TARGET INR60.

00
Dev Credit Bank DEVB IN PRIOR TP
CLOSE
N/A
INR44.95
BUY
INDIA / BANKS UP/DOWNSIDE +33.5%

HOW WE DIFFER FROM THE STREET INDUSTRY OUTLOOK Ï INITIATION

BNP Consensus % Diff
Target Price (INR)
EPS 2011 (INR)
60.00
0.16
na
na
na
na
The second coming
EPS 2012 (INR) 2.71 na na ƒ Initiating coverage on DCB with a BUY and TP of INR60.00.
Positive Neutral Negative ƒ We expect re-rating on turnaround potential in FY11-12.
Market Recs. 1 0 0 ƒ We estimate loan book CAGR of 23% over FY10-12.
KEY STOCK DATA
ƒ Trades at 1.4x our FY12E adj BV for FY12E adj RoE of 9%.
YE Mar (INR m) 2011E 2012E 2013E
Turnaround in the offing
Operating Profit 36 637 1,094 We initiate coverage on Development
Rec. net profit 36 637 1,094 Credit Bank (DCB) with a BUY and a TP
Recurring EPS (INR) 0.16 2.71 4.66 of INR60.00 . DCB is a private sector bank
Prior rec. EPS (INR) - - - with 80 branches across India and a loan
book of INR35b spread across the
Chg. In EPS est. (%) N/A N/A N/A
corporate, retail and SME segments.
EPS growth (%) (103.9) 1,543.6 71.7
Recurring P/E (x) 272.5 16.6 9.7
Under a new leadership, DCB is driving a
significant transformation across multiple
Dividend yield (%) 0.0 0.0 0.0
fronts to address losses suffered on the Abhishek Bhattacharya
Price/book (x) 1.4 1.3 1.2 +91 22 6628 2411
sharp spike in delinquencies witnessed in abhishek.bhattacharya@asia.bnpparibas.com
ROE (%) 0.5 8.2 12.7 FY08-10.The bank has cleaned up its
books by aggressively writing off NPLs Vijay Sarathi, CFA
ROA (%) 0.05 0.77 1.09 +91 22 6628 2412
and cutting down on exposure to risky vijay.sarathi@asia.bnpparibas.com
(INR) Dev Credit Bank (%) assets. DCB has also taken steps to lower
Rel to MSCI India its dependency on wholesale funding (through focus on CASA and retail
50 term deposits) and shore up capital adequacy. DCB has been
1
40 restructuring its distribution network and process flows to drive stronger
(19) traction on non-interest income and reduce operating costs. DCB’s efforts
30 to diversify its exposure through a push on mortgages, SME, micro-SME,
20 (39) mid-corporates and priority sector books has helped, with a 6% y-y
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 increase in the loan book for FY10, despite reduction in its unsecured
loan portfolio. The proportion of wholesale deposits declined to 18% in
Share price performance 1 Month 3 Month 12 Month FY10, from 47% in FY08, while the NNPL ratio has come down 80bps to
Absolute (%) 6.9 33.3 9.9 3.1%. Opex also declined 16% y-y in FY10. DCB managed to maintain
Relative to country (%) 6.4 33.4 (4.4) NIMs at 2.8% for FY10, driven by a 400bp y-y improvement in the CASA
ratio to 35%. We expect the bank to break even by 3QFY11.
Next results/event July 2010
Mkt cap (USD m) 225 Why BUY DCB now?
3m avg daily turnover (USD m) 7.8 We expect DCB to re-rate on the back of significant improvement in its
Free float (%) 77
core operating metrics in the next few quarters. We expect adjusted
ROEs to improve to 9% by FY12 on an expanded capital base (factoring
Major shareholder AKFED (23%)
in a potential 15% dilution in FY11), helped by a sharp drop in LLPs,
12m high/low (INR) 49.60/26.95 control on operating costs, surge in credit offtake and flat NIMs. We
3m historic vol. (%) 41.2 project loan book and net revenue CAGR of 23% and 15% respectively
ADR ticker - over FY10-12. Key near-term catalysts: A drop in LLPs, credit rating
ADR closing price (USD) -
upgrade, traction on loan book and fee income streams. We present a
comparison with IndusInd Bank (IIB IN; see page 12), the other
Sources: Bloomberg consensus; BNP Paribas estimates
turnaround story in the sector. We also detail a sensitivity analysis of
DCB’s adjusted ROE to the extent of dilution (page 13).
Valuation
We value DCB at a 12-month TP of INR60.00 using a three-stage
residual income model. At our TP, DCB is valued at 1.9x our FY12E ABV
and an adjusted ROE of 9%. Key risks include a sudden spike in short-
term rates, lower-than-expected credit offtake, higher-than-expected
dilution and key man risk.

BNP Paribas Securities Asia research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://equities.bnpparibas.com. Please contact your
salesperson for authorisation. Please see the important notice on the inside back cover.

PREPARED BY BNP PARIBAS SECURITIES ASIA 8 July 2010

THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX.
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Contents

1) Turnaround round the corner..................................................................................................................................................... 3

2) Strong earnings momentum post FY11..................................................................................................................................... 9

Comparison with IndusInd Bank........................................................................................................................................ 12
Sensitivity analysis ............................................................................................................................................................ 13

3) Valuation: BUY with TP of INR60.00 ........................................................................................................................................ 14

Residual income valuation ................................................................................................................................................ 15
Recommendation: Look beyond FY11 .............................................................................................................................. 15

4) Devil’s advocate: risks to our investment case...................................................................................................................... 17

5) Appendix 1 ................................................................................................................................................................................. 18
Background on CEO, Mr Murali Natrajan .......................................................................................................................... 18

6) Key company information ........................................................................................................................................................ 19

7) P&L, Balance Sheet and Cash Flow ........................................................................................................................................ 20

Looking for an alternative way to invest in the views and themes covered in this report?
Explore BNP Paribas’s
Asia Pacific Sector Swap
Covering eight key markets and 13 sectors, Sector Swap gives investors all the tools to
profit from macro events, including long and/or short Sector Swaps as well as options strategies.

Available on Bloomberg at BNSW [GO]

Winner Lee, Asia Equities Derivatives Strategist; +852 2108 5658; winner.lee@asia.bnpparibas.com

Please see India Research Team list on page 22.

2 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Turnaround round the corner

We initiate coverage on Development Credit Bank (DCB) with a BUY rating and
TP of INR60.00. We expect DCB to significantly improve its core operating
metrics over the next few years, driven by transformation on multiple counts. On
the asset side, DCB has cut down exposure to risky assets and diversified its
exposure across retail mortgage, mid-corporate, micro-SME, SME and priority-
sector categories. We expect these efforts to continue. On the liability side, we
expect DCB’s reduced dependency on wholesale funding and strong CASA focus
to provide stability to margins. We also expect DCB’s operational restructuring to
drive traction on fee income streams and improve cost efficiency. We expect
break even on P&L by 3QFY11 and improvement in adjusted RoEs to 9% by FY12.
Story so far: DCB is a private sector bank with 80 branches across India and a loan
book of INR35b for FY10 spread across corporate, retail and SME segments. DCB was
incorporated in 1930s and got listed in 2006. Its promoter – Aga Khan Fund for
Economic Development (AKFED) – holds a 23% stake at present. During 2006-08, the
bank focused heavily on unsecured personal-loan products, with exposure reaching as
high as 41% of total loan book. As this loan book growth ran ahead of low-cost current
and savings account deposit (CASA) accretion, DCB had to increasingly rely on higher
proportion of non-retail deposits. This started to put pressure on net interest margins
(NIMs) and overall profitability. DCB’s non-funded business also suffered due to severe
reduction in trade volumes. After the global meltdown in September 2008,
delinquencies shot up and wiped out operating profits for FY09 and FY10 as well. The
gross NPL ratio increased to 8.7% for FY10, compared to 1.6% for FY08. The spill-over
impact of writing off bad debts and running down the risky portfolio led to a loss of
INR881m in FY09 and INR785m in FY10.
What is changing now: Mr Murali Natrajan joined DCB as CEO in April 2009 (detailed
background in Appendix 1) and, along with the team, initiated the turnaround process.
Under his leadership, DCB is driving a three-pronged transformation strategy: 1) on the
asset side – focus on asset book growth and reduction in exposure to risky assets, 2)
on the liability side – reducing dependency on wholesale funding through CASA focus
and shoring up of tier-1 adequacy; and 3) on the operational front – realigning the
process flow structure to drive cost efficiencies and improving traction on non-interest
income streams. We detail these initiatives below.

