Dhanlakshmi Bank

Submitted to: Prof S C Bansal IIM Lucknow

Submitted by: Group

Amit Rajvanshi (WMP5005) Manjul Dudeja (WMP5033)

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1 Introduction..................................................................................3 2 External Analysis...........................................................................4

2.1 Industry Classification........................................................................4 2.2 Market Dynamics................................................................................4 2.3 Trend Analysis...................................................................................4 2.4 Porters Five Forces............................................................................6
2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 Rivalry among Competing Firms...................................................................................6 BARGAINING POWER OF SUPPLIERS..............................................................................6 BARGAINING POWER OF CONSUMERS...........................................................................7 POTENTIAL ENTRY OF NEW COMPETITORS....................................................................7 SUBSTITUTE PRODUCTS................................................................................................7

3 Internal Analysis............................................................................7
3.1 PESTLE TABLE....................................................................................7
3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 Political..........................................................................................................................8 Economic.......................................................................................................................8 Social..........................................................................................................................10 Technological .............................................................................................................10 Legal...........................................................................................................................10 Environmental.............................................................................................................11

4 Ratio Analysis..............................................................................11
4.1 DCF Analysis....................................................................................12 4.2 Industry Comparision........................................................................13

5 Conclusions.................................................................................14

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1 Introduction
The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base. The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business process management (BPM) to increase returns on investment, improve customer relationship management (CRM) and employee productivity. For, these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar products.

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2 External Analysis
2.1 Industry Classification
Public Sector Banks: Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines. Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licences to industrial houses as well. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.

Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organisation.

2.2 Market Dynamics

Market Overview The banking industry too has evolved rapidly over the last few years in India due to the availability of cheaper technology and falling communication costs. De-regulation, competition from non-financial players, new compliance requirements, and changing customer expectations has added complexity and challenges to banking systems and processes. Banks, however, face an uphill task in reaching out to the customers in remote locations such as villages. There is a lower level of literacy and access to Internet. Setting up branches involves higher cost and operating expenses, and lower return on investment. Given the 742-million rural population, the penetration of deposit accounts languishes at a deplorable 18 per cent. Growth Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03. The high GDP growth in India is creating lots of job opportunities in urban and semi-urban India and it will go further into rural India increasing the potential for rural entrepreneurships and rural growth with higher per-capita income and savings opportunities. Market potential India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia based on PPP. It is also the second largest among emerging nations.

2.3 Trend Analysis

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The last decade witnessed the maturity of India's financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country.

Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independent. With various changes in the regulatory framework as elaborated below the move to universal banking has started. Deregulation of banking system Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) were brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears. Bank lending norms were liberalized and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. Consolidation imperative Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation. Finally we will come to convergence in the financial sector, the new buzzword internationally. Enabling technology and the need to meet increasing consumer needs is encouraging convergence. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one umbrella. This phenomenon is expected to grow rapidly in the coming years. Where mergers may not be possible, alliances between organisations may be effective. Various forms of bank assurance are being introduced, with the RBI having already come out with detailed guidelines for entry of banks into insurance.

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2.4 Porters Five Forces

2.4.1

Rivalry among Competing Firms

Rivalry among competitors is very fierce in Indian Banking Industry. The services banks offer are more of a homogeneous mix. Banks fight hard to offer the same service at a lower rate and eat their competitors market share. Players use all sorts of aggressive selling strategies and activities from intensive advertisement campaigns to promotional stuff. Even consumer switch ba nk to another if there is a wide spread available. Number of other factors have contributed to increased rivalry elaborated as follows
1.A large no of Banks ( Public & Private ) as well as NBFCs 2.High Domestic market growth rate 3.India is seen as one of the biggest market place for future 4.Low Differentiation in Products and Services 5.Low switching cost for customers 6.Low the loyalty which banks used to enjoy before liberalization. 7.High exit barriers

2.4.2

BARGAINING POWER OF SUPPLIERS

Banking industry is governed by Reserve Bank of India. Reserve Bank of India is the authority to take monetary action which leads to direct impact on circulation of money in the Economy. The rules and regulation lay darn by RBI. Statutory ratios like SLR, CRR are used by RBI to regulate the liquidity with banks. Thus RBI can directly affect the profitability of a bank. Suppliers for banks are depositors who save their money in bank accounts. These depositors may be looking for safety or investments. The power these investors have over bank is limited.

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1. Suppliers of banks are those people who need safety, predictable income at low risk. Banks are the best

place for them to deposits theirs surplus money.

2. There are Few alternative investment profile of similar nature. 3. Banks are subject to RBI rules and regulations. They have to behave in a manner prescribed by RBI.

