% Tata Capital Ltd: 3.29% DCB Investments Ltd. (SVG Capital): 2.65% HDFC Ltd: 2.02% Satpal Khattar: 1.62% Sundaram BNP Paribas Mutual Fund: 1.36% The Royal Bank of Scotland PLC as: 1.33% Depository of First State Indian Subcontinent Fund a Subfund of First State Investment Girdharilal Lakhi: 1.23% Macquarie Bank Ltd.: 1.07%

Aga Khan Fund for Economic Development

Principal Promoter
Source: Company Q1FY12 Presentation

DCB Bank is promoted by the Aga Khan Fund for Economic Development (AKFED) AKFED is an international development enterprise. It is dedicated in promoting entrepreneurship and building economically sound companies AKFED operates as a network of affiliates with more than 90 separate project companies employing over 30,000 people. The Fund is active in 16 countries in the developing world

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Development Credit Bank Ltd. INVESTMENT RATIONALE

Business growth to pick up...
With most of the balance sheet restructuring in place, we expect the credit growth to pick up ~15% CAGR during FY11-13E (CAGR -5% during FY08-10) led by SME+MSME, mid corporate & Agri loans. This will aid business growth ~15% CAGR over FY11-13E buoyed by a well diversified loan book and retail deposit based liability franchise. During FY08-10, DCB's business growth contracted by 7% CAGR, mainly owing to new management's (since Apr 09) strategy of risk-averse lending, restructuring & revamping of business. DCB considerably changed its business focus through diversified & secured loan book reducing bank's dependence on bulk deposits & increased the share of retail deposits. Since June 08, DCB completely stopped unsecured personal lending by running down its exposure from INR 7 bn (17% of loans) in FY08 to 85 mn in FY11. DCB also reduced its exposure to commercial vehicle (CV) from 15% in FY08 to 2% in FY11 of total loans. Despite a slowdown in personal & CV loans the assets are gradually growing with diversification strategy (focus on mortgage, mid-corporate, MSME, Agri). This change resulted in DCB returning to profitability in FY11 (PAT of INR 214 mn) after two year consecutive losses during FY08-10.

Advances (INR Mn)

Corporate Q1FY12 FY11 FY10 FY09 0% 20% 40% 60% 80% 100% Retail Agri & Inclusive Banking SME+MSME

Share of Secured & Unsecured Loan (INR Mn)

Secured Loan 40000 30000 20000 10000 0 FY08 FY09 FY10 FY11 Unsecured Loan

Source: Company, Unicon Research

On the asset front, its loan book mix has been systematically spread out with the SME+MSME and agriculture and rural banking (ARB) segment, increasing their share from 4% and 8% in FY08 to 25% and 17%, respectively in Q1FY12. Some measures adopted by DCB to push asset growth are introducing products such as: a) warehouse-based commodity financing, which is focused on priority sector lending and b) cash management and trade finance products to mid-corporate/SME customers, c) wealth management advisory to its retail clients. This will benefit the business growth going forward.

Business Growth
Total Advances % Advances 100000 75000 50000 25000 0 FY09
Source: Company, Unicon Research

Total Deposits % Deposits 40.0% 20.0% 0.0% -20.0% -40.0%

FY10

FY11

FY12E

FY13E

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Development Credit Bank Ltd.

Branch Expansion to drive deposits growth
On the liability front, during FY08deposits to fund its expanded loan book strategy DCB increased its share of bulk deposits, which led to higher cost of deposits of ~8%. However, as part of new management strategy, DCB started reducing its dependence on wholesale deposits to curtail costs since 2009. This was achieved by increasing the share of retail deposits in total deposits (higher incremental share of CASA). The bulk deposits share was brought down from 57% in FY08 to 18% in FY11 and improved the CASA ratio to 35% in FY11 from 24% in FY08. This structural shift has been instrumental in reducing cost of deposits from 6.8% in FY08 to 5.6% in FY11.

Deposit Growth
Total Deposits 100000 80000 60000 40000 20000 FY08
Source: Company, Unicon Research

CASA % 40.0 35.0 30.0 25.0 20.0

FY09

FY10

FY11

FY12E FY13E

Despites CAGR -8% fall in deposits during FY08-10 (due to bulk deposit contraction), the CASA deposits witness a 5% CAGR growth during this period. This remarkable growth was achieved with limited number of branches ~80. Continuing with this liability strategy, we expect deposit base to grow at CAGR 16% during FY11-13E on back of branch expansion (RBI approval of 10 branches) & with focus on CASA - CASA ratio is likely to improve to 36.46% by FY13E. Going ahead, the cost of deposits are likely to be higher (higher deposit rates in the system), however, garnering higher CASA deposits DCB is expected to curtail the costs ~5.8%.

