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UTI Bank: Reaping ‘re-pricing’ benefits! - Views on News from Equitymaster
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UTI Bank: Reaping ‘re-pricing’ benefits!
Jan 13, 2006

Performance Summary
UTI Bank has reported strong results for the quarter and nine month ended December 2005, posting over 30% YoY and 53% YoY growth in bottomline respectively. The bank, besides reaping the benefits of re-pricing its funds, has also shown improvement in credit quality and other income growth. Not to mention that a well spread retail franchise has helped augment its retail assets and liabilities alike.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Income from operations 4,913 7,467 52.0% 13,681 20,561 50.3%
Other Income 1,429 1,734 21.4% 2,495 5,016 101.0%
Interest Expense 3,042 4,593 51.0% 8,332 12,908 54.9%
Net Interest Income 1,871 2,874 53.6% 5,349 7,653 43.1%
Net interest margin (%)       2.9% 2.9%  
Other Expense 1,505 2,047 36.0% 4,187 5,712 36.4%
Provisions and contingencies 317 592 86.8% 377 1,944 416.1%
Profit before tax 1,795 2,562 42.7% 3,280 5,013 52.8%
Tax 466 653 40.1% 1,100 1,681 52.8%
Profit after tax/ (loss) 1,012 1,317 30.1% 2,181 3,334 52.9%
Net profit margin (%) 20.6% 17.6%   15.9% 16.2%  
No. of shares (m) 278.5 278.5   278.5 278.5  
Diluted earnings per share (Rs)* 14.5 18.9   10.4 16.0  
P/E (x)         19.9  
* (annualised)

Aggressive on growth
UTI Bank is one of the new generation private sector banks and is promoted by some of the largest financial institutions in the country, namely UTI-1 (28%), LIC (11%) and General Insurance Corporation (GIC). 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. Its exposure to the retail segment stands at 30% of total advances. 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 1,820 ATMs, the third largest in the country. The bank has had a successful GDR issue in FY05 that brought its CAR to 11.7% from 11.1% in FY04.

What has driven performance in 3QFY06?
Margins buck the trend: UTI Bank registered an almost equivalent growth in its retail (48% YoY) and corporate credit segments (49% YoY) during 3QFY06. The bank has successfully capitalised on the RAC (retail asset centre) model to capture growth opportunities and at the same time not compromising on the asset quality. It may be recalled that the bank had set up RACs for dedicated disbursement of retail credit (distinct from branch distribution) so as to avoid any undue favours to the branch deposit customers and compromises on loans appraisals. The same seems to have paid off well now. Nevertheless, it may also be noted that though the bank has shown an appreciable growth in the retail advance book in absolute terms, it has restricted the share of retail segment (in its credit portfolio) to 30%, in the wake of higher incremental delinquencies witnessed in the same of late.

(Rs m) 3QFY05 % of total 3QFY06 % of total Change
Advances 131,081   195,310   49.0%
Retail 39,041 29.8% 57,780 29.6% 48.0%
Corporate 92,040 70.2% 137,530 70.4% 49.4%
           
Deposits 263,260   340,250   29.2%
CASA 73,000 27.7% 118,100 34.7% 61.8%
Term deposits 190,260 72.3% 222,150 65.3% 16.8%
Credit deposit ratio 49.8%   57.4%    

Post the bank’s GDR issue, wherein it could re-price the short-term high cost deposits, UTI Bank has visibly improved its net interest margins over the past couple of quarters. The NIMs have improved by over 30 basis points over the past 3 quarters. Thus, the bank’s margins have bucked the sector trend of a decline in NIMs on the back of pricing pressures. UTI Bank also believes that it now has a very credible and encouraging pipeline of corporate advances, indicative of the very visible upswing in the credit cycle in the country. As these translate into loan assets replacing existing short term advances, the NIMs will see a further upside. Stupendous growth in low cost deposits (62% YoY growth; 35% of deposit book in 3QFY06) has also aided margins during the period under consideration.

Accelerating fee: The bank registered a robust growth of 31% YoY in 9mFY06 in its fee income segment. It must, however, be noted that the growth remains subdued due to a high base effect (in 3QFY05, the bank had an extraordinary income from securitisation). 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. Besides, given the fact that the bank has 85% of its investments in the HTM category, its treasury portfolio remains well hedged.

Quality – ‘absolute’ improvement: After several quarters of write offs of provisioning, the bank has provisioned aggressively in this quarter despite having arrested delinquencies. The proportion of NPAs has reduced not only in percentage terms but also in absolute terms. This caused the net NPAs to slip from 1.3% in 3QFY05 to 1.0% in 3QFY06. The provisions together with accumulated write-offs as a proportion of gross NPAs (NPA coverage) amounted to 74% at end of 3QFY06.

What to expect?
At the current price of Rs 318, the stock is trading at 2.2 times our estimated FY08 adjusted price book value. Though the stock has crossed our FY07 price target, we believe that the bank remains attractive from the long-term perspective, given that higher margins and better asset quality have started filtering into its valuations. Given the bank’s consistency in fee income growth and visible upside in net interest margins, witnessed over the past few quarters, we have upwardly revised our projected figures for the same for UTI Bank.

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