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UTI Bank: Profitable growth - Views on News from Equitymaster

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UTI Bank: Profitable growth

Apr 17, 2006

Performance summary
Continued growth in retail advances combined with a larger contribution of demand deposits to total deposits has helped UTI Bank report a 60% YoY growth in net interest income in 4QFY06. While net interest margins (NIMs) were maintained for the year ended March 2006, a sharp jump in provisioning lowered the growth at the net profit level. UTI Bank continues to impress, as far as the quality of growth is concerned. The board has recommended a dividend of Rs 3.5 per share (dividend yield of 1%).

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 5,561 8,327 49.7% 19,242 28,888 50.1%
Other Income 1,664 2,281 37.1% 4,158 7,296 75.5%
Interest Expense 3,598 5,198 44.5% 11,930 18,106 51.8%
Net Interest Income 1,963 3,129 59.4% 7,312 10,782 47.5%
Net interest margin (%) 2.6% 3.0%   2.9% 2.9%  
Other Expense 1,627 2,429 49.3% 5,814 8,141 40.0%
Provisions and contingencies 243 682 181.0% 619 2,625 324.0%
Profit before tax 2,000 2,981 49.1% 5,037 7,313 45.2%
Tax 592 782 32.1% 1,691 2,462 45.6%
Profit after tax/ (loss) 1,165 1,517 30.2% 3,346 4,851 45.0%
Net profit margin (%) 21.0% 18.2%   17.4% 16.8%  
No. of shares (m) 278.5 278.5   278.5 278.5  
Diluted earnings per share (Rs)         17.4  
Adjusted price to book value (x)         3.6  

Retail segment drives 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 increased its focus on the retail segment to drive growth. Its exposure to the retail segment stood at 29% of total advances in FY06. 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 (FY06), the third largest in the country. Though the bank managed to shore its capital adequacy ratio (CAR) in FY05 through a GDR issue, the same has declined in FY06 (11.1% as compared to 12.7% in FY05).

What has driven performance in FY06?
Robust growth in advances: As is evident from the table below, retail advances grew at an impressive 55% YoY during FY06. While retail advances contributed to 29% of total advances in FY06 (27% in FY05), even as the corporate portfolio increased by 38% YoY, the contribution was lower. Going forward, the bank has indicated that the pipeline for corporate advances is robust on the back of cyclical recovery in capital spending by India Inc. Though retail segment offers significant growth opportunities, we believe that the corporate segment will start growing at a healthier pace in FY07. We are confident that UTI Bank will be able to outperform industry growth rates in the next three years, as far as advances are concerned.

Credit deposit ratio up…
(Rs m) FY05 % of total FY06 % of total Change
Advances 156,030   223,140   43.0%
Retail 41,840 26.8% 64,900 29.1% 55.1%
Corporate 114,190 73.2% 158,240 70.9% 38.6%
Deposits 317,120   401,140   26.5%
CASA 120,460 38.0% 160,360 40.0% 33.1%
Term deposits 196,660 62.0% 240,780 60.0% 22.4%
Credit deposit ratio 49.2%   55.6%    

Though NIMs were more or less the same in FY06, in 4QFY06, NIMs expanded significantly on the back of a 65% YoY increase in savings deposit (total deposit growth in 4QFY06 was 26% YoY). For FY06 as a whole, low cost deposits accounted for almost 40% of total deposits, which is an encouraging sign. The total number of saving accounts expanded by 37% YoY to 3.4 m in FY06, thus boosting the low cost deposit contribution. However, there has been a marginal increase in cost of funds, which is on account of the rise in interest rates in the past six months. Despite average cost of funds going up, the bank was able to report stable NIMs also on account of a 48% YoY growth in investment income in FY06. The bank has indicated that NIMs should continue to rise in light of higher advances (corporate and retail alike).

Impressive asset quality: Despite competition and the urge to grow assets, UTI Bank has managed to keep delinquencies under control. This is not only reflected in lower net non-performing assets (NPAs) to net advances, but also very marginal rise in absolute gross NPAs (gross NPAs increased by 16% YoY in FY06).

Other highlights of FY06 were lower contribution from fee-based income to net interest income and higher trading profits. Though trading profits in FY06 increased by 5 times, the fact that the bank booked losses to the extent of Rs 1.1 bn in FY05 highlights the fact that the growth is not comparable (the bank booked losses on account of shifting of trading portfolio from available for sale (AFS) category to held to maturity (HTM) category). Though fee-based income increased by 38% YoY, it was slower than the rise in NIMs and therefore, the contribution was lower.

What to expect?
At Rs 335, the stock is trading at 2.5 times our estimated FY08 adjusted book value (3.5 times FY06 numbers). As compared to our earnings estimates, the bank's EPS is lower by 15%. Even though the bank has outperformed our net interest income estimates, higher provisioning has subdued the bottomline growth (we had factored in a decline in provisions, whereas actual provisions were 3 times that of FY05). We continue to remain positive on the bank from a long-term perspective.

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