Exhibit 1: Unsecured Personal Loan Exposure Exhibit 2: Proportion Of CV loans

(INR b) Loan book (LHS) (%) (INR b) Loan book (LHS) (%)
Personal loans (LHS) 60 CV loans (LHS) 12
60 Proportion of personal loans (RHS) 25 Proportion of CV loans (RHS)

50 20 50 10

40 40 8
15
30
10 30 6
20
20 4
10 5

10 2
0 0
Mar-11E
Mar-12E
Mar-07
Jun-07

Dec-07
Mar-08
Jun-08

Dec-08
Mar-09
Jun-09

Dec-09
Mar-10
Sep-07

Sep-08

Sep-09

0 0
FY07 FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

Reduction in exposure to risky asset classes: DCB stopped disbursing unsecured

personal loans and has been running down the book since 2QFY09. Total unsecured
personal loan book currently stands at INR0.95b (2.7% of loan book) compared to
INR7b (17.1% of loan book) in FY08. Similarly, DCB put a squeeze on its commercial
vehicle (CV) loan disbursals over the last few quarters and the proportion of CV loans
reduced to 6% of loan book (INR2b) in FY10, from 10% in FY08. We expect the

3 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

proportion of personal loan and CV book to reduce further to 0.2% and 2.1%,
respectively by FY12.
Diversification of asset book exposure: Since 3QFY10, DCB is back on growth
track, despite running down its personal and CV loan books. This has happened
through a shift in focus towards sectors such as mortgage, mid-corporate, micro-SME,
SME, agri and priority sector. The bank clocked loan book growth of 5.7% y-y for FY10
after reporting a decline of 19.5% in FY09. The bank also managed to increase the
proportion of secured loans to above 76% for FY10. Some of the key differentiated
approaches being adopted by DCB are – focusing on priority sector lending with
products like warehouse-based commodity financing, and providing bundled cash
management and trade finance products to under-serviced mid corporate, and SME
customers. We expect DCB to increase its loan book at a CAGR of 23% over FY10-12.

Exhibit 3: Loan Book Movement Exhibit 4: Movement In Loan Book Composition

(INR b) Retail Unsecured personal loans CV Loans

20 Corporate Other retail Home loan
SME & Micro-SME Rural & priority sector
18 SME Corporate
Rural & priority sector (AMRB)
16
FY12E 02 4 16 18 26 33
14
12 FY11E 14 5 14 18 25 33
10
8 FY10 3 6 5 12 17 25 32
6
FY09 10 11 11 8 14 17 28
4
2 FY08 17 11 10 4 4 8 45
0
FY08 FY09 FY10 FY11E FY12E (%) 0 20 40 60 80 100

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

Improvement in NPL trends: DCB’s efforts on credit cost management have started to
yield results as the GNPL and NNPL ratios have started coming down over the last two
quarters. GNPLs have come off from a peak of 11.2% in 2QFY10 to 8.7% in FY10,
while NNPLs have come down to 3.1% for FY10 from 5% in 1QFY10. The loan-loss
provision (LLP) has also started to taper off in the past few quarters. Provision coverage
now stands at a healthy 66% (70% including technical write-offs). DCB has
aggressively written off non performing assets including a big ticket delinquent account.

Exhibit 5: Movement In NPL Ratios Exhibit 6: Movement In Loan Loss Provisions (LLPs)

(%) Gross NPL ratio (LHS) (%) (bps) LLPs (LHS) (%)
14 Net NPL ratio (LHS) 80 500 P&L provision as % of net revenues (RHS) 60
Provision coverage ratio (RHS)
12 450
400 50
10 70
350
40
8 300
60
6 250 30
4 200
50 20
150
2
100
10
0 40 50
FY11E
FY12E
1QFY09

2QFY09
3QFY09

1QFY10
2QFY10
3QFY10
FY07
FY08

FY09

FY10

0 0
FY07 FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

4 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

On the unsecured personal loan book of INR0.95b, DCB has net NPLs of just INR0.3b.
DCB also reported INR1.0b in recovery and upgradation of NPLs in FY10. We expect
NPL provisions on the P&L to come down to INR0.6b for FY11 and INR0.46b for FY12,
from INR1.14b in FY10. We expect LLPs to fall to 98bp for FY12, from 337bp in FY10.
Improving margin stability from reducing dependency on wholesale funding: On
the funding side, DCB has got its focus back on increasing CASA deposits and on
improving the mix of retail term deposits. Strong traction on CASA has helped maintain
NIMs despite the reduction in loan yields (from a changing loan book mix) and marginal
increase in cost of term deposits (retail deposits are priced at a premium to wholesale).
While loan yields dropped 127bp y-y to 12.33% for FY10, a higher reduction of 199bp in
the cost of funds to 6.44% helped to keep the NIM flat at around 2.8%. Proportion of
wholesale deposits dropped from 47% in FY08 to 32% in FY09 and further to 18.5% for
FY10. CASA deposits increased 17.6% y-y for FY10 compared to a decline of 2% for
FY09. The CASA ratio came in at 35.3% for FY10 compared to 30.9% for FY09. Going
forward, DCB expects to keep its CASA ratio above 30% and the mix of wholesale
deposits below 30%. DCB is also working with rating agencies to improve its credit
rating. We expect DCB to clock a CASA ratio of 30.7% for FY12, factoring in our
estimate of 23% CAGR in loan book and no addition in branches over the next two
years. We expect NIMs to improve marginally to 2.8% for FY12, from 2.79% for FY10.

Exhibit 7: CASA Ratio And NIM Exhibit 8: Interest Rate Spreads

(%) CASA ratio (LHS) (%) (%)

Loan yields Cost of funds Spreads*
50 Wholesale deposit ratio (LHS) 3.8 14
45 NIM (RHS) 3.6
40 3.4 12
35 3.2
30 10
3.0
25
2.8 8
20
15 2.6
6
10 2.4
5 2.2
4
0 2.0
1QF10

2QF10

3QF10

FY11E

FY12E
FY08

FY09

FY10

2
FY08 FY09 1QFY10 2QFY10 3QFY10 FY10

Sources: Dev Credit Bank; BNP Paribas estimates * Overall spreads would include the yield on investment book too
Sources: Dev Credit Bank; BNP Paribas

On the asset-liability management (ALM) front, DCB has managed to reduce the gap
between the blended loan and deposit duration. Almost the entire current loan portfolio
of DCB is either floating or subject to interest rate reset within a year. A smaller ALM
mismatch would add further stability to margins for DCB, although we expect margins to
remain under pressure in a rising rate environment.

5 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Exhibit 9: Loan And Deposit Durations Exhibit 10: Residual Maturity Of Asset and Liability

(Year) (%) Liability with < 1-year maturity

1.8 Deposits Advances
80
Asset with <1-year maturity
1.6 70
1.4
60
1.2
50
1.0
40
0.8
30
0.6
0.4 20

0.2 10

0.0 0
Mar-08 Mar-09 Mar-10 Mar-08 Mar-09 Mar-10

Sources: Dev Credit Bank; BNP Paribas Sources: Dev Credit Bank; BNP Paribas

Improving capital strength: DCB has also shored up its capital strength during the
year through the issuance of lower Tier II Subordinated Debt in August 2009,
aggregating INR0.7b and a QIP issue in November 2009, where it raised INR0.8b in
tier-1 capital. The CAR ratio for DCB stands at 14.85% under Basel-2 as at March
2010, compared to 13.3% in March 2009. DCB has the board’s approval to issue rights
and QIP for INR2b and INR1.5b, respectively. The tier-1 ratio for the bank improved to
11.9% in FY10, from 11.5% in FY09 despite reporting a loss for the fiscal year. Cutting
down on exposure to unsecured loan assets would also lower the overall risk weights
for the bank, adding to tier-1 adequacy going forward, all else being equal. We assume
DCB will raise equity of INR1.4b in FY11 and clock a tier-1 of 11.3% for FY12. We have
factored in an equity dilution of 15% in FY11 as the bank has laid a roadmap with the
RBI for bringing its promoter stake down to 10% by FY14, from 23% at present.
However, once the bank returns to profitability, we believe RBI may get more
comfortable with the ownership structure of the bank, with positive implications on
required dilution. We present a sensitivity analysis of equity dilution to operating metrics
in our next section (Page –13).