Profits & NIMs to improve further

With influx of new management in April 2009, various initiatives have been taken up to bring back DCB on profitability path & improve it on all growth parameters. With change in management's strategy of reducing unsecured loan book, costs & focusing on CASA, DCB registered a net profit of INR 48 mn in Q2FY11 after two years of consecutive losses (net loss of INR 882 mn & 785 mn in FY09-10 respectively). We expect DCB to continue its business strategy of well diversified secured loan book, focus on CASA & reduction of costs with healthy NII growth. This will result in DCB posting a net profit growth of ~60% CAGR during FY11-13E.

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Development Credit Bank Ltd.

PAT (INR Mn)
1200 828 800 400 0 -400 -800 -1200
Source: Company, Unicon Research

383 214

490

FY08

FY09

FY10

FY11

FY12E FY13E

-881

-784

Post FY09, to restrain mounting NPAs the bank completely curtailed its unsecured personal & CV lending (yielding ~13%) to prevent further stress on its loan portfolio. Due to which the NII contracted resulting in net interest margin declining by 50 bps from 3.1% in FY08 to 2.6% in FY10. However, with change in business strategy of shifting from bulk deposits to low costs deposits, the overall cost of deposits have been reduced to 5.6% in FY11. This helped NIMs to maintain above 3% levels in FY11, offsetting the runoffs of high yielding unsecured loans. Additionally, shifting the loan book from fixed to floating interest rates with low duration gave it re-pricing flexibility.

16% 12% 8% 4% 0%

NIMs 12.7%

Cost of Deposits 13.5% 10.7%

Yield on Advances 10.4% 5.6% 10.7% 5.7% 3.1% 10.8% 6.0% 3.4%

6.8% 3.1%

7.5% 3.3%

6.0% 2.6%

3.1%

FY08
Source: Company, Unicon Research

FY09

FY10

FY11

FY12E

FY13E

Since Q4FY10, NIMs have remained above 3% due to small increase in cost of deposits by altering its liability franchises significantly. Despite interest rates hardening in the system we believe DCB should able to maintain NIMs above 3% by FY13E, because of a) with focus on CASA deposits costs are likely to be contained at ~5.8% in FY12-13E, b) yield on advances to improve to 10.8% with focus on MSME+SME segment, c) CASA ratio to improve ~36.46% on the back of branch expansion.

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Development Credit Bank Ltd.

NIM %
NIMs % ICICI Bank Ltd. HDFC Bank Ltd. Corporation Bank IndusInd Bank Ltd. Dhanalakshmi Bank Ltd. Lakshmi Vilas Bank Ltd. City Union Bank Ltd. Development Credit Bank Ltd. 0
Source: Company Q1FY12 Presentation, Unicon Research

DCB provides services like cash management, trade finance, internet banking & bancassurance etc., which is one of the key drivers of fee income growth. Going ahead, DCB is likely to continue to provide these services to corporate's & MSME+SME segment to increase more share of fee income in non interest income. With bank focus on diversified loan book, we expect MSME+SME segment to generate more fee income for the bank going ahead. Due to its small balance sheet size the trading limits in terms of investment are limited for DCB. It is following the conservative approach with ~80-85% of the investments are held in HTM category. Going ahead, we expect this strategy to continue with marginal trading gains. We expect the non-interest income to grow by 13% CAGR during FY11-13E (15% CAGR during FY08-10).

Non interest income growth

Other Income 2000 1500 1000 500 0 FY08
Source: Company, Unicon Research

% growth 1609 120 80 21 40 0 -40

1737 88 1201 1075 -10 FY10 1121 4 1330 19

-31 FY09

FY11

FY12E FY13E

Asset quality to improve with higher provisioning

Economic downturn of 2008-09 resulted in DCB witnessing higher than industry slippages of ~7.4%, especially in its unsecured loan book. This took the gross non performing assets (GNPAs) & net non performing assets (NNPAs) to 8.8% & 4% respectively in FY09. Since FY09, management has been focused on improving its asset quality by increasing recoveries & written off some of the non performing accounts. The bank has already written-off its book worth INR 770 mn & scaled up its provisions from 56% in FY08 to 85.5% in Q1FY12. The impact of restructuring of balance sheet was visible in GNPAs & NNPAs, which fell to 6.1% & 1% respectively & maintained provision coverage ratio at 84% (much above the RBI limit) in FY11.

