DBL, it must be recalled, is in the process of doing shareholders a valuable service by converting the partly paid-up shares (from its high priced IPO) into fully paid shares, by a process of proportionate reduction, which considerably improved sentiment in the stock. Almost 58 per cent of its IPO remained unpaid at the time and shareholders who have paid up partly will now have held shares in proportion to the amount paid up, instead of paying the balance amount. There will be a 28 per cent reduction in the outstanding equity as a result.

But going by last year's performance and the reporting standards adopted, there is little else to cheer about. The maximum growth was seen in the bank's deposits, since by its own admission, it targeted deposit growth aggressively. Deposits grewfrom Rs 1,040 crore to Rs 1,235 crore, but there was no corresponding increase in advances, which were up just 10 per cent.

Like most other banks that grew in a difficult year, deployment of incremental resources (which is costlier for DBL considering the nature of its depositors), at remunerative rates was difficult.

In fact, the bank has been lending below its incremental cost of funds. This was compounded by the fact that the short-term assets of the bank declined, especially monet at call which meant that the yield on funds should have ideally increased. Instead, the incremental interest flows were inadequate to cover for corresponding interest outflows.

The impact on the operating profit was considerable. Operating profit declined from Rs 18.9 crore to Rs 13.3 crore, a drop by 30 per cent. The net profit dropped by more than 50 per cent. But interestingly, despite the increase in net non-performing assets (NPAs) from 11.01 per cent to 12.33 per cent, the provisions during the year for NPAs werelower by 7 per cent. If the same proportion of provisions to net advances was maintained, then, net profit for the year would have been considerably lower.

A more telling impact would have been on the return on assets. Even in a bad year, most Indian banks (with the exception of the new generation banks, which reported higher RoA) managed to report RoA ranging between 0.8 to 1 per cent. In DBL's case the RoA was just 0.28 per cent for 1998-99. The bank expanded its balance sheet size by 17 per cent in what was a tough year, stretching thin the available capital cover.

The total capital adequacy as a result was just 10.06 per cent (it would be lower if adjustments were made for the equity reduction as well as the various under provisions). If the rate of growth continues or accelerates into the current financial year which is likely to be the case, there will be a need for additional capital, mostly in the form of an equity infusion.

An equity dilution at this stage could continue to keep the stockprice depressed. And if interest rates continue to remain depressed in the current year as it is likely to be, profit margins will be squeezed further, given the already narrow spreads. The stock is an underperformer and is yet to emerge from a decline spanning over one and a half years.