Exhibit 11: Capital Adequacy Ratios Exhibit 12: Exposure Breakdown By Risk Weights

(%) Capital adequacy ratio (INRb) < 100% Risk Weights

18 Tier-1 (in per cent) 80 100% Risk Weights
16 70 > 100% Risk Weights
14 60
12 50
10
40
8
30
6
4 20

2 10

0 0
FY07 FY08 FY09 FY10 FY11E FY12E Mar-09 Mar-10

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas

Focus on non-interest income streams: DCB has renewed its focus on broad basing
its non-interest income streams, reporting an increase of 8.4% y-y in fees and other
operating income for FY10, compared to a 9% decline in FY09.

6 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

In terms of third-party distribution income, DCB has tied up with Birla Sunlife (not listed)
for selling its life insurance products. DCB has also teamed up with ICRA (not listed);
for a wealth management product, which would generate backend fees for the bank.

Exhibit 13: Non Interest Income Exhibit 14: Fee And Other Operating Income

(INR b) Fee & other operating income (INR b) NII (LHS) (%)
1.6 Treasury income Fee & other operating income (LHS)
2.5 90
Forex income
1.4 Fee/op inc as % of NII (RHS)
80
1.2 2.0 70

1.0 60
1.5
50
0.8
40
0.6 1.0
30
0.4
0.5 20
0.2 10
0.0 0.0 0
FY08 FY09 FY10 FY11E FY12E FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

On the non-funded business, DCB’s strength lies in its relation with micro-SME, SME,
mid-corporate and trade-related customers. In FY08-09, DCB centralized many of the
trade-finance-related products for a stronger control on exposure and better cost
efficiency. This adversely impacted its ability to address the local needs, and affected
cash management and trade finance income streams. However, since February 2010,
DCB has again decentralized its trade-finance channel and given branches more
flexibility to push customized products. We expect these initiatives to drive 13% CAGR
in fee income growth over FY10-12.
On the treasury and forex front, we expect a more muted income for FY11 as DCB’s
counterparty limits have been squeezed over the last year and it will take some time for
it to get these limits back. We expect forex and treasury income to drop to INR111m for
FY11 from INR241m in FY10, and then get back to INR168m for FY12. Besides these,
there could be further upside to our estimates if recoveries from delinquent accounts
are stronger than our expectation. We are currently budgeting for INR90m-100m in
recoveries and upgrades in FY11 and FY12, compared to INR1b for FY10.
Improving cost efficiency: On the opex front, DCB has taken many initiatives to
improve its cost efficiency ratios. DCB has managed to trim its headcount to 1,500 from
2,235 in FY08. The bank has also managed to retain top management, despite cutting
down on bonuses and increments. We expect DCB to shore up its manpower going
forward. The bank has also centralized many of its vendors for driving economies of
scale. These efforts led to a cost reduction of INR0.4b for FY10, which we believe can
be sustained. As is evidenced in Exhibit 16, the average opex excluding staff costs per
branch has come down to INR25m for FY10 from INR31m in FY09. DCB’s cost-to-
income ratio has stayed in the 75-80% range over the last two years on account of
shrinkage in net revenue caused by balance sheet cleansing. However, the cost to
average assets ratio has shown consistent improvement, from 3.7% in FY08 to 3.6% in
FY09 and 3.3% in FY10. Management expects to contain operating cost increases in
the 5-10% range over the next two years and it has set a target of a 55% cost-to-
income ratio by FY13. We expect 3% CAGR in operating costs over FY10-12. We also
expect the cost-to-income ratio to improve to 63.8% for FY12 compared to 80.6% for
FY10.

7 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Exhibit 15: Cost To Income And Cost To Asset Ratio Exhibit 16: Operating Cost Ratios

(%) Cost to income ratio (LHS) (%) (INR m) Employee cost per head (LHS) (INR m)
140 Cost to average assets ratio (RHS) 4.0 0.6 Total operating cost per branch (RHS) 36
3.8 33
120 0.5
3.6
100 3.4 30
0.4
80 3.2 27
3.0 0.3
60 24
2.8
0.2
40 2.6 21
2.4 0.1
20 18
2.2
0 2.0 0.0 15
FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

We expect RoA to improve to 77bps by FY12. We expect transformation on multiple

counts (as detailed above) to improve adjusted ROEs for the bank to 9% and 13.5% for
FY12 and FY13. respectively.

8 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Strong earnings momentum post FY11

We expect a loan book CAGR of 23% FY10-12 to drive net interest income (NII)
CAGR of 21% for DCB. We expect the drop in LLPs and the improvement in cost-
to-income ratio to aid an earnings turnaround in FY11 and drive strong earnings
momentum from FY12. Our EPS estimates for FY12 and FY13 are INR2.7 and
INR4.6, respectively. We are factoring in an equity dilution of 15% in FY11, as DCB
aims to cut down its promoter holding as per its roadmap with the RBI. We present a
sensitivity analysis of adjusted ROE and book value per share to the amount of capital
dilution. We also highlight IndusInd Bank’s turnaround with its subsequent re-rating and
compare its movement across key metrics with DCB.
Strong NII growth over FY10-12E: We expect DCB to increase both its loan book and
deposits at a CAGR of 23% respectively over FY10-12. We expect CASA deposits to
increase at 15% over this period, as we don’t estimate any branch addition until FY12.
On the loan-book front, we expect 25% growth in corporate loans, 26% for SME and
priority sector loans and 16% in retail loans as DCB runs down the unsecured personal
loan and CV loan portfolio. We expect this to drive 21% NII CAGR over FY10-12.

Exhibit 17: Loan Book and Deposit Movement Exhibit 18: Loan Book Composition – March 2010

Deposit (LHS) Loan book (LHS)

Deposit grow th (RHS) Loan grow th (RHS) Rural &
(INR b) (y-y %) priority Retail
80 60 sector 26%
70 50 (AMRB)
40 25%
60
30
50
20
40 Micro SME
10
30 7%
0
20 (10)
10 (20) SME Corporate
0 (30) 11% 31%
FY11E

FY12E
FY05

FY06

FY07

FY08

FY09

FY10

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas

Exhibit 19: Retail Loan Book Break Down – Mar-10 Exhibit 20: Funded Exposure Break Down – Mar-10
Engineering &
Metal &
Loans electronics
mining NBFC Trade &
against FD/ 2%
Home loan 2% 6% transport
CE & other 46% 9%
retail Pharma &
19% chemical
Cement &
3%
construction
5%
Personal
Infrastructure
loans & telecom
11% 5% Others
27%
Retail loans
Commercial 20%
vehicles Auto loans
22% Gems and Food and agri
2% textiles linked
3% 18%

Sources: Dev Credit Bank; BNP Paribas Sources: Dev Credit Bank; BNP Paribas

9 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Maintain NIMs over FY10-12: We expect marginal contraction in NIMs on account of:
1) reduction in loan yields owing to reduction in the mix of high yielding unsecured
loans, 2) higher proportion of retail term deposits (that are priced at a slight premium to
wholesale deposits); and 3) marginal drop in CASA ratio to 30.6% for FY12 from 35.4%
in FY10, as the rate of loan-book growth outpaces CASA accretion. However, marginal
expansion in the loan-to-deposit ratio (LDR) from potential equity-capital infusion and
higher credit offtake would marginally offset the contraction. Also, DCB’s strong
franchise in the priority sector (like warehouse financing) and micro SMEs should help it
to maintain loan yields. DCB earns yields of 10-12% on its priority sector book, while it
generates yields of 13.0-13.5% on the micro-SME book. Even on larger SMEs and mid-
corporate book, DCB currently gets a 10-12% yield. We expect NIMs to pick up again in
FY12 to 2.8% after dropping to 2.65% for FY11. Stronger-than-expected traction on
CASA deposits could add potential upside to our NIM estimates.

