Comparative analysis of Dena Bank and Karnataka Bank

[Ed. Note – This article does not meet our new editorial guidelines, nor does the company profiled meet our investment criteria. Both will be removed from the site in the future.]

It is the earning season in Indian bourses, no wonder the investors are on the lookout for potential winners. Bank Nifty, the banking share index reflecting latest mood in the banking space has been having a correction after the moving up for the whole week. In this context, a comparative analysis of two midsize banks is presented, Dena Bank (BSE: 532121), and Karnataka Bank (BSE: 532652).

Dena Bank is a public sector bank, where the central government holds the majority of shares (around 55%).  Karnataka Bank is a private enterprise, where the general public owns 51.93% shares and the private corporate bodies own 19.7% and FIIs own21.62%.

Sl. Parameters Dena Bank Karnataka Bank
1 Equity(Million Rupees) 3500 1880
2 EPS  FY2012 March, ( Rupees) 24 13.07
3 EPS  (9months :2012 December) 19.56 14.90
4 Change in annualized  EPS +8.7% +55.2%
5 Current Market Price: (Rupees)Price band:  52 week High-low 9380-128 14770-198
6 P.E.  ratio on latest  annualized E.P.S. 3.7 7.6
7 Net  non productive assets % 1.31 2.19
8 Return on assets % 0.99 0.97
9 Recommendation Buy for long term: Target price: 110-120 Accumulate on dips for long term: Target price: 170-180

(source: bank websites:  and ).

Karnataka Bank is on an expansion spree. It has added a large number of branches to its network in recent months. Its net interest margin has improved from 1.9% to 2.45%, and it hopes to achieve a 3% net interest margin by FY13.The rise in EPS  is an indicator of the dynamic leadership. There was a rumor of a takeover bid recently, which caused prices to flare up.   The prices could settle down around 130-140 in short terms.

While the rate of return on assets is almost same for both the banks, net NPAs are on the higher side for Karnataka Bank. How the bank deals with this issue needs to be watched. Dena Bank enjoys the advantage of low cost (CASA) deposits. Net Interest Margin is around 2.84%.

Downside risk of Dena Bank is minimal. Considering the industry PE of around 18, both the shares may be considered as under priced. Industry leader, HDFC Bank commands a PE of 23 and public sector banks deserve better discounting due to their vast network of branches. But industry watchers are concerned with their asset quality and regulatory issues in private banks, particularly some reports of money laundering.

Market mood will also depend on announcement of key policy rates by RBI. Easing of the inflation figures has brought back the hope that RBI may reduce repo rate and SLR, and thus help industry to reduce the borrowing costs.

Investors in banking space also need to monitor movement of precious metals, as recovery of gold loans may be hampered at lower gold prices. Banking share prices will also depend upon GDP growth rate spurring the demand for the credit. Slow pace of economic recovery and political uncertainty in the election year may adversely impact the investor sentiment.