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Development Credit Bank Ltd.

Declining GNPAs & NNPAs
Provision Coverage % 10% 8% 5% 3% 0% FY09 FY10 FY11 FY12E FY13E
Source: Company, Unicon Research

GNPAs Sectoral Composition

GNPA % NNPA % 100% 75% 50% 25% 0%

Personal Loans 3500 2800 2100 1400 700 0 Corporate

CV/CE/STVL* Others

FY09 FY10 Q111 Q211 Q311 Q411 Q112

Going forward, we expect asset quality to steadily improve, as 90-95% of the loan book is secured & bank to focus on recovery process. Due to this the credit costs for bank are likely to fall below 100 bps by FY13E. The decline in credit costs is likely to improve bank's profitability & lead ROA progression. We expect the GNPA & NNPA to fall to 3.5% & 0.5% by FY13E.

Fund raising to improve capital adequacy thereby to fuel business growth

In FY10, DCB issued lower Tier II subordinated bonds of INR 650 mn as well as raised QIP of INR 800 mn at INR 32 per share which improved the capital adequacy ratio (CAR) to 14.8% from 13.3% ion FY09. In FY11, the CAR stood at 13.25% with tier I at 11.1% of risk weighted assets. DCB has got approval of its board to raise INR 1.5 bn QIP (expected to be executed in FY12), this would support bank's business expansion going ahead. With abundant tier I capital the bank would not be keen in raising its tier II capital in near future. However, promoter holding in the bank is high as ~23%, which is against the RBI's norms. According to management RBI has allowed DCB to reduce promoter's stake to 10% by FY14 and bank is expected to adhere to it.

CAR (%)
Tier I 20.00 15.00 10.00 5.00 0.00 FY09
Source: Company, Unicon Research

Tier II 14.85

13.30 1.81

13.25 2.15

2.92

12.92 1.85

11.49

11.93

11.10

11.07

FY10

FY11

Q1FY12

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Development Credit Bank Ltd.

Cost efficiency ratios to improve with aggressive cost controls
In FY10, DCB's cost to income ratio was highest among its peers at ~80% on account of balance sheet restructuring which led to fall in net income. Since then, DCB has overhauled various processes like centralized most of its vendors and headcount, which helped it to reduce operating cost from INR 2.2 bn in FY08 to INR 2 bn in FY11. Overall, operating expenses declined 6% CAGR during FY08-10, with employee expenses & other expenditure declining by 3% & 13% respectively during FY08-10. This resulted in cost to income ratio declining to 71% in FY11 from 80% in FY10. We expect the operating costs to increase CAGR 11% during FY11-13E, factoring 10 branch additions & field staff during FY12-13E. With an improvement in top line we expect cost to income ratio improve to ~61.1% by FY13E.

Cost to Income Ratio to decline with growth in business

Cost to Income Ratio 90% 80% 70% 60% 50% FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company, Unicon Research

Cost to Avg Assets Ratio is likely to fall with low operating costs
Cost to Avg Assets Ratio 4.00% 3.50% 3.00% 2.50% FY07 FY08 FY09 FY10 FY11 FY12E FY13E

CONCERNS
Negative macro-economic factors to increase incremental slippages for bank Recent changes in macro-economic fundamentals to pressure the various sectors of the economy. This would result in higher than anticipated slippages for the bank. We believe, growing its loan book without incremental slippages to be a challenge for the bank. Any increase in slippages would impact the profitability of the bank. Fall in credit demand & rising interest rates to hit small banks more Any slowdown in industry growth will drag down the credit demand in the system. Also the higher inflationary environment to negate the retail credit growth. This will have larger effect on DCB than large cap banks. The high interest rates pushed up both lending & deposits rates in the system. With sluggish deposits growth in the system deposits rates are likely to go up pushing up the costs for banks especially negative for DCB. Small size makes a potential acquisition target Large cap banks which are looking to strengthen their footprint in western India, DCB can become a potential target with small balance sheet size & branches.

10

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Development Credit Bank Ltd. FINANCIAL ANALYSIS

Business growth to support profit growth
From losses of INR 784 mn in FY10, DCB returned to profitability in FY11 (INR 214 mn). This was due to a revival of business in terms of change in loan mix, write down of unsecured loan book, focus on CASA and improvement in cost to income ratio. Going ahead, we expect management to continue its current business strategy & expect profitability to improve ~57% CAGR during FY11-13E.