Exhibit 21: NIM And CASA Movement Exhibit 22: Credit Disbursal And GNPL Accretion

(%) NIM (LHS) CASA ratio (RHS) (%) (INR b) Loan disbursements (LHS) (INR b)
3.1 40 70 Personal + CV loan book (LHS) 3.5
Gross NPL accretion (RHS)
3.0 60 3.0
35
2.9 50 2.5

2.8 30 40 2.0

2.7 25 30 1.5

2.6 20 1.0
20
2.5 10 0.5

2.4 15 0 0.0
FY07 FY08 FY09 FY10 FY11E FY12E FY07 FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

Strong traction on fee income: We expect fee income to increase at a 13% CAGR
over the next two years, driven by traction on third-party distribution fees and a revival
in trade finance and transaction banking income streams. We expect treasury and forex
income to stay muted for FY11 and FY12. We expect overall net revenues to increase
at a CAGR of 15.3% over FY10-12.
Lower opex and LLPs: We expect 3% CAGR in operating expenses to help drive pre-
provisioning profit CAGR of 57.4% over FY10-12. Furthermore, we expect LLPs to
taper off sharply (Exhibits 5, 6, and 22), helped by a reduction in unsecured loan book,
aggressive write-off taken in the books, and increased focus on recoveries. We expect
these to add to strong momentum on net profits.
Tax benefits: DCB is carrying forward tax losses of INR3.4b on its books, which should
help it offset any tax provisions over the next three years.
ROE expansion on expanded capital base: We are factoring in capital raising of
INR1.4b in FY11, amounting to dilution of 15%. However, we expect DCB to report a
strong improvement in adjusted ROE on the assumed expanded capital base. We
estimate adjusted book value per share and EPS at INR31.60 and INR2.71 respectively
for FY12. We expect adjusted ROEs to improve to 9% for FY12 from -14.8% in FY10,
and ROAs to 0.77% for FY12.

10 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Exhibit 23: Revenue, PPP And PAT Movement Exhibit 24: ROE And ROA Movement

(INR b) (%) Adjusted RoE (LHS) (%)

Net revenue Pre-provisioing profit PAT
4.0 15 RoA (RHS) 1.0
3.5
3.0 10
0.5
2.5 5
2.0
0 0.0
1.5
1.0
(5) (0.5)
0.5
0.0 (10)
(0.5) (1.0)
(15)
(1.0)
(1.5) (20) (1.5)
FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY07 FY08 FY09 FY10 FY11E FY12E

Sources: Dev Credit Bank; BNP Paribas estimates Sources: Dev Credit Bank; BNP Paribas estimates

Exhibit 25: RoE Movement for DCB – DuPont Decomposition

Year-end 31 Mar (%) 2007 2008 2009 2010 2011E 2012E
PAT margin A~ 1-C-P 3.5 11.0 (27.8) (31.5) 1.3 19.3
Cost to income ratio C 80.7 68.5 76.3 80.6 74.6 63.8
P&L provision/net revenue P 18.5 21.1 51.0 48.6 24.0 16.9
LLPs (P&L provisions by average loan book) L 0.7 1.5 4.4 3.4 1.5 1.0
Asset turnover ratio D= N+T+F 4.7 5.4 4.7 4.1 3.9 4.0
NIM (~NII/Average assets) N 2.7 3.0 2.9 2.8 2.7 2.8
Treasury & forex income/average assets T 0.3 0.6 0.4 0.4 0.2 0.2
Fee & other income/average assets F 1.3 1.3 1.1 1.4 1.4 1.3
ROA ROA= A * D 0.2 0.6 (1.3) (1.3) 0.1 0.8
Equity multiplier (x) M ~ 1/ (R * B) 15.9 12.3 11.8 11.4 11.2 11.6
Risk weighted asset to total asset R 85.0 80.0 75.6 72.1 72.0 72.0
Tier -1 capital adequacy B 8.4 11.8 11.5 11.9 12.5 11.3
Adjusted ROE ROE = ROA * M 2.6 7.3 (15.4) (14.8) 0.6 9.0
Sources: Dev Credit Bank; BNP Paribas estimates

As is evident in the exhibit above – we expect the sharp turnaround in adjusted RoEs to
be largely driven by a steep drop in LLPs and cost-to-income ratios over FY11 and
FY12. We expect capital raising in FY11 to lower the equity multiplier marginally, but as
DCB begins to deploy the capital over FY12, we expect RoEs to trend up steadily.

11 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Comparison with IndusInd Bank

We highlight the turnaround path of IndusInd Bank (IIB IN) across six key operating
metrics and its subsequent re-rating and we compare DCB’s progress across those
lines.

Exhibit 26: Comparison With IndusInd

Year-end 31 Mar (%) 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 2011E 2012E
IndusInd Bank
ROA 0.3 0.6 0.7 0.8 1.3 1.1 1.1 1.2 1.2
Adjusted ROE* 6.4 10.3 13.5 15.0 25.7 18.5 17.7 19.4 18.5
Net interest margin 1.7 1.8 2.0 2.5 2.6 2.9 2.9 3.2 3.5
Cost to Income ratio 70.9 65.5 58.3 51.8 48.8 54.4 50.9 50.5 50.1
Net NPL ratio 2.4 2.2 1.3 1.1 1.0 1.0 0.7 0.5 0.3
Revenue per employee (INR m) 2.1 2.2 2.5 1.9 3.0 2.9 2.9 3.0 3.0
P/ABV 1-Yr forward 1.2 1.2 0.8 0.6 1.5 1.9 2.2 2.6 2.9

Development Credit Bank

ROA 0.2 (0.1) (0.3) (5.2) (2.4) (1.2) (1.3) (0.6) 0.1 0.8
Adjusted ROE* 2.2 (1.1) (3.9) (47.0) (24.9) (13.2) (13.5) (5.9) 0.6 9.0
Net interest margin 2.6 2.8 2.5 2.6 3.3 2.6 2.8
Cost to Income ratio 71.3 77.4 70.8 88.0 90.2 76.2 86.6 71.5 74.6 63.8
Net NPL ratio 1.5 1.3 2.0 3.9 5.0 4.7 4.3 3.1 2.0 1.3
Revenue per employee (INR m) 1.6 1.6 1.5 1.3 1.2 1.5 1.5 1.8 1.7 1.9
P/ABV 1-year forward 1.6 1.3 0.8 0.7 1.4 1.5 1.2 1.4 1.9
Sources: Companies’ data; BNP Paribas estimates

As is evident in the exhibit above, DCB is about seven to eight quarters behind IndusInd
in its turnaround cycle. DCB is trading at 1.5x on a rolling 1-year forward adjusted book
value. We expect turnaround across core operating metrics to drive a re-rating for DCB
on similar lines as we saw for IndusInd Bank.

12 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Sensitivity analysis
We present a sensitivity analysis of DCB’s ROE and book value per share to quantum
and pricing of the potential equity raising.
Our base case is for an equity dilution of 15% in FY11, to account for the planned
reduction in promoter stake to 10% by FY14, from 23% at present. We are factoring in
equity issuance of INR1.4b in 2HFY11 at INR40 per share, based on the stock’s three-
month trading average.