Flexibility to akes all decisions related to interest rates is limited by RBI.

4. Suppliers are not concentrated and thus their bargaining power is drastically reduced.

2.4.3

BARGAINING POWER OF CONSUMERS

Today Customer is the King. Banks offers customized services suitable to clients need and requirement They offer loan at Prime Lending Rate to their trust worthy clients and higher rate to others clients. Customers have high bargaining power. Reasons are :-

1.

Customers have large no of alternatives, there are so many banks, non financial institutions like HDFC,

IFCI etc., foreign banks, privet banks, co-operative banks and development banks together with specialized financers that provides finance to customers.

2. 3. 4.

Switching costs have come down drastically in banks. This makes harder to retain existing customers. The sevices offered by banks have low differentiation Customers have good information about the alternatives in the market. Hence no gain are expected

out of information asymmetry.

2.4.4

POTENTIAL ENTRY OF NEW COMPETITORS

RBI regulates new entrant in Banking Industry. The structural barriers to an entry in banking industry are low. Lots of private and foreign banks are entering into the market. But there is fierce competition as product differentiation is low and already existing large number of players. So every bank strives to survive in a highly competitive market. Every bank to tries to achieve economics of scale through use of technology and selecting and training manpower. In this scenario consolidation is expected to happen via M&As.

2.4.5

SUBSTITUTE PRODUCTS

Banks are not limited to tradition banking which just offers deposit and lending. In addition today banks offers loans for all products, derivatives, Forex, Insurance Mutual Fund, Demit account to name a few. Substitute products and services are those which are different but satisfy same set of customers needs. In banking industry following are the substitutes:

1. 2. 3. 4.

NBFC: Non-banking financial Institutions Post Office Products. Mutual Funds Stock Markets etc

3 Internal Analysis
3.1 PESTLE TABLE
PESTLE Analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. PESTLE stands for

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Political, Economic, Social, Technological, Legal and Environmental Analysis. The PESTLE Analysis is a tool to analyze the forces that drive the industry and how these factors can influence the industry.

3.1.1

Political

Government and RBI policies affect the banking sector. Sometimes looking into the political advantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmers votes. By doing so the profitability of the bank gets affected. Various banks in the cooperative sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT MONETARY POLICY

Indian Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework. Bank Rate (Unchanged) Repo Rate (Reduced by 25 basis points) Reverse repo rate (Reduced by 25 basis points) FDI inflows ( 20% to 49%)

BUDGET MEASURES

Example: Increased Farm Credit, Debt waiver to farmers.

3.1.2

Economic

Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget savings are encouraged, then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through banking channels.

GROWING ECONOMY / GDP

Indian economy has registered a growth of more that 9 per cent for last three year

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and is expected to maintain robust growth rate as compare to other developed and developing countries. Banking Industry is directly related to the growth of the economy. Contribution of various sectors to Indias GDP: Agriculture :17% Industry :29% ServiceSector:54%
LOW INTEREST RATES Reserve Bank of India controls the Interest rate, which is based on several monetary policies. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. As on September 11, 2009 Bank Rate was6.00 per cent, the same as on the corresponding date of last year. Call moneyrates (borrowing & lending) were in the range of 1.50/3.47 per cent as comparedwith 5.25/11.00 per cent on the corresponding date of last year. INFLATION RATES

Inflation represents a rise in general level of prices of goods and services over a period of time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services. Inflation has a very high correlation with the lending rates of banks. As stated earlier, India continues to remain one of the high savings economies among the emerging market economies. Gross Domestic Savings (GDS) of the Indian economy constitutes savings of public, private corporate and household sectors. In the recent period the high growth performance of the Indian economy is driven by rise in savings

SAVINGS AND ACCOUNTS

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3.1.3

Social
Socio culture factors also affect the business. They show in which people behave in country. Socio-

cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There are some socio-culture factors that affect banking in India. Shift towards nuclear family Change in life style Population

3.1.4

Technological

TECHNOLOGY IN BANKS Technology plays a very important role in banks internal control mechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services. The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed anytime, anywhere banking facilities. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started Credit card facility issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Today banks are also using SMS and Internet as major tool of promotions and giving IT SERVICES & great utility to its customers. Technology advancement has changed the face of MOBILE BANKING traditional banking systems. It is the buzzword today and every bank is trying to adopt it is the centralize banking CORE BANKING platform through which a bank can control its entire operation the adoption of core SOLUTIONS banking solution will help bank to roll out new product and services. ATM

3.1.5

Legal

Strict laws and regulations governed by RBI regulate the Indian banking Industry. Interests of the investors are well protected. Disputes are settled under the Jurisdiction of the Indian Judiciary.