Net Interest income to grow 17% CAGR during FY11-13E

Loan book growth to be driven by balanced mix of MSME+SME, agri & retail segments, while retail deposits drive the total deposit growth in the bank. This will help DCB to register a NII growth of ~16% CAGR during FY11-13E. Also, we expect non interest income to grow at CAGR ~13% in FY11-13E on back of strong fee income growth.

Net Interest Income (INR Mn)

NII 3500 2800 2100 1400 700 0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company, Unicon Research

1739 1196

1972 1416

16% 2985 GR CA 2281 1891

NIMs to improve
DCB has consistently improved NIMs from 2.6% in FY10 to 3.1% in FY11. We expect the CASA deposits to grow ~16% CAGR during FY11-13E & its share in total deposits to improve 36.46% by FY13E from 35% in FY11. This will result from cost of deposits at 5.8% & with bank's focus on MSME sector yield on advances are likely to increase in future. This is likely to improve NIMs ~3.3% in FY13E from 3.1% in FY11.

ROE & ROAA to expand in FY13E

DCB's ROE has improved from (14.3%) in FY09 to 3.5% in FY11, and we expect it to further improve to 9.5% by FY13E with factoring the capital infusion. With change in management strategy & restructuring of balance sheet its ROAA has significantly improved 0.29% in FY11 from -1.48% in FY08, and further we expect it to increase to 0.85% by FY13E.

RoE 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%

Source: Company, Unicon Research

RoAA 1.0% 0.5% 0.0%

FY09

FY10

FY11

FY12E FY13E -0.5% -1.0% -1.5%

11

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Development Credit Bank Ltd. PEER COMPARISON

Dhanlakshmi Bank Lakshmi Vilas Bank City Union bank Ltd. Development Credit Bank Ltd. Price Market Cap (INR mn) P/E* P/BV* RoA* ROE* CASA ratio** NIMs** Branch Business (INR mn) Business per branch 9INR mn) GNPA** NNPA**
S ourc e: Bloomberg, Unic on, * FY13E, ** Q1FY12

76 6,521 11.3 0.7 0.3 6.4 22.2 2.0 275 225,780 821 0.6 0.2

99 9,655 8.2 1.1 0.9 12.8 32.3 3.7 274 201,020 734 2.1 1.0

44 17,936 6.9 1.4 1.6 22.7 19 3.6 259 178,194 688 1.2 0.5

46 9,190 13.4 1.2 0.9 9.5 33.3 3.1 82 102,149 1246 5.9 1.2

Despite the limited number of branches, DCB is ahead of its peers interms of business per branch at INR 1,246 mn, CASA ratio of 33.3%. Also, DCBs NIMs are in par with its peers at 3.1%. However, on the asset quality front bank is lagging behind its peers, but with continuous efforts we believe bank to reduce its NPAs going ahead. We believe DCB can further improve on this parameter, as it returns to profitability in the coming quarters. This efficiency makes a case for DCB to trade at a premium relative its peers. Interms of valuations DCB is trading in par with its other peers at 1.2x of its FY13 book value.

VALUATION & OUTLOOK

DCB has revamped itself since FY09 and with change in management and business strategy we believe DCB to run on growth trajectory going forward. We believe that with thrust on improving NIMs, CASA ratio, better core operating income and return ratios, DCB would be one of the fastest growing Indian banks over next few years. We expect DCB to control its incremental slippages and maintain NIM in the range of ~3.3% levels by FY13E. The stock historically traded at higher than 4x its one year forward ABV till Jan 08, slid to 2.5x in mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business & returning to profitability, we expect the stock to command higher multiple going forward. At the CMP stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value (ABV) respectively. We expect return ratios to improve from hereon for the bank i.e. RoE to reach to 9.8% in FY13E from 3.5% in FY11. Thus, we value the bank's business at 1.7x FY13E P/ABV, thereby evaluating it at INR 64. We initiate coverage on DCB with a price target of INR 64, an upside of 40% from the current market price.