Exhibit 27: Sensitivity Analysis Of DCB’s Dilution To RoE And ABV Per Share
Adjusted ROE FY12E —————— Equity dilution in FY11 and FY12 ——————
Price (INR) 5% 10% 15% 20%
30 10.0% 9.6% 9.2% 9.0%
40 9.8% 9.4% 9.0% 8.7%
50 9.8% 9.3% 8.7% 8.4%
60 9.7% 9.1% 8.5% 8.2%

ABVPS FY12E (INR) —————— Equity dilution in FY11 and FY12 ——————
Price (INR) 5% 10% 15% 20%
30 29.8 29.9 30.0 30.1
40 30.3 31.0 31.6 32.3
50 30.8 32.0 33.1 34.4
60 31.3 33.1 34.7 36.5

P/ABVFY12E at CMP (x) —————— Equity dilution in FY11 and FY12 ——————
Price (INR) 5% 10% 15% 20%
30 1.52 1.51 1.50 1.50
40 1.49 1.46 1.43 1.40
50 1.47 1.41 1.36 1.31
60 1.44 1.36 1.30 1.24
Source: BNP Paribas estimates

13 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Valuation: BUY with TP of INR60.00

We expect transformation on multiple counts to drive strong improvement in
ROE over the next two years for DCB. This coupled with a 23% CAGR in loan-
book growth. Should help achieve a break even by 3QFY11 and drive strong
earnings momentum post FY11. We expect net revenue to increase at 20% CAGR
over FY10-12 and adjusted ROE to clock 9% for FY12. DCB is trading at 1.4x FY12E
ABV, well below its historical mean of 2.0x 1-year forward ABV. We expect the
management under a new leadership to drive an impressive turnaround over the next
two years. We expect DCB to re-rate along with increasing visibility on improvement in
key metrics. At our TP the implied P/FY12E ABV is 1.9x. We recommend BUY with a
12-18-month TP of INR60.00.
We have come to our target price of INR60.00 using a three-stage residual-income
valuation method that uses the following assumptions:
1 We estimate loan book growth of 21.7% and 24.3% for FY11 and FY12,
respectively. For FY11, we expect 25% growth in corporate loans, 26% increase in
SME/micro-SME lending and 25% increase in priority-sector loans.
2 We expect CASA deposits to increase 14.5% in FY11 and 15% in FY12. We
expect the bank to maintain a CASA ratio of above 30% over FY10-12, in line with
management guidance. We are not factoring in any branch addition over the next
two years.
3 We expect fee income CAGR of 13% for FY10-12, driven by a 20% and 11%
increase in third-party distribution and transaction banking/trade finance income
respectively.
4 We expect NIMs to contract marginally by 14bp, from 2.79% in FY10 to 2.65% in
FY11, and then improve to 2.8% by FY12. Management has guided towards a NIM
range of 2.5-2.7% for FY11.
5 On the NPL front, we expect LLPs to taper off to 149bp and 98bp for FY11 and
FY12 respectively, from 337bp for FY10. We expect the gross NPL ratio to decline
to 6.9% in FY11 and 5.3% in FY12, from 8.7% in FY10. Our net NPL ratio estimate
for FY11 is 2.0%.
6 On the capital adequacy front, we are factoring in INR1.4b of equity raising at
INR40 per share in 2HFY11. We expect overall capital adequacy and tier-one ratio
to reach 15.5% and 12.5% respectively for FY11.
7 We expect the bank’s cost-to-income to decline to 74.6% for FY11 and 63.8% for
FY12, from 80.6% in FY10.
8 We expect a pro forma diluted EPS of -INR0.3 for FY11 and +INR2.9 for FY12.
At 1.4x our FY12E ABV and 16.6x our FY12E diluted EPS, we believe DCB offers an
interesting entry point into the next turnaround story in the sector. Our target price of
INR60.00 implies 1.9x our FY12E adjusted BV (average ROE of 9% for FY12E) and
22.1x our FY12E EPS.
Key catalysts: Any of these could trigger a re-rating for the stock in the near to medium
term: A sharp reduction in LLPs in-line with guidance, rating upgrade from rating
agencies, continued drop in operating cost ratios, and a strong uptick in credit offtake.
Key risks: Risks to our thesis are “key man risk” – or the dependence on a small
leadership team, slower-than-expected credit offtake, and a sharp spike in short-term
rates among others.

14 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Residual income valuation

We have built in the following assumptions into our three-stage residual-income model:
ƒ We expect DCB to post a steady 19% CAGR for its average interest-earnings
assets over FY10-13, compared to an industry average of 18-20% on our
forecasts. We expect this to be followed by a CAGR of 17% in FY13-20 and a
terminal growth rate of 4% beyond that.
ƒ We have modelled for ROE improvement to 13.5% by FY13 followed by average
ROE of 16.4% for FY13-20 and a 17% terminal value ROE. Our discount rates
range from 14.5% (current cost of equity) for FY09-13, 12% for FY13-20 and 10%
terminal rate.
ƒ Our book value estimates factor in equity dilution of 15% in FY11.
ƒ We are not factoring in any dividend payouts until FY13.

Exhibit 28: Residual Income Valuation

Year-end 31 Mar (INR m) 2010E 2011E 2012 E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Terminal
Net profit (784) 36 637 1,070 1,341 1,621 1,935 2,292 2,658 3,030 3,364 3,511
Dividend payout (including dividend tax) - - - - 284 340 536 778 1,064 1,377 2,464
Beginning book value 5,290 5,347 6,783 7,420 8,490 9,831 11,168 12,764 14,519 16,399 18,366 20,352
Required return 768 777 985 1,078 1,019 1,180 1,340 1,532 1,742 1,968 2,204 2,035
Residual income (1,553) (741) (348) (7) 322 441 595 760 916 1,062 1,160 24,589
Discounted residual income (1,553) (647) (265) (5) 192 234 282 321 346 358 349 6,732
Residual income per share (3) (1) (0) 1 1 1 1 1 2 1 29
Sum of future residual Income (INR/share) 33
Book value – FY10E (INR/share) 27

Value/share (INR) 60

RFR (%) 7.8 7.0 6.0

BETA 1.1 1.0 1.0
ERP (equity risk premium) (%) 6.0 5.0 4.0
Cost of equity (%) 14.5 14.5 14.5 14.5 12.0 12.0 12.0 12.0 12.0 12.0 12.0 10.0
Source: BNP Paribas estimates

Recommendation: Look beyond FY11

Although we expect DCB to report a marginal profit for FY11, we expect sharp
improvement in all operating metrics going forward. We believe DCB is driving a strong
turnaround on multiple fronts and expect ROEs to move up sharply once the LLPs drop
off and loan book growth picks up.
Exhibit 30 below compares the FY12E P/ABV metrics across our banking coverage
universe. We would urge investors to look beyond FY11 estimates, as we believe
DCB’s turnaround strategy will begin to bear fruit in terms of a superior growth profile
and stronger profitability.

15 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Exhibit 29: 1-Year Forward P/ABV For DCB Exhibit 30: FY12E P/ABV vs ROE For Coverage Universe

(INR) CMP/FY12E ABV

160
3.8
140 3.5 HDFCB
3.2 BUY
120 4.0x A XSB
2.9
HOLD
100 2.6
3.0x 2.3 IIB YES
80 DCB
2.0 B UY B UY P NB
B UY
1.7 HOLD
60 2.0x BOB
1.4 B UY
40 1.1 ICICIB C
SB IN UNB K
BOI
1.0x 0.8 HOLD
HOLD HOLD
B UY
20 0.5
0 6 8 10 12 14 16 18 20 22 24 26 28 30
Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Average RoE FY12E (%)

Sources: DataStream; BNP Paribas estimates Sources: DataStream; BNP Paribas estimates

Exhibit 31: Peer Valuation

BBG ——— P/ABV ——— –——— P/E –——— ——— Adjusted ROE ———
Company code FY11E FY12E FY11E FY12E FY11E FY12E
(x) (x) (x) (x) (%) (%)
Development Credit Bank DEVB IN 1.6 1.4 NM 16.7 0.6 9.0
Indian public sector banks
State Bank of India* SBIN IN 1.5 1.3 12.4 10.1 12.5 13.6
Bank of Baroda BOB IN 1.6 1.4 7.9 6.6 21.9 22.0
Bank of India BOI IN 1.4 1.2 8.4 5.8 17.3 21.5
Union Bank of India UNBK IN 1.5 1.2 7.5 5.7 22.0 23.8
Punjab National Bank PNB IN 1.8 1.5 8.2 6.1 23.4 25.9
Indian private sector banks
ICICI Bank* ICICIBC IN 1.3 1.2 14.5 12.2 8.3 9.5
Yes Bank YES IN 2.6 2.2 15.2 11.1 18.4 21.3
Axis Bank AXSB IN 2.8 2.4 15.0 11.7 20.4 22.3
HDFC Bank HDFCB IN 3.7 3.2 22.7 19.7 17.4 17.6
IndusInd Bank IIB IN 3.1 2.7 19.1 15.6 18.5 18.8
* For Core Banking Business
Prices as at 7 July 2010
Source: BNP Paribas estimates

