Turnaround Restructuring
Turnaround story : Development Credit Bank
Auteur : expressmoney
Du : 03/10/2006
A sweeping look at the financials of Development Credit Bank only throws up reasons to reject any equity investment in it. Mounting losses for the last four years, that too on declining income and rising operating expenses, non-performing assets at alarming levels, capital levels under mighty strain, return ratios of a loser all in all, a business going downhill like nobody’s business. But a closer look shows this bank with a rather unflattering past turned the corner this year and the signs are, with its IPO (initial public offer) adding Rs 157-186 crore to its capital base, things will get even better for it.
Turnaround done…
The genesis of the turnaround can be traced to the new management that took over operations at DCB last year, and focussed on controlling costs and ensuring loans went out only to credit-worthy borrowers. So, the bank, which reported a net loss of Rs 80.5 crore on total income of Rs 357 crore in 2005-06, reported a net profit of Rs 4.3 crore in the first quarter (April to June) of 2006-07, even as its income increased 11 per cent over the previous corresponding period to Rs 99.9 crore.
DCB is looking to expand and improve further, for which it needs to shore up its capital base. In February, the bank raised about Rs 52 crore from a clutch of private investors. What’s notable is that one of these investors was HDFC, which currently holds 4.9 per cent of DCB’s pre-issue equity capital. HDFC is the promoter of one of India’s best banks, which raises the possibility of DCB merging with it down the line.
That private placement increased DCB’s capital and gave it much-needed cash to clean up its balance sheet. Its capital adequacy ratio how much capital it has for every Rs 100 of loans given stands at 9.4 per cent, which is just above the regulatory minimum of 9 per cent. If its IPO goes through at Rs 26, the upper end of the price band, this ratio will increase to a healthy 17 per cent. This will also give enough scope for the bank to raise further capital in the form of tier-II bonds and preference capital, taking care of its asset growth for the next two to three years.
…now growth
Capital in place, growth shouldn’t be a problem. With 72 branches and five extension counters in 26 cities, growing its loan book, by lending to retail and to SMEs (small and medium enterprises), should not be that difficult. Besides, the bank has 101 ATMs, which should help it retain old deposit holders and attract new ones.
Over the last three years, DCB had seen a decline in asset growth, but with the new management in place, the bank is focussing on new consumer loans, as well as selling third-party products like insurance and mutual funds.
Simultaneously, the bank has been writing off its bad loans non-performing assets (NPAs) have fallen from 9.4 per cent in 2002-03 to 4.1 per cent in the first quarter of 2006-07. The bank says by doing greater provisioning, it will bring down its NPAs to below 3.5 per cent at the end of the financial year. That’s still higher than some other smaller banks, but it is at manageable levels.
So, the all-important question: should you buy the bank’s stock at Rs 22-26? Post-issue, at the upper end of the price band, the bank’s book value per share will increase to Rs 22.3. Adjusting for NPAs, the adjusted book value works out to Rs 16.6, which gives a price-to-book value of 1.6 times. DCB’s projected earnings per share for 2006-07 of Rs 1.2 gives a forward PE of 18.3-21.7, which is comparable to some of the larger private sector banks in the country. But as the bank grows in size and lowers its operating expenses, that PE should fall to more reasonable levels. With a smaller base that makes it easier to scale up, greater capital that provides the cushion to grow, a new management that has done well so far and the presence of HDFC, DCB makes the cut over the long haul.
Related Articles
[28/05/2009] PEI Asia, July/August 2009, Mapping the turnaround market
[14/03/2007] March 28-31 Dallas TMA Conference Updates Corporate Renewal Professionals on Best Practices
[01/03/2006] KPMG adds turnaround executives to its restructuring practice
[01/02/2006] Chief Restructuring Officers: The Lender’s Secret Weapon
[01/11/2005] Northern California Turnaround Pioneer Receives ACTP Lifetime Achievement Award
[01/11/2005] Tom Ridge and Cokie Roberts Speak at Turnaround Management Association's Chicago Convention, Oct. 20-21
[01/11/2005] Turnaround Professionals to Take on Gulf Coast Business Renewal Project
Turnaround done…
The genesis of the turnaround can be traced to the new management that took over operations at DCB last year, and focussed on controlling costs and ensuring loans went out only to credit-worthy borrowers. So, the bank, which reported a net loss of Rs 80.5 crore on total income of Rs 357 crore in 2005-06, reported a net profit of Rs 4.3 crore in the first quarter (April to June) of 2006-07, even as its income increased 11 per cent over the previous corresponding period to Rs 99.9 crore.
DCB is looking to expand and improve further, for which it needs to shore up its capital base. In February, the bank raised about Rs 52 crore from a clutch of private investors. What’s notable is that one of these investors was HDFC, which currently holds 4.9 per cent of DCB’s pre-issue equity capital. HDFC is the promoter of one of India’s best banks, which raises the possibility of DCB merging with it down the line.
That private placement increased DCB’s capital and gave it much-needed cash to clean up its balance sheet. Its capital adequacy ratio how much capital it has for every Rs 100 of loans given stands at 9.4 per cent, which is just above the regulatory minimum of 9 per cent. If its IPO goes through at Rs 26, the upper end of the price band, this ratio will increase to a healthy 17 per cent. This will also give enough scope for the bank to raise further capital in the form of tier-II bonds and preference capital, taking care of its asset growth for the next two to three years.
…now growth
Capital in place, growth shouldn’t be a problem. With 72 branches and five extension counters in 26 cities, growing its loan book, by lending to retail and to SMEs (small and medium enterprises), should not be that difficult. Besides, the bank has 101 ATMs, which should help it retain old deposit holders and attract new ones.
Over the last three years, DCB had seen a decline in asset growth, but with the new management in place, the bank is focussing on new consumer loans, as well as selling third-party products like insurance and mutual funds.
Simultaneously, the bank has been writing off its bad loans non-performing assets (NPAs) have fallen from 9.4 per cent in 2002-03 to 4.1 per cent in the first quarter of 2006-07. The bank says by doing greater provisioning, it will bring down its NPAs to below 3.5 per cent at the end of the financial year. That’s still higher than some other smaller banks, but it is at manageable levels.
So, the all-important question: should you buy the bank’s stock at Rs 22-26? Post-issue, at the upper end of the price band, the bank’s book value per share will increase to Rs 22.3. Adjusting for NPAs, the adjusted book value works out to Rs 16.6, which gives a price-to-book value of 1.6 times. DCB’s projected earnings per share for 2006-07 of Rs 1.2 gives a forward PE of 18.3-21.7, which is comparable to some of the larger private sector banks in the country. But as the bank grows in size and lowers its operating expenses, that PE should fall to more reasonable levels. With a smaller base that makes it easier to scale up, greater capital that provides the cushion to grow, a new management that has done well so far and the presence of HDFC, DCB makes the cut over the long haul.
Related Articles
[28/05/2009] PEI Asia, July/August 2009, Mapping the turnaround market
[14/03/2007] March 28-31 Dallas TMA Conference Updates Corporate Renewal Professionals on Best Practices
[01/03/2006] KPMG adds turnaround executives to its restructuring practice
[01/02/2006] Chief Restructuring Officers: The Lender’s Secret Weapon
[01/11/2005] Northern California Turnaround Pioneer Receives ACTP Lifetime Achievement Award
[01/11/2005] Tom Ridge and Cokie Roberts Speak at Turnaround Management Association's Chicago Convention, Oct. 20-21
[01/11/2005] Turnaround Professionals to Take on Gulf Coast Business Renewal Project