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UTI Bank: Asset quality is the key - Views on News from Equitymaster
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  • May 4, 2002

    UTI Bank: Asset quality is the key

    Promoted by a group of institutions (UTI, LIC and GIC) in 1994, UTI Bank is the first private bank in the post liberalization era. It is one of the fastest growing private banks in India. Over the last six years, the bank’s interest income has grown at a CAGR of 47% backed by its strong relationship with its promoting institutions.

    The bank started its operation with corporate assets being the main focus area. Corporate loans offered higher yields to the bank during the period FY96 to FY99. Corporate advances witnessed a CAGR of 239% since March 1998 and currently account for about 80% of total funds lent by the bank. However, over exposure to corporate loans also impacted the bank’s asset quality. The bank’s net NPAs to advances ratio jumped to 6.3% in FY99 from 3.7% in FY97. Also, when the industrial activity slows down, corporate loans are the first to get hit. This is already reflected from a marginal 17% growth in the bank’s total advances in FY02 from a CAGR of 44% in the last four years. Realizing the risk of over weightage to this one segment, UTI Bank started shifting its concentration to retail finance, which presented immense growth opportunities.

    UTI Bank started its retail focus with building up infrastructure and adhering to the latest technology, which is a key for acquiring customers in the retail finance segment. This is reflected from a significant rise in its distribution network. The number of branches increased to 139 from just 35 in FY99 and ATMs crossed 500 from 40 in FY99. Today, it has the second largest ATM network in the country and aims to increase the number to 900 by FY03. On the technology integration front too, the bank speeded up the efforts. It is the first bank in the country to adopt ‘Finacle’ as its core banking software, provided by Infosys and it is also the first Indian bank to have a remote disaster recovery management system to protect its business from any eventualities. It has also launched Internet banking last year and is currently offering a comprehensive range of e-commerce services (B2B and B2C). The bank’s endeavour enabled it to grow its retail deposit accounts by 49% in FY02 to 1 m accounts.

    The bank is aggressively launching new products and services to expand its retail assets and client base. UTI Bank aims to strengthen its wings into 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. With the expansion in retail asset base, the bank’s net interest margins are likely to increase further. On the liability side too, the bank’s deposits are still tilted towards term deposits, which formed 84% of total deposits in FY02. This kept the bank’s average cost of deposits on the higher side (8.8% in FY02). Consequently, its loan spread is very thin even with high yield on advances. The proportion of low cost funds (currently contributes 16% to total deposits) is expected to go up with its retail initiatives. This will help the bank in reducing its average cost of borrowings further in the coming years.

    Although the bank is likely to reap benefits of its aggressive expansion drive in future, its financial ratios took a hit over the last four years due to higher capex on building up of infrastructure. While the bank’s net interest income grew at a CAGR of 40%, operating cost witnessed a higher CAGR of 59% in the last four years. Consequently, operating margins turned into negative in FY01 to (3.4%) from 5.8% in FY99. A 55% compounded rise in net profits during the period FY99 to FY02 was however, supplemented by higher other income and lower loan provision.

    The strong growth in other income (CAGR of 87%) during the period FY99 to FY01 was driven by the bank’s evergreen cash management services business (CMS). (Over 155% rise in fee-based income in FY02 was largely from money market funds due to more than expected fall in interest rates. The higher income is unlikely to be repeated in future. Consequently it is excluded while computing CAGR).

    UTI Bank is one of the leading players among private sector banks in CMS. It received around 15% of total turnover of CMS (Rs 224 bn in FY02) from its promoter UTI. (The contribution of transaction business from UTI has been reduced considerably from over 60% in FY01.) UTI being the largest mutual fund in the country does business of around Rs 150-Rs 200 bn every year and UTI Bank gets 95% of this transaction business, which is accounted in its books under the other income head. The bank’s CMS business is growing by leaps and bounds (accounted for 8% of total income in FY01) and the bank is optimistic about generating good revenues from this tool. It also leverages its synergies with other promoting institutions GIC and LIC through cash management services (not on all India basis).

    Over the last four years, UTI Bank expanded its asset base significantly (CAGR of 55%), which enabled the bank to maintain sparkling growth in bottomline. However, this expansion reduced the bank’s capital adequacy ratio (CAR) to 9% in FY01 (minimum required by RBI). In FY02, the bank diluted the equity base by 45% through private placement of its shares, which increased its CAR to 10.7%. The bank expects a further 10% dilution in equity in FY03 to maintain the growth pace. This could however, impact the bank’s return on equity (29% in FY02) if it is unable to bring down the cost of funds and resultant pressure on margins. Its aggressiveness could also impact quality of its assets. Gross non-performing assts were higher by 7% in FY02, compared to below 3% rise in the last two years. The bank has diversified its loan portfolio with engineering, housing finance and infrastructure accounting for nearly 25% of total corporate credit. However, going forward the sustainability of superior earnings growth depend on the bank’s ability to keep a watch on its asset quality. Also, with increasing pressure from its private sector peers, the bank needs to establish brand name through constant improvement in customer service.



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