16 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Devil’s advocate: risks to our investment case

ƒ We expect corporate capex and retail-loan demand to pick up in 2HFY10 and
FY11. However, increasing inflationary pressures leading to earlier-than-expected
and more stringent monetary policy tightening from the RBI could hamper growth.
ƒ In the event of the macro-economic scenario worsening again, there is a strong
possibility of restructured loans turning bad and resulting in higher-than-expected
NPL provisions.
ƒ Key man risk – the investment thesis for the bank is sensitive to changes in the top
management team.
ƒ Sudden spike in short-term interest rates could have a significant downside impact
on our earning estimates.
ƒ Slower-than-expected ramp-up in branch network or CASA deposits could have a
significant impact on NIMs and hence the return ratios.
ƒ Higher than expected dilution requirements could impact the return ratios for the
bank in near to medium term.

17 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Appendix 1

Background on CEO, Mr Murali Natrajan

Mr Natrajan joined DCB in April 2009. Prior to this, he was the global head for SME
banking at the Indian operations of Standard Chartered Bank (StanChart).
Mr Natrajan has been a consumer banking professional with over 20 years of
experience in India, Singapore, Hong Kong, Korea and Indonesia. Mr. Natrajan is a
fellow member of the Institute of Chartered Accountants of India. He started his career
with American Express TRS in India where he worked for five years before joining
Citibank in 1989. In Citibank, he spent 14 years and worked across functions including
his role as Director of Cards Business in Indonesia and Hong Kong. He joined
StanChart in October 2002 as General Manager for Mortgage & Auto Business for
Southeast Asia. In November 2004, he took over as the head of consumer banking for
India and Nepal with StanChart and in June 2008 he moved to Singapore as Global
Head for SME banking in StanChart.

18 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Key company information

Exhibit 32: Top Management Exhibit 33: Revenue Breakdown – FY10

Nasser Munjee, Chairman- since Aug 2005. He has over 30 years

of banking experience across boards of companies like ICICI Bank Forex
and IDFC. Currently, he sits on 15 Corporate Boards in India income
Treasury
including HDFC, Tata Motors, Tata Chemicals and ABB India. 3%
income
Murali Natrajan, MD/CEO – since May 2009. Prior to this, he was 9%
the global head for SME banking in Standard Chartered Bank
(StanChart). Has over 20 years of experience across consumer
banking positions with Citibank, Standard Chartered and American
Express TRS.
Fee & other Net interest
Bharat Sampat, Exec VP and CFO – since Sep 2008. Prior to this operating income
he was Head of Finance Shared Services at Royal Bank of Scotland. income 55%
Has over 22 years of experience in Manufacturing, Banking and 33%
Finance Shared Services industry.

Source: Dev Credit Bank Sources: Dev Credit Bank; BNP Paribas

Exhibit 34: Zone-wise Branch Presence In India Exhibit 35: Shareholding Pattern – March 2010

Promoters
East Other 23%
foreign
North 4%
holding Domestic
10% 9% financial
institutions
8%
Retail
South investors
19% 37%

FIIs
Other 3%
West Corporate
67% bodies 2%
18%

Sources: Dev Credit Bank; BNP Paribas Sources: Dev Credit Bank; BNP Paribas

Exhibit 36: Company History Exhibit 37: Top Holders As Of March 2010
1930 Inception as a co-operative bank AKFED & associates 23.1
Al Bateen Investment Co L.L.C 3.7
1988 Acquired scheduled status from Reserve Bank of India (RBI)
Tata Capital Limited 3.3
1995 Conversion of Development Co-operative Bank into DCB Bajaj Allianz Life Insurance Co Ltd 2.9
ICICI Prudential Life Insurance Co Ltd 2.9
1995 Acquired forex license and became authorized dealer
DCB Investments Ltd 2.7
2004 Classified as a new generation private sector bank by RBI Birla Sun Life Insurance Co Ltd 2.0

2006 PE investment of INR0.5b by HDFC and Khattar Holdings HDFC Ltd 2.0
Khattar Holdings Private Ltd 1.5
2006 Came up with IPO issue - raised INR1.9b
Edelweiss Securities Ltd 1.5
2007 Preferential allotment of INR2.8b in August India Capital Opportunities 1 Ltd 1.4

2009 Raised INR0.7b through tier-2 debt issue in August

2009 Raised INR0.8b in tier-1 capital through QIP issue in

November

Source: Dev Credit Bank Sources: Dev Credit Bank; BNP Paribas estimates

19 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

FINANCIAL STATEMENTS

Dev Credit Bank

Profit and Loss (INR m)
Year Ending Mar 2009A 2010A 2011E 2012E 2013E
Interest income 6,452 4,594 5,091 6,355 7,752
Interest expense (4,480) (3,174) (3,480) (4,288) (5,211) We expect 21% NII
Net interest income 1,973 1,420 1,611 2,067 2,541 CAGR on the back of
Net fees & commission 768 832 948 1,062 1,308 23% loan book CAGR
Foreign exchange trading income 224 63 76 95 119 over FY10-12
Securities trading income 20 178 36 84 49
Dividend income 0 0 0 0 0
Other income 189 (2) 0 0 0
Non interest income 1,201 1,071 1,060 1,242 1,477
Total income 3,173 2,491 2,670 3,309 4,018
Staff costs (1,044) (881) (816) (893) (949)
Other operating costs (1,376) (1,128) (1,177) (1,220) (1,424)
Operating costs (2,420) (2,008) (1,993) (2,112) (2,373)
Pre provision operating profit 753 483 677 1,196 1,645
Provisions for bad and doubtful debts (1,619) (1,135) (570) (464) (433)
Other provisions 0 (75) (72) (95) (118)
Operating profit (866) (727) 36 637 1,094
Recurring non operating income 0 0 0 0 0
Associates 0 0 0 0 0
Goodwill amortization 0 0 0 0 0
Non recurring items 0 0 0 0 0
Profit before tax (866) (727) 36 637 1,094
Tax (15) (57) 0 0 0
Profit after tax (881) (784) 36 637 1,094
Minority interests 0 0 0 0 0
Preferred dividends 0 0 0 0 0
Other items 0 0 0 0 0
Reported net profit (881) (784) 36 637 1,094 We expect a sharp drop in
Non recurring items & goodwill (net) 0 0 0 0 0 LLPs to drive turnaround
Recurring net profit (881) (784) 36 637 1,094 in profitability
Per share (INR)
Recurring EPS * (5.05) (4.25) 0.16 2.71 4.66
Reported EPS (5.05) (4.25) 0.16 2.71 4.66
DPS 0.00 0.00 0.00 0.00 0.00
Growth
Net interest income (%) 13.4 (28.0) 13.4 28.3 22.9
Non interest income (%) (30.9) (10.8) (1.1) 17.2 19.0
Pre provision operating profit (%) (31.3) (35.9) 40.3 76.6 37.5
Operating profit (%) (339.6) (16.0) (104.9) 1,675.8 71.7
Reported net profit (%) (329.8) (11.0) (104.6) 1,675.8 71.7
Recurring EPS (%) (323.6) (15.9) (103.9) 1,543.6 71.7
Reported EPS (%) (323.6) (15.9) (103.9) 1,543.6 71.7
Income breakdown
Net interest income (%) 62.2 57.0 60.3 62.5 63.2
Net fees &commission (%) 24.2 33.4 35.5 32.1 32.6
Foreign exchange trading income (%) 7.1 2.5 2.9 2.9 3.0
Securities trading income (%) 0.6 7.1 1.3 2.5 1.2
Dividend income (%) 0.0 0.0 0.0 0.0 0.0
Other income (%) 6.0 (0.1) 0.0 0.0 0.0
Adjusted RoE on the
Operating performance adjusted book to be 9%
Gross interest yield (%) 9.35 9.03 8.37 8.60 8.60 for FY12
Cost of funds (%) 7.62 6.11 5.96 6.02 5.93
Net interest spread (%) 1.74 2.91 2.41 2.59 2.67
Net interest margin (%) 2.86 2.79 2.65 2.80 2.82
Cost/income (%) 76.3 80.6 74.6 63.8 59.1
Cost/assets (%) 3.58 3.32 2.94 2.56 2.36
Effective tax rate (%) - - 0.0 0.0 0.0
Dividend payout on recurring profit (%) - - 0.0 0.0 0.0
ROE (%) (14.3) (13.1) 0.5 8.2 12.7
ROE – COE (%) (32.5) (31.3) (17.7) (10.0) (5.5)
ROA (%) (1.30) (1.30) 0.05 0.77 1.09
RORWA (%) (3.92) (1.76) 0.07 1.07 1.51
* Pre exceptional, pre-goodwill and fully diluted
Sources: Dev Credit Bank; BNP Paribas estimates

