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GTB: Analyst meet notes - Views on News from Equitymaster
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  • May 3, 2001

    GTB: Analyst meet notes

    Global Trust Bank had its analyst meet yesterday where it discussed the issue of the bank’s over exposure to the capital markets and its future strategies to bring back the investors confidence.

    GTB has recently appointed Mr. R. S. Hugar as the Chairman and Managing Director to restructure the bank. Mr. Hugar was earlier heading Corporation bank. He has identified number of initiatives for GTB to bring in consolidation in the assets and aggressive expansion of retail base.

    1. Reviewing investment and credit policy: Currently the bank has total (investments and advances) exposure of over 9% to capital markets, which it plans to bring down to 5% in the next six months. As on March ’01, the bank had invested Rs 4.3 bn in the capital markets (Rs 3.6 bn through loans which is 8.8% of total advances). This over exposure led to heavy losses for the bank during the year. The ratio of overall investments in capital markets was as high as 17% in January ’01.

    2. To broad base the risks: GTB plans to review the industry and per account exposure to broad base the risks. The loans to top 5 industries include broking, telecom, construction, housing and trading. The bank’s investment strategies in the telecom and media are of short term in nature (180 days to less than 1 year). Currently the telecom and broking sectors are facing tough times and are considered to be high-risk investments. To broad base the risk GTB is required to reduce its exposure to these sectors.

    3. Bring down the NPAs:

      • During the year, GTB’s net NPA to advances ratio shot up to 3.75% from 0.87% in the previous year. According to the bank this was due to additional NPAs in the sectors of agriculture, distilleries and gems & jewellery.

      • In FY01, GTB made adhoc provisions for Rs 350 m and created a special contingency reserve of Rs 200 m to meet any eventuality in the capital market fluctuations in future. It has provided Rs 272 m for depreciation in the value of investments and incurred a loss of Rs 420 m. These losses were however offset by the profits of Rs 690 m on SLR investments. The bank aims to bring down its NPA ratio to the level of around 2% in the current year. This will be a very challenging task for GTB considering the nature of industry exposure it has currently.

    4. Retail initiatives: During the year ended March ’01, GTB’s customer base increased to 660,000 from 450,000 in the previous year. The bank aims to increase the base to over 1 m in the current year. This will be achieved by entering several new areas. It plans to enter into distribution of mutual funds and insurance products. It aims to introduce new retail asset products including education loans, home loans, auto loans, consumer durable loans and credit cards. The bank also wishes to increase its ATM base from the current base of 101 to 250 by the year-end, to reduce its transaction costs. Its current branch network of 79 will be extended to 100 by FY02.

    5. Interest spread: GTB’s FY01 results were highly disappointing with cost of funds increasing substantially in 4QFY01(10.6%), an increase of 112 basis points from FY00. Another concern is the fall in interest income by 8% in the fourth quarter. The bank has not sited any reason for this. On a year on year basis yield on advances too dropped by 129 basis points to 14.5%. This has resulted in interest spread falling to 5.1% in FY01 from 6.3% in the previous year. In the month of April the bank saw a substantial withdrawal of deposits due to loss of confidence among the investors. As a result the RBI extended Rs 4 bn special liquidity support facility to GTB. The facility is expected to serve as a fallback mechanism if the bank is faced with any difficulties. It is important to note here that the RBI extends this facility only to banks not faced with any solvency risk.

    6. Vision 2002: GTB’s advances and deposit base in FY01 increased by 24% and 27% respectively. The bank aims to achieve an advances base of Rs 100 bn and deposits base of Rs 50 bn by FY02, implying a growth of 29% and 22% respectively. Its credit to deposit ratio of 53% is highest among its private sector peers. Higher cost of funds has resulted in the sharp fall in 4QFY01 profits. As a result GTB plans to improve the operating margins by increasing its retail assets.

    At the current market price of Rs 28 GTB is trading at a P/E multiple of 4 times FY01 earnings and a Price/Book value ratio of 0.6x. The bank’s lower valuations compared to its peers are the result of concerns over its high exposure to capital markets. Although, productivity ratios are comparable to the best in the industry, rising NPAs and falling margins are affecting the financials of the bank.

    Ratio analysis
    Particulars GTB ICICI Bank HDFC Bank
    Deposits/employee (Rs m) 66.0 63.6 64.8
    Interest income/employee (Rs m) 7.7 4.8 7.0
    Profits/employee (Rs m) 0.7 0.6 1.2
    NPM/employee 9.0% 13.1% 17.1%
    Capital adequacy ratio 12.7% 11.6% 11.1%
    Net NPA to advances 3.8% 1.4% 0.5%



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