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UTI Bank: Challenges ahead

Apr 8, 2002

UTI Bank, one of the fastest growing new private sector banks, maintained its high growth rates for the first nine months of FY02. Over 69% rise in investment income and three-fold jump in fee-based income pushed up the bank’s earnings growth by 58%. (Over the last six years, the bank’s interest income and earnings have grown at a CAGR of 50%). Over the last few years, UTI Bank concentrated on corporate advances to fuel its business expansion. Corporate loans account for over 80% of the funds disbursed by the bank. Similarly on the liability side, term deposits account for 85% of total deposits raised by the bank. Higher cost of term deposits pulled down UTI Bank’s net interest margins, from 2.1% in FY99 to 1.2% in FY01. To diversify its loan portfolio and improve interest margins, the bank has identified retail segment as a key area of growth in the coming years.

UTI Bank is focusing on increasing its reach by way of expansion in ATMs (514) and branch (128) network. It has the second largest base of ATMs in the country and aims to double the number by FY03. It is also aggressively launching new products and services to expand its current customer base. The proportion of saving account deposits (currently contributes a marginal 7.5% to total deposits) is expected to go up with its retail initiatives. This will help the bank in reducing its average cost of borrowings, which stands on a higher side. On the asset side too, UTI Bank aims to strengthen its wings in auto and home loans. The proportion of retail loans is expected to double in FY03 from a mere 4% of total loans in FY02. The bank has hired Boston Consulting Group for its retail expansion strategies and organization structure.

Financial snapshot
(Rs m) 9m FY01 9m FY02 Change FY01 FY02E Change
Interest Income 6,170 8,302 34.6% 8,896 11,200 25.9%
Other Income 869 2,974 242.1% 1,630 4,017 146.4%
Interest Expenses 5,465 7,121 30.3% 7,914 9,510 20.2%
Net Interest Income 705 1,181 67.5% 983 1,689 71.9%
Other Expenses 834 1,395 67.4% 1,288 1,888 46.6%
Operating Profit (129) (215) 66.6% (305) (199) -34.9%
Provisions & Contingencies 94 1,221 1196.5% 284 1,696 496.7%
Profits before Tax 646 1,538 137.9% 1,041 2,121 103.8%
Tax 64 617 860.7% 180 843 369.6%
Profits after Tax 582 921 58.2% 861 1,278 48.4%
Equity shares (m) 131.9 178.3   131.9 178.3  

Performance measures
(Particulars) 9m FY01 9m FY02 FY01 FY02E
OPM -2.1% -2.6% -3.4% -1.8%
Cost to income ratio 53.0% 33.6% 49.3% 33.1%
Other income to total income 12.3% 26.4% 15.5% 26.4%
NPM 8.3% 8.2% 8.2% 8.4%
EPS (Rs) 3.3 5.2 4.8 7.2

For the full year ended March 2002, UTI Bank is expected to report nearly 50% rise in earnings. Although its pre tax profit would double, higher provision for non-performing assets is likely to lower net profit growth. The bank had a relatively high NPA ratio of 6.8% in FY99. This was due to its over exposure to corporate loans. Over the years the bank has reduced this ratio which stood at 3.8% in FY01. The bank aims to bring this to below 3% in FY02 by increasing its provision coverage. In the first nine months of FY02, it has already increased the NPA coverage ratio to about 30% from 20% in FY01.

At the current market price of Rs 40, UTI Bank is trading at a P/E of 6x FY02 projected earnings and Price/Book value ratio of about 1.7x. The bank’s stock has appreciated by nearly 50% in the last three months. The sharp rise in its price was contributed by a general upbeat sentiment in the sector backed by consolidation hopes. Also, its key promoter UTI has reduced its stake in the bank to 40% by offering the same to a group of insurance companies at a price of Rs 39. Going forward the key challenge for the bank is to bring down its cost of funds and sustain high earnings growth in this competitive scenario.

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