20 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

Dev Credit Bank

Balance Sheet (INR m)
Year Ending Mar 2009A 2010A 2011E 2012E 2013E
Gross customer loans 34,370 36,713 44,288 54,507 67,611
Total provisions (1,630) (2,116) (2,199) (2,207) (2,435)
Interest in suspense 0 0 0 0 0
We expect 23% loan book
Net customer loans 32,740 34,597 42,088 52,300 65,176 CAGR over FY10-12
Bank loans 3,733 410 883 1,092 1,339 driven by mortgage,
Government securities 12,675 15,790 18,474 21,245 24,432 micro-SME, SME, mid-
Trading securities 0 0 0 0 0 corporate and agri-linked
Investment securities 3,542 4,390 5,477 6,837 8,536 book
Cash & equivalents 2,869 2,914 3,778 4,807 6,097
Other interest earning assets 0 0 0 0 0
Tangible fixed assets 1,489 1,358 1,358 1,358 1,658
Associates 0 0 0 0 0
Goodwill 0 0 0 0 0
Other intangible assets 95 78 78 78 78
Other assets 2,287 1,831 2,175 2,687 3,295
Total assets 59,430 61,367 74,310 90,403 110,610
Customer deposits 46,469 47,873 58,371 72,627 90,429
Bank deposits 0 0 0 0 0
Other interest bearing liabilities 4,455 5,035 5,535 6,035 6,535
Non interest bearing liabilities 2,523 2,447 2,957 3,657 4,492
Hybrid Capital 0 0 0 0 0
Total liabilities 53,447 55,356 66,863 82,319 101,455
Share capital 1,769 2,021 2,371 2,371 2,371
Reserves 4,214 3,990 5,076 5,713 6,783
Total equity 5,983 6,011 7,447 8,084 9,155
Minority interests 0 0 0 0 0
Total liabilities & equity 59,430 61,367 74,310 90,403 110,610
Supplementary items
Risk weighted assets (RWA) 44,936 44,265 53,602 65,210 79,786
Average interest earning assets 68,970 50,890 60,808 73,890 90,093
Average interest bearing liabilities 58,800 51,916 58,407 71,284 87,813
Tier 1 capital 5,165 5,282 6,718 7,355 8,425
Total capital 5,977 6,562 8,303 9,265 10,679
Gross non performing loans (NPL) 2,900 3,192 3,051 2,893 3,184 Factoring in equity
Per share (INR) issuance of INR1.4b in
Book value per share 34.33 30.06 31.69 34.40 38.96 FY11
Tangible book value per share 30.35 26.74 28.86 31.58 36.13
Growth
Gross customer loans (%) (16.3) 6.8 20.6 23.1 24.0
Average interest earning assets (%) 20.2 (26.2) 19.5 21.5 21.9
Total assets (%) (21.6) 3.3 21.1 21.7 22.4
Risk weighted assets (%) 449,360,90 (1.5) 21.1 21.7 22.4
Customer deposits (%) (23.5) 3.0 21.9 24.4 24.5
Leverage & capital measures
Customer loans/deposits (%) 70.5 72.3 72.1 72.0 72.1
Equity/assets (%) 10.1 9.8 10.0 8.9 8.3
Tangible equity/assets (%) 9.9 9.7 9.9 8.9 8.2
RWA/assets (%) 75.6 72.1 72.1 72.1 72.1
Tier 1 CAR (%) 11.5 11.9 12.5 11.3 10.6
Total CAR (%) 13.3 14.8 15.5 14.2 13.4
Asset quality
Change in NPL (%) 357.2 10.1 (4.4) (5.2) 10.1
NPL/gross loans (%) 8.4 8.7 6.9 5.3 4.7
Total provisions/gross loans (%) 4.7 5.8 5.0 4.0 3.6
Total provisions/NPL (%) 56.2 66.3 72.1 76.3 76.5
Valuation 2009A 2010A 2011E 2012E 2013E
Recurring P/E (x) * (8.9) (10.6) 272.5 16.6 9.7
Recurring P/E @ target price (x) * (11.9) (14.1) 363.7 22.1 12.9
Reported P/E (x) (8.9) (10.6) 272.5 16.6 9.7
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Price/book (x) 1.3 1.5 1.4 1.3 1.2
Price/tangible book (x) 1.5 1.7 1.6 1.4 1.2
Price/tangible book @ target price (x) 2.0 2.2 2.1 1.9 1.7
* Pre exceptional, pre-goodwill and fully diluted
Sources: Dev Credit Bank; BNP Paribas estimates

21 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

India Research Team

MANISHI RAYCHAUDHURI GAUTAM MEHTA KARAN GUPTA

Head of India Research Associate Metals & Mining
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2403 +91 22 6628 2413 +91 22 6628 2427
manishi.raychaudhuri@asia.bnpparibas.com gautam.mehta@asia.bnpparibas.com karan.gupta@asia.bnpparibas.com

VISHAL SHARMA, CFA SHASHANK ABHISHEIK AVNEESH SUKHIJA

Infrastructure - E&C Infrastructure - E&C (Associate) Real Estate (Associate)
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2441 +91 22 6628 2446 +91 22 6628 2432
vishal.sharma@asia.bnpparibas.com shashank.abhisheik@asia.bnpparibas.com avneesh.sukhija@asia.bnpparibas.com

LAKSHMINARAYANA GANTI CHARANJIT SINGH GIRISH NAIR

Capital Goods/Cement Capital Goods/Cement (Associate) Utilities
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2438 +91 22 6628 2448 +91 22 6628 2449
lakshminarayana.ganti@asia.bnpparibas.com charanjit.singh@asia.bnpparibas.com girish.nair@asia.bnpparibas.com

AMIT SHAH SRIRAM RAMESH ABHIRAM ELESWARAPU

Oil & Gas Oil & Gas (Associate) Tech - IT
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2428 +91 22 6628 2429 +91 22 6628 2406
amit.shah@asia.bnpparibas.com sriram.ramesh@asia.bnpparibas.com abhiram.eleswarapu@asia.bnpparibas.com

AVINASH SINGH SAMEER NARINGREKAR KUNAL VORA, CFA

Tech - IT (Associate) Tech - Telecom Tech - Telecom (Associate)
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2407 +91 22 6628 2454 +91 22 6628 2453
avinash.singh@asia.bnpparibas.com sameer.naringrekar@asia.bnpparibas.com kunal.d.vora@asia.bnpparibas.com

VIJAY SARATHI, CFA ABHISHEK BHATTACHARYA JOSEPH GEORGE

Financial Services Financial Services Consumer
BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd BNP Paribas Securities India Pvt Ltd
+91 22 6628 2412 +91 22 6628 2411 +91 22 6628 2452
vijay.sarathi@asia.bnpparibas.com abhishek.bhattacharya@asia.bnpparibas.com joseph.george@asia.bnpparibas.com

MANISH A GUPTA
Consumer (Associate)
BNP Paribas Securities India Pvt Ltd
+91 22 6628 2451
manish.a.gupta@asia.bnpparibas.com