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3.1.6

Environmental

Bank liability for the environmental damage arising from a loan to a client Reputational Risk: Thousands of credit cards were returned and destroyed by users, due to the Bank participation in investments on Finance Projects considered controversial. Demonstrations of citizens and NGOs against Banks lending money to build a nuclear power plant or extract oil & gas

4 Ratio Analysis
Mar '11 Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Interest Spread Adjusted Cash Margin(%) Net Profit Margin Return on Long Term Fund(%) Return on Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Management Efficiency Ratios Interest Income / Total Funds Net Interest Income / Total Funds Non Interest Income / Total Funds Interest Expended / Total Funds Operating Expense / Total Funds Profit Before Provisions / Total Funds Net Profit / Total Funds Loans Turnover Total Income / Capital Employed(%) Interest Expended / Capital Employed(%) Total Assets Turnover Ratios 10 0.5 -6.16 108.54 75.95 -4.03 3.93 2.49 80.56 3.08 3.02 99.21 99.21 8.27 2.53 1.09 5.74 3 0.48 0.23 0.13 9.36 5.74 0.08 Mar '10 10 1 -2.8 87.51 42.54 -3.26 5.27 3.73 95.83 5.29 5.13 68.64 68.64 8.17 2.43 0.92 5.74 2.69 0.51 0.34 0.14 9.09 5.74 0.08 Mar '09 10 1 5.66 67.16 42.43 -5.1 13.26 11.76 86.38 13.53 13.49 66.21 66.21 8.9 2.97 1.2 5.93 2.22 1.79 1.19 0.16 10.1 5.93 0.09 Mar '08 10 2 8.76 102.26 23.11 -6.79 11.5 8.07 146.42 16.52 16.52 53.73 53.73 8.76 3.06 0.66 5.71 2.31 1.08 0.87 0.17 9.42 5.71 0.09 Mar '07 10 1 4.94 78.8 18.43 -6.27 9.03 5.84 120.16 11.46 10.92 45.97 45.97 8.02 3.27 0.74 4.76 2.76 0.97 0.51 0.15 8.77 4.76 0.08

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Asset Turnover Ratio Profit And Loss Account Ratios Interest Expended / Interest Earned Other Income / Total Income Operating Expense / Total Income Selling Distribution Cost Composition Balance Sheet Ratios Capital Adequacy Ratio Advances / Loans Funds(%) Debt Coverage Ratios Credit Deposit Ratio Investment Deposit Ratio Cash Deposit Ratio Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Leverage Ratios Current Ratio Quick Ratio Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio

4.42 70.75 11.68 32.04 0.65 12.47 88.98 71.69 28.87 7.21 14.83 0.11 1.06 0.04 38.7 19.1 11.95 80.5 87.9

4.16 73.71 10.11 29.64 0.1 12.99 82.15 67.97 29.79 8.35 16.13 1.11 1.09 0.03 13.66 32.18 22.31 66.8 77.2

3.92 70.22 11.85 22.01 0.16 15.38 74.49 61.77 30.81 8.73 11.71 1.33 1.23 0.03 14.98 13.05 11.54 86.91 88.43

3.19 67.08 6.97 24.48 0.1 9.21 62.7 58.86 28.97 9.03 20.95 1.25 1.19 0.03 10.36 26.35 18.5 73.65 81.5

2.62 60.75 8.48 31.52 0.25 9.77 65.39 61.09 28.02 7.59 20.95 1.26 1.17 0.03 10.49 22.64 14.64 77.31 85.34

Credit Quality Annual credit loss provisions as % of total loans NPA Total NPA NPA as a % of total loan Tier I Ratio

2007

2008

2009

2010

2011

1.08% 0.88 30.34 1.65% 5%

0.95% 0.88 35.49 1.69% 5%

0.89% 0.88 49.66 1.55% 9%

0.26% 0.84 67.93 1.36% 6%

0.39% 0.3 42.80 0.47% 6%

From the ratio analysis we can see that the banks Interest Spread has taken a dip during the phase 2008 10. But improvements can be seen in the most recent year 2011.Though the significant since 2009 and have not recoverd till now. On the credit quality we can see a marked improvement in the FY 201 , NPAs dropping from 0.84% to 0.3 %. The Tier I ratio is an important ratio to judge the credit quality of the bank . Six percent levels are the minimum levels expected from banks.The Dhanlakshmi bank is able to maintain this minimum levels of Teir I ratio. net profit margins has taken a

4.1 DCF Analysis

The bank has been in a extensive expansion spree since last 3 years.The managements plans to increase the number of Customer Touch Points by 100 % in next 1 year. Thus sales growth will primarily come from new account openings . The bank has been able to achieve a phenomenal growth in last 3 years. But the

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operational efficiency has been the lowest in the industry. The Bank plans to halt its expansion drive and focus on efficiency improvements starting this financial year. Using the DFC analysis for estimating the value of the bank we found a the value of the bank to be 5100 crore. Our model assumes a 1 yr expansion ( 68 % Grwoth) , 3 Year ( 30 % ) then stable growth at 18 % .

