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UTI Bank: Provisions depress earnings - Views on News from Equitymaster
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  • Jan 12, 2002

    UTI Bank: Provisions depress earnings

    UTI Bank reported better than expected growth in net profits backed by a spectacular rise in other income. The bank's higher treasury income contributed to a rise of over 50% in earnings.

    (Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
    Income from Operations 2,376 2,897 22.0% 6,170 8,302 34.6%
    Other Income 283 1,043 268.6% 869 2,974 242.1%
    Interest Expenditure 2,048 2,389 16.6% 5,465 7,121 30.3%
    Operating Profit 12 16 31.4% (129) (215) -
    Operating Profit Margin (%) 0.5% 0.5%   -2.1% -2.6%  
    Other Expenses 315 493 56.3% 834 1,395 67.4%
    Provisions and contingencies 29 475 1532.6% 94 1,221 1199.3%
    Profit before Tax 266 584 119.5% 646 1,538 137.9%
    Tax 36 226 533.6% 64 617 863.8%
    Profit after Tax/(Loss) 230 358 55.3% 582 921 58.1%
    Net profit margin (%) 9.7% 12.3%   9.4% 11.1%  
    No. of Shares (m) 131.9 178.3   131.9 178.3  
    Diluted Earnings per share* 5.2 8.0   4.3 6.9  
    P/E Ratio   3.4     3.9  

    The bank's interest margins (excluding other income and other expenses) improved by about 380 basis points in the third quarter. However, excluding other operating expenses, operating profit margins have remained stagnant at 0.5%. The bank's low cost saving account deposits grew by 66% and accounted for 5% of total deposits. The contribution of retail deposits is still on the lower side compared to other private sector banks. The bank needs to increase this proportion to reduce its average cost of funds and improve operating margins.

    Although the bank's cost to income ratio reduced significantly to 34% in the first nine months of current fiscal from 53% in the comparable previous period, it is still on the higher side. This is reflected from negative operating margins in the first nine months of FY02.

    During the first nine months, UTI Bank's other income increased four fold fueled by a strong rise in treasury income. Other income accounted for 26% of the bank's total income and 46% of treasury income (this includes liquidity management, forex operations, money market and derivatives trading). The RBI has recently issued guidelines for banks to transfer gains from trading in government securities to the investment fluctuation reserve (IFR). Banks are required to build up IFR to 5% of their total investment portfolio over a period of five years. Consequently, banks will have to transfer gains of treasury income to build up this reserve. This reserve can be then utilised against depreciation in the value of investments. UTI Bank's earnings growth is also likely to slowdown if the bank transfers its treasury income to reserves.

    During the quarter, UTI Bank made a preferential allotment of its shares to the South Asia Regional Fund and CDC Capital Partners, which together hold 26% stake in the bank. Consequent to this fund infusion (Rs 1.6 bn), the bank's capital adequacy ratio rose to 10% from 9% as on March 2001. The ratio is however, still low to support the bank's rapid business expansion in future.

    The bank increased its NPA provision amount substantially in the first nine months to Rs 1.2 bn from Rs 284 m as on March 2001. This could be to increase the provision coverage ratio which stood at just 20% in FY01 (this means that only 20% of gross NPA were provided for). Higher provision and tax figure trimmed the earnings growth of the bank.

    At the current market price of Rs 27, UTI Bank is trading at a P/E of 4x and Price/Book value ratio of 1x its nine months annualised earnings. The bank's lower valuations are the result of its asset quality and loan portfolio which is tilted in favour of corporates. A downturn in economy is likely to deteriorate its core interest income growth. Already, in the third quarter, interest income from advances which accounts for 45% of total income grew by just 5%.



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