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UTI Global Bank – Union of equals

Feb 14, 2001

UTI Bank and Global Trust Bank announced a merger recently and created UTI Global Bank with an asset base of over Rs 200 bn. Interestingly, none of the two banks were been taken over by another; it is a merger of equals.The aim of any merger is the size, which plays a critical role in the future growth of the bank given the extremely fragmented structure of the Indian banking sector. UTI Global Bank will not only achieve the growth but will also be able to capture a good market share through this amalgamation.

The swap ratio of every 4 shares of Global Trust Bank for 9 shares held in UTI Bank was decided after considering several factors like book value of the two banks, market price, branch network and quality of the assets. The ratio seems to be in favour of UTI Bank. However, Global Trust Bank is also getting an advantage to leverage the parental of UTI Bank with its large customer base. Also, the asset quality of GTB is suspected and the new bank may have to increase its provisioning requirement to take care of the hidden stick assets.

Unit Trust of India (UTI), the primary promoter of UTI Bank, will hold a 19.8% stake in the new entity and the promoters of GTB will hold 16%. The Washington based International Finance Corporation (IFC) will hold a 7.8% stake and LIC, GIC & its subsidiaries will hold together 3.7%. UTI Bank will be merged with Global Trust Bank and will be delisted consequently.

Financial overview
(Rs m)FY00FY01EFY02EFY03E3 yrs CAGR
Operating income 6,464 17,303 23,658 30,475 32.7%
Other income 2,327 3,678 4,598 5,748 25.0%
Interest expended 5,072 13,967 18,827 23,839 30.6%
Operating profit 1,392 3,336 4,830 6,636 41.0%
Provision & Contingencies 990 606 890 1,349 49.2%
Other Expenses 1,239 3,342 4,526 6,192 36.1%
Profit before tax 1,490 3,067 4,013 4,843 25.7%
Tax 404 574 803 969 29.9%
Profit after tax 1,086 2,493 3,211 3,874 24.7%
Number of shares (m)121.4180.0180.0180.0 
*Financials of GTB

Ratio analysis
ParticularsFY00FY01EFY02EFY03E
Operating margin21.5%19.3%20.4%21.8%
Net profit margin16.8%14.4%13.6%12.7%
Fully Diluted EPS (Rs) 6.0 13.8 17.8 21.5
Interest spread 4.7%3.1%3.1%3.0%
Credit/Deposit Ratio51.8%57.0%56.0%54.8%
RONW 20.6%25.8%26.1%24.9%
ROA 3.0%2.9%2.8%2.5%
ROIC 3.3%1.7%1.7%1.6%

UTI Global Bank has targeted to achieve a balance sheet size of Rs 500 bn in the next three years. This implies a growth of 30% per annum. Accordingly, net profit of the bank is expected to grow by 29% and 21% in FY02 and FY03 respectively. Retail focus, operating efficiencies and volume growth will drive the bottomline of the bank in future. Also, the bank’s foray into insurance will help it to maintain the topline growth in future.

The combined network of both the banks’ is amongst the largest with 157 branches and 321 ATMs, well spread across the country. It will have direct access to over 1 m customers to whom they can offer several retail products such as insurance, mutual funds, personal loans, housing loans and auto loans. The challenge for the bank lies in increasing its retail presence by leveraging its branch network. It is also planning to foray into insurance, which is relatively untapped market in India. The bank will be able to leverage the extensive branch network (including that of UTI) to distribute the insurance products.

Integration of technology will not be a major problem for both the banks since they are using the common banking software ‘Finacle’ made by Infosys. Cultural integration will also be smooth, as both of them are new private sector banks with productivity ratios in line with their peers in the industry. In order to remain ahead in increasing competition from banks and financial institutions, UTI Global Bank will have to continuously invest in technology. If the bank is not able to generate incremental returns from the amount invested, its return on net worth is likely to get impacted.

The bank is expected to emerge as a dominant player in the cash management services (high volume and low margin business). It will get the maximum number of transactions from UTI, which does business of around Rs 150-Rs 200 bn every year.

The bank compares well in terms of productivity ratios. However, its ratio of profits/employee is less than that of ICICI Bank and HDFC Bank. This is due to comparatively lower operating profit margins. Its focus on building up retail assets, which has a higher margin and efforts to generate more fee-based income, is expected to improve its profit per employee ratio in future.

Performance parameters
ParticularsUTI Global
Bank
ICICI
Bank
HDFC
Bank
SBICorporation
Bank
Revenue/employee (Rs m)8.796.11.11.8
Profits/employee (Rs m)1.22.52.50.10.3

UTI Global Bank’s current valuations are lowest even when compared to other banks globally. Future valuations of the bank depend on its ability to maintain its current growth rate and improve operating margins. Also, offering of value added services could trigger a re-rating in the stock.

Comparative Valuations
ParticularsUTI Global
Bank
ICICI
Bank
HDFC
Bank
Bank of East
Asia (Hong Kong)
Abbey National
Plc. (London)
The Bank of
New York
P/E6.221.530.116.513.828
Price/Book Value1.62.46.91.82.46.5


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