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UTI Bank: Well rounded FY07 - Views on News from Equitymaster
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UTI Bank: Well rounded FY07
Apr 17, 2007

Performance summary
UTI Bank has announced results for the fourth quarter and full year ended March 2007, marginally under-performing our estimations particularly on the net interest margin front. While the bottomline for both the periods under review grew in excess of 35% YoY, offering no disappointment on the fee income and asset growth front, operating costs and treasury losses have proved to be dampeners. However, the 200 basis points fall in net profit margins point towards inability to sustain high profits along with growth. We continue to remain comfortable on the bank’s capital adequacy and asset quality fronts.

Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Interest income 8,326 13,667 64.1% 28,887 45,604 57.9%
Interest expense 5,197 9,025 73.7% 18,105 29,933 65.3%
Net Interest Income 3,129 4,642 48.4% 10,782 15,671 45.3%
Net interest margin (%)       2.9% 2.9%  
Other Income 2,281 3,011 32.0% 7,296 10,101 38.4%
Other Expense 2,428 3,430 41.3% 8,140 12,145 49.2%
Provisions and contingencies 681 1,065 56.4% 2,625 3,663 39.5%
Profit before tax 2,982 4,223 41.6% 9,938 13,627 37.1%
Tax 782 1,039 32.9% 2,462 3,372 37.0%
Profit after tax/ (loss) 1,519 2,119 39.5% 4,851 6,592 35.9%
Net profit margin (%) 18.2% 15.5%   16.8% 14.5%  
No. of shares (m) 278.5 281.1   278.6 281.6  
Diluted earnings per share (Rs) 21.8 30.2   17.4 23.4  
P/E (x)*         19.9  
*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 24% of total advances at the end of FY07. 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 2,341 ATMs, the third largest in the country.

What has driven performance in 4QFY07?
Assets - Quality comes first: The detailed bifurcation of the composition of its advance book and the growth in each basket, which the bank has disclosed for the first time this quarter, points out towards the fact that it is reworking its strategy. While making a marginal change in its portfolio allocation, the bank has visibly slowed down growth in its retail assets and has gone back to adding more large corporates to its customer base. However, it must be noted here that the overall growth in advances for the bank is at rates more than double the sector average (29% YoY). Despite a sizeable advance book, UTI Bank showed no signs of slowing down in its incremental advance growth, clocking over 50% YoY growth for the seventh consecutive quarter in 4QFY07. 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: Settling for quality
(Rs m) FY06 % of total FY07 % of total Change
Advances 223,140   368,760   65.3%
Agriculture 19,630 8.8% 40,740 11.0% 107.5%
Retail 64,900 29.1% 89,280 24.2% 37.6%
SMEs 47,360 21.2% 79,630 21.6% 68.1%
Large corporates 91,250 40.9% 159,110 43.1% 74.4%
Deposits 401,140   587,860   46.5%
CASA 160,360 40.0% 234,300 39.9% 46.1%
Term deposits 240,780 60.0% 353,560 60.1% 46.8%
Credit deposit ratio 55.6%   62.7%    

On the net interest margin front, the bank has fallen short of our FY07 estimations by 10 basis points (2.9 % in FY07 against our estimation of 3.0%). Besides the costs of funds that have shot by nearly 40 basis points this quarter, the NIMs that have marginally improved quarter on quarter, have been impacted by the change in composition of assets with a higher weightage to low risk and low return assets (AAA-rated corporates). It may be recalled that the bank was reaping the benefits of its assets getting re-priced faster and at higher rates as compared to liabilities, thus not scathing its margins over the past 2-3 quarters. Higher growth in term deposits has added to the bank’s margin woes.

Treasury dents other income: Lower treasury gains dampened the bank’s other income growth for the final quarter and full year. The share of trading profits to the operating revenue decreased from 12% in 4QFY06 to 6% in 4QFY07 (12% in FY06 to 7% in FY07). A 61% YoY growth in fee income in FY07 took the contribution of fee-based income to the bank’s total income to 32% in FY07, from 28% in FY06. The bank has outperformed our estimates on this parameter and continued to surpass 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, UTI Bank has also succeeded in growing its market share in cash management services (CMS) and improving its stronghold on placement and syndication of corporate bonds and project advisory services. The number of CMS clients has grown to 2,164, from 1,432 a year earlier. Besides, given the fact that the bank has 90% of its investments in the HTM (held to maturity) category and AFS (available for sale) duration of less than a year, its treasury portfolio is one of the best hedged in the sector.

Delinquencies - Taken care of: The aggressive growth in retail assets had earlier shown a red signal to the bank in the second and third quarter of FY07, as there had 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 4QFY07 against 0.7% in 3QFY07 and 0.8% in 4QFY06, the bank has also succeeded in arresting the incremental delinquencies this quarter.

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. During FY07, it added 111 branches and 450 ATMs. The same has spurted its cost to income ratio from 45% in FY06 to 47% in 4QFY07 largely due to the high employee intake in the past few quarters. This may also impact the bank’s efficiency ratios in the medium term. The bank also opened its overseas branch in Hong Kong in February 2007 and in Dubai in April 2007. This is in addition to its existing overseas branches in Singapore and Shanghai. The total assets under overseas operations were US$ 731 m as at the end of March 2007.

Capital adequacy: During FY07, UTI 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 11.1% in FY06 to 11.6% in FY07, making it comfortable for Basel-II compliance by March 2008. In order to shore up its Tier-I capital, the bank intends to issue fresh equity during FY08.

What to expect?
At the current price of Rs 465, the stock is attractively valued at 2.5 times our estimated FY09 adjusted book value. While UTI Bank continues to outperform our expectations in terms of asset growth and fees, we remain skeptical about the downside in margins. While the fact that the bank has chosen to guard its asset quality rather than chase high yielding assets is a matter of comfort, this may put its net interest margins at risk. Nevertheless, the bank’s consistency in fee income growth makes it a safe play in the rising interest rate scenario. While concerns on the asset quality front have started diluting, those over succession issue (with Dr. Nayak due to retire this fiscal) loom large. Our outlook on the bank continues to remain positive from a long-term perspective and we stand by our recommendation.

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