12

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Development Credit Bank Ltd. FINANCIAL STATEMENTS

Profit & Loss Statement Y/E March Inte re st Income Inte re st Expe nses Net Interest Income Othe r Income Operating Income Operating Expense s Operating Profit Provisions and Continge ncie s Profit before Tax Provision for Tax Profit after Tax Balance Sheet Y/E March Sources of Funds Equity Capital Re se rve s & Surplus Net Worth Deposits Borrowings Othe r Liabilitie s Total Liabilities Application of Funds Cash & Balance with RBI Bal. with Banks/ Short Notice Advances Inve stme nts Fixe d Assets Othe r Asse ts Total Assets
Source: Company, Unicon Research

(INR Mn)

Key Ratios Y/E March (INR Mn) Valuation EPS (INR) Book Value (INR) Adj. Book Value (INR) P/E (x) P/BV (x) P/ABV (x) Profitability (%) RoANW RoNW RoAA ROE Cost / Income Ratio Cost / Avg. Earning Assets Yie ld on Advances 10.7 5.2 6.0 2.4 2.6 35.4 -28.2 -10.4 -35.9 -11.0 5.7 3.0 72.3 42.2 9.2 3.3 14.9 11.9 212 10.4 6.1 5.6 2.9 3.1 35.2 33.6 4.3 78.3 -127.3 23.5 17.2 76.1 40.9 6.2 1.0 13.3 11.1 247 10.7 6.6 5.7 2.9 3.1 36.0 20.6 18.6 39.7 128.8 22.0 21.6 76.4 39.8 4.6 0.8 14.5 12.9 273 10.8 7.2 6.0 3.1 3.4 36.5 30.9 21.0 46.8 68.9 24.2 22.8 77.2 37.6 3.5 0.6 13.2 11.7 332 Yie ld on Investme nts Cost of De posits Spre ad Ne t Inte re st Margin CASA Growth (%) Ne t Inte re st Income Othe r Income Operating Profit -14.7 -13.1 -1.3 -13.1 80.6 -12.9 3.5 0.3 3.5 71.4 3.0 5.9 0.6 6.8 66.7 5.7 9.1 0.9 9.6 61.6 -3.9 29.9 24.6 -14.8 1.9 2.4 1.1 30.9 28.8 54.2 1.9 2.0 2.1 35.7 34.0 22.7 1.3 1.4 3.6 39.2 37.7 13.4 1.2 1.3 FY10 FY11 FY12E FY13E

FY10 4,590 3,174 1,416 1,075 2,491 2,008 483 1,210 -727 57 -784

FY11 5,363 3,471 1,891 1,121 3,012 2,152 861 568 293 78 214

FY12E 6,746 4,466 2,281 1,330 3,611 2,408 1,202 658 545 54 490

FY13E 8,433 5,448 2,985 1,609 4,594 2,828 1,765 791 974 146 828

(INR Mn)

FY10 2,000 3,990 5,989 47,874 5,035 2,447 61,367

FY11 2,002 4,186 6,187 56,101 8,607 2,800 73,723

FY12E 2,314 5,939 8,253 68,239 8,749 3,232

FY13E 2,314 6,767 9,081 83,814 9,227 3,633

88,566 105,849

2,914 410 34,597 20,179 1,358 1,909 61,367

4,045 826 42,714 22,950 1,275 1,912 73,723

4,784 871 52,112 27,160 1,492 2,147

5,173 651 64,723 31,488 1,612 2,202

Ne t Profit Cre dit De posit C/D ratio Inve stme nt / De posit Ratio Asset Quality Gross NPA to Adv (%) Ne t NPAs to Adv (%) Capital Adequacy (%) CAR - Tier - I Efficiency (INR Mn) CASA per branch

88,566 105,849

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Unicon Wealth Management www.unicon.in