4.2 Industry Comparision

IF we compare with Industry Average we find that bank is growing at a fast pace. But the profitability has a significant room for improvement.
Sales Sales (MRQ) vs Qtr. 1 Yr. Ago Sales (TTM) vs TTM 1 Yr. Ago Sales - 5 Yr. Growth Rate Profitability Operating Margin (TTM) Operating Margin - 5 Yr. Avg. Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr. Avg. Net Profit Margin (TTM) Net Profit Margin - 5 Yr. Avg. Effective Tax Rate (TTM) Effecitve Tax Rate - 5 Yr. Avg. Company 87.85 68.1 33.99 Company 8.35 19.17 8.35 19.17 5.19 13.62 37.83 28.96 Industry 13.01 11.05 14.47 Industry 19.34 24.83 22.96 25.12 16.5 17.4 24.94 30.29 S&P 500 13.01 10.73 8 S&P 500 -15.89 15.93 15.42 12.03 11.44 22.51 25.17

Comparing with comparable banks in the sector we found that Dhalakshmi has lowest profit margins. This seems to be aftermath of a breakneck expansion drive, Once the bank starts concentrating on operation al efficiencies once again these can improve significantly.

Private Sector Banks Banks - Private Sector Dhanlaxmi Bank IndusInd Bank ING Vysya Bank Karur Vysya Bank Kotak Mah. Bank Lak. Vilas Bank South Ind.Bank Yes Bank

Year End 2011 03 2011 03 2011 03 2011 03 2011 03 2011 03 2011 03 2011 03

Equity Gr. Blk Sales NP 37944. 33742. 164578. 25857. 49 93 72 86 1,053.1 85.14 209.23 9 25.76 4,303.0 466.56 971.25 2 579.21 3,349.0 149.75 996.44 2 308.71 2,482.0 107.2 412.43 3 415.13 4,936.6 369.32 831.8 0 818.17 1,201.8 97.94 298.14 5 101.07 2,642.7 113.01 501.39 1 293.19 4,665.0 351.05 255.3 2 727.41

NP Margi n

2.45% 13.46 % 9.22% 16.73 % 16.57 % 8.41% 11.09 % 15.59 %

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5 Conclusions
Dhanlakshmi is a private sector bank. Its operations are largely concentrated in south India. The bank has been trying to expand at a fast pace during the last one year. The total touch points with customers have increased by 100 % in last one year. They have 275 branches with ATMs more than 450 now. The bank is trying to increase its customer base and reach across India as well. Dhanalakshmi Bank has Put in place the Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) systems to facilitate large value payments and settlements online in real time, on a transaction-by-transaction basis and has Set up NRI Boutiques (Relationship Centres) across nine locations in Kerala and Tamil Nadu, with plans to open specialized NRI outlets at potential locations with emphasis on impeccable service levels. The Bank is a major player in micro credit in Kerala and the Banks outstanding under micro credit was Rs. 266 crores at the end of March 2011 and has Attained ISO 9001-2000 certification for the Banks corporate office at Thrissur and industrial finance branch at Kochi. Bank also has tie-up with some major MF, Insurance and broking houses which will help in overall income in years to come.

Further Expansion: Recently, Dhanlaxmi Bank has lifted Rs 380 crore through its QIP at Rs
181.30 Rs. / Share to expand its business. In FY10, Company did big investment. In FY11, company is planning 50% further expansion to Rs. 18,000 Crore. Expansion in Higher yielding retail and SME loans will help NIMs to move upward. It also has planned to increase the no. of branch in FY11 which will help bank to improve its Bank Deposit and Credit deposit.

Share Price Valuation: At CMP of 77 Rs. stock is trading less that

across the segment, Improvement in margins and further expansion will help ban k

its BV of 99. P/BV stands

@ 0.78. It is trading at very attractive valuation if ones compare with other small private banks. High Growth

to reach P/BV of at least

1.6 in future. Thus a price target of 125 per share in an year seems achievable.

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