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UTI Bank: All in its stride - Views on News from Equitymaster
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UTI Bank: All in its stride
Jan 12, 2007

Performance summary
UTI Bank has announced results for the third quarter and nine months ended December 2006. The bank continues its trend of superlative performance quarter after quarter giving little opportunity to investors to complain about. While the bottomline for both the periods under review grew in excess of 30% YoY, what is most surprising is the fact that the bank has managed to improve its NIMs at a time when most of its peers are struggling to sustain it. A growth in fee income and improvement in asset quality have further helped matters. However, the 200 basis points fall in net profit margins for both the periods suggests the inability to contain operating costs.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 7,467 11,896 59.3% 20,561 31,936 55.3%
Other Income 1,734 2,797 61.3% 5,016 7,090 41.3%
Interest Expense 4,593 7,737 68.5% 12,908 20,907 62.0%
Net Interest Income 2,874 4,158 44.7% 7,653 11,029 44.1%
Net interest margin (%)       2.9% 3.0%  
Other Expense 2,047 3,369 64.6% 5,712 8,716 52.6%
Provisions and contingencies 592 763 28.9% 1,944 2,598 33.6%
Profit before tax 2,561 3,587 40.1% 6,957 9,403 35.2%
Tax 653 977 49.6% 1,681 2,333 38.8%
Profit after tax/ (loss) 1,316 1,847 40.3% 3,332 4,472 34.2%
Net profit margin (%) 17.6% 15.5%   16.2% 14.0%  
No. of shares (m) 278.5 281.1   278.5 281.1  
Diluted earnings per share (Rs) 18.9 26.3   16.0 21.2  
P/E (x)*         22.9  
*Trailing 12 months

Aggressive on growth
UTI Bank is one of the most aggressive players in the private sector banking industry having nearly doubled its share in non-food credit over the last 6 years from 0.9% in FY00 to 1.7% in FY06. The bank in the last few years has changed its focus from the corporate segment and is currently focusing on the retail segment to fuel growth going forward. Its exposure to the retail segment stands at 28% of total advances at the end of 9mFY07. The bank's strategy is to aggressively tap the retail domain via the use of ATMs. Following this strategy, the bank has set up a network of 1,891 ATMs, the third largest in the country.

What has driven performance in 3QFY07?
Back to corporate? After several quarters of concentrated efforts to grow its retail assets at a quicker clip than the corporate book, UTI Bank, that was erstwhile a corporate loan heavy bank, seems to have started reworking its strategy. While not making a visible change in its portfolio allocation, the bank has slowed down growth in its retail assets. However, it must be noted here that the overall growth in advances for the bank is at rates double the sector average (29% YoY). Despite a sizeable advance book, UTI Bank showed no signs of slowdown in its incremental advance growth, clocking over 50% YoY growth for the sixth consecutive quarter in 3QFY07. The delinquency figures suggest that the bank has taken the step at re-working its retail strategy given the high-risk weightage of incremental retail assets. Also, a fall in the proportion of CASA (current and savings accounts) elicits concern with respect to retail deposits.

Assets: Retail takes backseat
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 195,310   323,370   65.6%
Retail 57,780 29.6% 91,780 28.4% 58.8%
Corporate 137,530 70.4% 231,590 71.6% 68.4%
Deposits 340,250   509,200   49.7%
CASA 222,150 65.3% 320,370 62.9% 44.2%
Term deposits 118,100 34.7% 188,830 37.1% 59.9%
Credit deposit ratio 57.4%   63.5%    

On the net interest margin front, it may be recalled that the bank had faced pressure over the last 3 quarters due to the presence of high cost short-term liabilities in its books. The same has, however, eased with the bank accessing long-term Tier–II borrowing and resorting to a PLR hike. It also needs to be noted that as liabilities are of a shorter average duration than assets, they get repriced faster than assets. The bank is thus reaping the benefits of its assets getting re-priced faster and at higher rates as compared to liabilities, thus not scathing its margins. While the NIMs have marginally improved by 10 basis points, we stand by our conservative stance with respect to it for the full year numbers.

Fees – Hedging margins: A 59% YoY growth in fee income took the contribution of fee-based income to the bank’s total income to 29% in 3QFY07 from 27% in the corresponding quarter of FY06. This helps it surpass its closest competitor HDFC Bank (25%) in terms of fee income contribution. While both retail and corporate segments contributed an appreciable proportion of the fee income growth, the bank has also succeeded in growing its market share in cash management services and improving its stronghold on placement and syndication of corporate bonds and project advisory services. The number of CMS clients has grown to 1,773 from 1,328 a year earlier. Besides, given the fact that the bank has 90% of its investments in the HTM category and AFS duration of less than a year, its treasury portfolio is one of the best hedged in the sector.

Delinquencies: Surprises in the offing? The aggressive growth in retail assets seems to have shown a red signal to the bank in this quarter, as there has been a visible growth in incremental delinquencies in absolute terms. The same has, however, got camouflaged in percentage terms due to the higher growth in advances. While it is heartening to see that the bank’s net NPAs as a percentage of advances have fallen to 0.6% in 3QFY07 against 0.8% in 3QFY06, one is forced to be concerned about whether are higher delinquencies in the offing.

Cost heavy: UTI Bank that had one of the lowest cost to income ratio in the Indian banking sector has seen its operating costs escalate over the past few quarters, understandably due to accretion of franchise and branches. The same has, spurted from 44% in 3QFY06 to 48% in 3QFY07 largely due to the employee intake in the last quarter (1,559 employees were recruited in 2QFY07) that was the largest personnel increase so far in the bank. This may also impact the bank’s efficiency ratios in the medium term.

Capital adequacy: During the nine-month period, the bank raised US$ 150 m by way of issuing upper Tier–II bonds overseas and Rs 2 bn by way of perpetual debt in the form of non-convertible debentures qualifying for Tier-I capital. This improved the bank’s CAR from 10.3% in FY06 to 11.8% in 9mFY07, making it comfortable for Basel-II compliance by March 2007.

What to expect?
At the current price of Rs 498, UTI Bank’s stock is well priced at 3.1 times our estimated FY09 adjusted price book value. UTI Bank continues to outdo our expectations in terms of asset growth and margins. Also, as against most of its peers in the private sector banking space, which have an embargo on branch expansion for a year (due to the discrepancies on IPO allotments), the bank has got fresh approval from RBI for opening 100 new branches and 226 ATMs in the current year. The bank’s consistency in fee income growth makes it a safe play in the rising interest rate scenario. However, concerns on the asset quality front and over succession issues (with Dr. Nayak due to retire this fiscal) loom large. While our outlook on the bank continues to remain positive from a long-term perspective, its current valuations certainly call for caution.

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