22 BNP PARIBAS
ABHISHEK BHATTACHARYA DEV CREDIT BANK 8 JULY 2010

DISCLAIMERS & DISCLOSURES

ANALYST(S)
Abhishek Bhattacharya, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2411,
abhishek.bhattacharya@asia.bnpparibas.com.
Vijay Sarathi, CFA, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2412, vijay.sarathi@asia.bnpparibas.com.
This report was produced by a member company of the BNP Paribas Group (“Group”)1. This report is for the use of intended recipients only and
may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this
report, the recipient agrees to be bound by the terms and limitations set out herein.
The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are
expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is
accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or
an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference
of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification or taken in substitution for the
exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to
change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this
report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts
any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report.
The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with
regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is,
or will be, directly or indirectly, related to the specific recommendation or views expressed herein.
This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose
business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a
subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities
and providing automated trading services. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who
are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the
Financial Services Authority for the conduct of its designated investment business in the U.K. This report may be distributed in the United States by
BNP PARIBAS SECURITIES ASIA or by BNP Paribas Securities Corp.
Where this report has been distributed by BNP PARIBAS SECURITIES ASIA it is intended for distribution in the United States only to “major
institutional investors’ (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the
use of any person or entity that is not a major institutional investor. Where this report has been distributed by BNP Paribas Securities Corp, a U.S.
broker dealer, it will have been reviewed by a FINRA S16 qualified registered supervisory analyst or a S24 qualified and authorized person, in
accordance with FINRA requirements concerning third party affiliated research.
All U.S. institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities
Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities
Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or
publication is not permitted under the applicable laws or regulations of such places is strictly prohibited.
Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd.
Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such
places is strictly prohibited.
1
No portion of this report was prepared by BNP Paribas Securities Corp personnel.
Disclosure and Analyst Certification
BNP Paribas represents that:
Within the next three months, BNPP or its affiliates may receive or seek compensation in connection with an investment banking relationship with
one or more of the companies referenced herein.
The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with
regard to any and all of the subject securities and companies mentioned in this report; (ii) no part of the compensation of the analyst(s) was, is, or
will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) BNPP is not aware of any other actual or
material conflicts of interest concerning any of the subject securities and companies referenced herein as of the time of publication of the research
report.
Recommendation structure
All share prices are as at market close on 7 July 2010 unless otherwise stated. Stock recommendations are based on absolute upside (downside),
which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or
more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we
have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most
five key buys and five key sells in each market at any point in time.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a
temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
*In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market
will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases,
therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
Rating distribution (as at 6 July 2010)
Out of 466 rated stocks in the BNP Paribas coverage universe, 315 have BUY ratings, 103 are rated HOLD and 48 are rated REDUCE. Within
these rating categories, 2.54% of the BUY-rated companies either currently are or have been BNP Paribas clients in the past 12 months, 1.94% of
the HOLD-rated companies are or have been clients in the past 12 months, and 6.25% of the REDUCE-rated companies are or have been clients in
the past 12 months.

Should you require additional information please contact the relevant BNP Paribas research team or the author(s) of this report.
© 2010 BNP Paribas Group

23 BNP PARIBAS
HONG KONG BEIJING
BNP Paribas Securities (Asia) Ltd BNP Paribas Equities (Asia) Ltd
63/F, Two International Finance Centre Beijing Representative Office
8 Finance Street, Central Unit 1618, South Tower
Hong Kong SAR Beijing Kerry Centre
China 1 Guang Hua Road, Chao Yang District
Tel (852) 2825 1888 Beijing 100020, China
Fax (852) 2845 9411 Tel (86 10) 6561 1118
Fax (86 10) 6561 2228
SHANGHAI
BNP Paribas Equities (Asia) Ltd
Shanghai Representative Office
Room 2630, 26/F
Shanghai World Financial Center
100 Century Avenue
Shanghai 200120, China
Tel (86 21) 6096 9000
Fax (86 21) 6096 9018
BANGKOK
(In cooperation with BNP Paribas)
Thanachart Securities Public Co Ltd
28/F, Unit A1 Siam Tower Building
989 Rama 1 Road, Patumwan
Bangkok 10330
Thailand
Tel (66 2) 617 4900
Fax (66 2) 658 1470
JAKARTA
PT BNP Paribas Securities Indonesia
Grand Indonesia, Menara BCA, 35/F
JI. M.H. Thamrin No. 1
Jakarta 10310
Indonesia
Tel (62 21) 2358 6586
Fax (62 21) 2358 7587

KUALA LUMPUR MUMBAI SEOUL SINGAPORE TAIPEI

BNP Paribas Capital (Malaysia) Sdn. Bhd. BNP Paribas Securities India Pvt Ltd
Suite 21.03 Level 21 Menara Dion 6/F, Poonam Chambers
27 Jalan Sultan Ismail B-Wing, Shivsagar Estate
50250 Kuala Lumpur Dr Annie Beasant Road, Worli
Malaysia Mumbai 400 018
Tel (60 3) 2050 9928 India
Fax (60 3) 2070 0298 Tel (91 22) 6628 2300
Fax (91 22) 6628 2455
BNP Paribas Securities Korea Co Ltd BNP Paribas Securities
22/F, Taepyeongno Building (Singapore) Pte Ltd
310 Taepyeongno 2-ga (Co. Reg. No. 199801966C)
Jung-gu, Seoul 100-767 20 Collyer Quay
Korea #08-01 Tung Centre
Tel (82 2) 2125 0500 Singapore 049319
Fax (82 2) 2125 0593 Tel (65) 6210 1288
Fax (65) 6210 1980
BNP Paribas Securities
(Taiwan) Co Ltd
72/ F, Taipei 101
No. 7 Xin Yi Road, Sec. 5
Taipei, Taiwan
Tel (886 2) 8729    7000
Fax (886 2) 8101 2168 

TOKYO NEW YORK BASEL FRANKFURT GENEVA

BNP Paribas Securities (Japan) Ltd BNP Paribas BNP Paribas BNP Paribas BNP Paribas
GranTokyo North Tower The Equitable Tower Aeschengraben 26 Mainzer Landstrasse 16 2 Place de Hollande
1-9-1 Marunouchi, Chiyoda-Ku 787 Seventh Avenue CH 4002 Basel 60325 Frankfurt 1211 Geneva 11
Tokyo 100-6740 New York Switzerland Germany Switzerland
Japan NY 10019, USA Tel (41 61) 276 5555 Tel (49 69) 7193 6637 Tel (41 22) 787 7377
Tel (81 3) 6377 2000 Tel (1 212) 841 3800 Fax (41 61) 276 5514 Fax (49 69) 7193 2520 Fax (41 22) 787 8020
Fax (81 3) 5218 5970 Fax (1 212) 841 3810

LONDON LYON MADRID MILAN PARIS

BNP Paribas BNP Paribas Equities France BNP Paribas SA, sucursal en Espana BNP Paribas Equities Italia SIM SpA BNP Paribas Equities France
10 Harewood Avenue Société de Bourse Hermanos Becquer 3 Piazza San Fedele, 2 Société de Bourse
London NW1 6AA 3 rue de L’ Arbre Sec PO Box 50784 20121 Milan 20 boulevard des Italiens
UK 69001 Lyon 28006 Madrid Italy 75009 Paris
Tel (44 20) 7595 2000 France Spain Tel (39 02) 72 47 1 France
Fax (44 20) 7595 2555 Tel (33 4) 7210 4001 Tel (34 91) 745 9000 Fax (39 02) 72 47 6562 Tel (33 1) 4014 9673
Fax (33 4) 7210 4029 Fax (34 91) 745 8888 Fax (33 1) 4014 0066

ZURICH MANAMA
BNP Paribas BNP Paribas Bahrain
Talstrasse 41 PO Box 5253
8022 Zurich Manama
Switzerland Bahrain
Tel (41 1) 229 6891 Tel (973) 53 3978
Fax (41 1) 267 6813 Fax (973) 53 1237

www.equities.bnpparibas.com