Dhanlaxmi Bank: Promising Bet or a Ticking Bomb?

On February 29, 2024, an analyst in a portfolio-management firm prepared to examine the financial position of one of the oldest private-sector banks in India, Dhanlaxmi Bank Ltd. (Dhanlaxmi Bank), in response to a query from a client who wanted to rebalance their portfolio, replacing Dhanlaxmi Bank stock with some other banking stock. Dhanlaxmi Bank had faced financial issues since 2015 and had been governed directly by the country’s central bank, the Reserve Bank of India, through its Prompt Corrective Action mechanism until 2019. Its financial performance since 2019 had led long-term investors to believe that the bank had come out of financial trouble. Its share price had appreciated 148 per cent from to 2024. However, concerns had recently been raised about the bank’s financials and its dire need for additional capital, and investors feared that share prices would be affected. The analyst therefore had to examine the bank’s financials to determine whether it was in financial distress and to assess the possibility of further intervention by the central bank. He had alternatives to use in assessing the financial situation objectively: the Z-score and probability of financial distress (PFD) models. The Z-score analysis indicated that the bank was not in financial distress, and the PFD model suggested there was no risk of bankruptcy. However, certain financial issues needed to be addressed swiftly.