Stock To Buy From Banking Domain: Development Credit Bank

Stock to buy as medium term investment for next one year; Development Credit Bank (DCB) is a definite one. This bank is going thru a significant transformation to address the losses it has suffered in past two years.

DCB is a private sector bank with 80 branches all over India and having a loan book of Rs.3500 crore spread across the corporate, retail and SME segments. The bank has recently cleaned up its books by writing off non performing loans and cutting down exposure to risky assets. Steps have also been initiated to cut down its dependence on wholesale funding and to shore up capital adequacy. The bank is restructuring it's distribution network and to raise non interest income.

For FY 2010, loan book increased by 6% on Y-O-Y basis with stable net interest margin at 2.8%. The bank has also managed to bring down net non performing loans by 80 bps to 3.1% in FY 2010.

Considering all the changes, the bank is expected to break even by third quarter of FY 2011. The stock could be re-rated in stock markets due to significant improvement in its performance in all core areas.

Stock Price & Guidance
Current stock price is in the range of Rs.40-45. The stock price could be Rs.60 in next one year time frame. At Rs.60 target price, the stock valuation would stand at 1.9 times of its expected adjusted book value for FY 2012.