Development Credit Bank Ltd. RESEARCH RECOMMENDATIONS

Date of Recommendation 15-S ep-11 30-Aug-11 2-Aug-11 18-Jul-11 12-Jul-11 30-Jun-11 16-May-11 4-May-11 28-Apr-11 1-Apr-11 31-Mar-11 29-Mar-11 7-Mar-11 28-Feb-11 3-Feb-11 31-Jan-11 12-Jan-11 31-Dec -10 31-Dec -10 31-Dec -10 22-Dec -10 30-Nov-10 30-Nov-10 18-Nov-10 16-Nov-10 3-No v-10 27-Oc t-10 26-Oc t-10 29-S ep-10 16-S ep-10 15-S ep-10 14-S ep-10 31-Aug-10 27-Aug-10 30-Jul-10 26-Jul-10 14-Jul-10 9-Jul-10 26-Jun-10 23-Jun-10 19-Jun-10 18-Jun-10 17-Jun-10 12-Jun-10 5-Jun-10 10-May-10 30-Apr-10 16-Apr-10 16-Apr-10 16-Apr-10 7-Apr-10 6-Apr-10 5-Apr-10 Company Name S upreme Infrastruc ture India Ltd Persistent S ystems Ltd. Tamil Nadu News Print Ltd KEC International Ltd. V isa S teel Ltd. Tec pro S ystems Ltd. Camson Bio tec hnolo gies Ltd. Ganesh Polytex Ltd. CES C Ltd. Unity Infraprojec ts Ltd. Ro lta India Ltd. West Coast Paper Mills Ltd. Hindusthan National Glass & Industries Ltd. Deepak Fertilisers & Petroc hemic als Ltd. Ceat Ltd. MIC Elec tro nic s Ltd. Diamond Power & Infrastruc ture Ltd. Hathway Cable & Datac om Ltd. Jindal Poly Films Ltd. Allahabad Bank S asken Communic ation Tec h. Ltd. Banc o Produc t Allc argo Global Log istic s Jy oti S truc ture Pennar Industries HS IL Ltd. IDBI Bank MS P S teel and Power Nakoda Textiles Kajaria Ceramic s Go kul Refo ils Aqua Logistic Lakshmi Prec ision S c rews BGR Energ y S ystem Patel Engineering KPR Mills Ltd. IDBI Bank Opto Circ uit BGR Energ y S ystem Ltd. Bioc on Ltd. Emmbi Poly arns Indian Bank Diamond Power & Infrastruc ture Ltd. Man Industries Usher Agro Greaves Co tton Indraprastha Gas Ltd. Heidelburg Cement KEC International Ltd. Piramal Glass Ltd. S etc o Auto mative Den Netwo rks Arshiya International Report Type Investment Idea Sector Construc tions Recommendation Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Ac c umulate Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Ac c umulate Hold Ac c umulate Buy Buy Ac c umulate Ac c umulate Buy Ac c umulate Buy Buy Buy Ac c umulate Buy Buy Buy Buy Ac c umulate Ac c umulate Ac c umulate Buy Ac c umulate Buy Recommended P rice 230.0 309.0 117.0 79.0 59.0 250.0 116.0 62.0 311.0 69.0 139.0 77.0 212.0 152.0 109.0 31.6 193.0 164.0 525.0 225.0 168.0 93.0 155.0 137.0 49.0 141.0 171.0 72.0 15.0 70.0 97.3 59.1 79.8 786.0 416.0 156.0 125.0 243.0 697.0 321.0 15.6 221.0 196.0 85.0 79.0 67.0 233.0 59.0 570.0 97.0 90.0 197.0 204.0 Target 280.0 381.0 161.0 104.0 75.0 300.0 156.0 102.0 411.0 86.0 191.0 95.0 351.0 202.0 149.0 51.0 257.0 227.0 620.0 304.0 226.0 149.0 233.0 171.0 63.0 171.0 228.0 114.0 23.0 88.0 109.0 60.8 91.8 1020.0 480.0 181.0 142.0 293.0 820.0 387.0 26.0 276.0 226.0 102.0 110.0 82.0 290.0 60.0 655.5 111.6 135.0 226.6 291.0

Initiating Co verage Informatio n Tec hnology Initiating Co verage Paper & Paperboard Initiating Co verage Power Transmissio n Investment Idea Investment Idea Investment Idea Metal Material Handling Agri Biotec h

Initiating Co verage Waste Rec yc ling Initiating Co verage Power Investment Idea Investment Idea Investment Idea Infrastruc ture IT / ITES Paper & Paperboard

Initiating Co verage Glass Initiating Co verage Fertilisers Investment Idea Auto Anc illaries Initiating Co verage Led Display & Lig hting Initiating Co verage Power Initiating Co verage Media Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Pac kaging Banking IT / ITES S hipping & Logistic s Power S teel

Initiating Co verage Auto

Initiating Co verage Building Produc t Initiating Co verage Banking Initiating Co verage S teel Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Textiles Ceramic Tiles Food Pro c essing Logistic Fastner

Initiating Co verage Power Initiating Co verage Infrastruc ture Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Investment Idea Textiles Banking Capital Goods Pharmac eutic als Pac kaging Banking Power Anc illary S teel Pipes Food Pro c essing Construc tion Cement Power Transmissio n Pac kaging Auto Anc illaries Media Logistic

Initiating Co verage Healthc are

Initiating Co verage Gas Distribution

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Development Credit Bank Ltd.

Unicon Investment Ranking Methodology
Rating Return Range Buy >= 20% Accumulate 10% to 20% Hold -10% to 10% Reduce -10% to -20% Sell <= -20%

Disclaimer
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