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UTI Bank: Quality concerns!

Apr 22, 2005

Performance Summary
UTI Bank has posted a subdued performance of 33% YoY growth in its bottomline for 4QFY05 as compared to the 60% growth witnessed in 3QFY05. Despite 67% YoY growth in credit, the bank has posted operating margins of barely 6.1% for 4QFY05 and a dip of 18.0% YoY in operating profits. The growth in margins is primarily subdued due to the rise in interest expenses and operating expenses. The contribution from the other income side continues to be generous with the bank capitalizing on fee-based revenues (97% YoY).

Rs (m)4QFY044QFY05 ChangeFY04FY05Change
Income from operations 4,137 5,561 34.4% 15,985 19,241 20.4%
Other Income 1,025 1,664 62.3% 5,402 4,158 -23.0%
Interest Expense 2,474 3,597 45.4% 10,214 11,929 16.8%
Net Interest Income 1,663 1,964 18.1% 5,771 7,312 26.7%
Other Expense 1,249 1,627 30.3% 4,192 5,813 38.7%
Operating Profit 414 337 -18.6% 1,579 1,499 -5.1%
Operating profit margin (%)10.0%6.1% 9.9%7.8% 
Provisions and contingencies 326 247 -24.2% 2,686 619 -77.0%
Profit before tax 1,113 1,754 57.6% 4,295 5,038 17.3%
Tax 242 592 144.6% 1,511 1,691 11.9%
Profit after tax/ (loss) 871 1,162 33.4% 2,784 3,347 20.2%
Net profit margin (%)21.1%20.9% 17.4%17.4% 
No. of shares (m)273.8 231.5   273.8 231.5  
Diluted earnings per share (Rs)* 12.7 20.1   10.2 14.5  
P/E (x)    16.5 
* (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 Unit Trust of India (UTI), Life Insurance Corporation (LIC) and General Insurance Corporation (GIC). The bank has been focusing on the retail segment to fuel growth going forward. 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 been able to set up a large network of ATMs, thus enabling it to widen its reach.

What has driven performance in 4QFY05?
Robust credit growth: UTI bank, in sync with its repute of achieving aggressive growth has registered a robust 104% YoY growth in retail and 54% YoY growth in corporate assets during 4QFY05. However, the fall in yields have taken a toll on the bank’s net interest margins (NIM) that dipped further from 2.9% in 3QFY05 to 2.6% in this quarter. The fall in the current financial year has been significant considering that NIM at the end of 4QFY04 was 3.4%. The bank, however believes 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 and as these translate into loan assets and replace existing short term advances, the NIM should begin to rise.

Segmental revenue
 FY04% of totalFY05% of totalChange
Retail & wholesale banking
Revenue 27,845 93.6% 21,203 84.9%-23.9%
Profit from banking operations 2,655 61.9% 3,133 62.0%18.0%
Profit margin9.5% 14.8%  
Other income
Treasury 3,484 11.7% 374 1.5%-89.3%
Fee income 1,917 6.4% 3,784 15.1%97.4%
Profit 1,633 38.1% 1,917 38.0%17.4%
Profit margin85.2% 50.7%  
Revenue 29,762   24,987  -16.0%
Profit 4,288   5,050  17.8%
Profit margin14.4% 20.2%  

Treasury tragedy: The bank’s other income continued to remain a significant contributor to bottomline despite the fact that it witnessed 89% fall in treasury profit during 4QFY05.This was because the treasury losses were offset by gains of 97% in fee income. Further, during FY05, trading income constituted 2% of the operating income, as against a proportion of 12%% in FY04, while that of fee income increased from 6% to 15% during the same period. This shows that the bank is progressively reducing its reliance on treasury income.

Mounting expenses: The bank’s other expenses continue to mount with the same having grown 30% YoY during 4QFY05. This can be attributed to a significant increase in infrastructure investments, including increase in the branch network ATMs.

Callous on asset quality: While the bank continues to cut back on provisioning, its asset quality has marginally deteriorated with net NPA to advances ratio increasing from 1.03% in FY04 to 1.07% in FY05. While most other banks are striving to improve on their asset quality, UTI Bank’s callousness on this front remains a matter of concern.

GDR issue: The bank raised capital in the form of GDR issue during 4QFY05 at a price of US$ 5.91 per GDR. Each GDR represented 1 equity share. Net of issue expenses, the bank receivedUS$ 40.9 m. Consequent to this issue, the networth of the bank increased by Rs 12.7 bn, a growth of 112%. The capital adequacy ratio of the bank stands at 12.7% as against 11.2% at the end of FY04.

What to expect?
At a price of Rs 236, UTI Bank’s stock is trading a adjusted price to book value of 2.7 times FY05 book value. This is at the higher end of the valuation spectrum of both public as well as private sector banks. The augmentation of capital adequacy ratio from 9.4% in 3QFY05 to 12.7% post the GDR issue has not only equipped the bank to sustain its credit growth but also meet the Basel requirements. Also given the government’s stand on liberalizing foreign holding in private banks, HSBC (which holds 14% stake in UTI Bank) will be looking at hiking this stake post 2009. What remains a matter of concern is the bank’s ability to sustain a clean balance sheet. Though the stock has crossed our FY07 price target we reiterate the view that the stock continues to get a premium because of its growth prospects. However much of this is already factored in the current price.

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