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Research meet extracts: UTI Bank - Views on News from Equitymaster
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Research meet extracts: UTI Bank
May 9, 2005

We recently met with UTI Bank in person to understand the growth prospects of the banking sector and where is UTI Bank placed with respect to its competitors? Here are the excerpts from the meeting.

Company background
Despite having a smaller asset base, a scorching growth pace (CAGR of 34% over the last five years) and a well-diversified retail asset portfolio is what puts UTI Bank in the reckoning of some of the best private banks in the country. The bank concentrates its business on 3 SBUs – corporate banking, retail banking and merchant banking. While the corporate banking SBU caters to government, SMEs and large corporates, the merchant banking division garners substantial fee income from placement and syndication, advisory services, capital restructuring and management of public issues. It has also instituted ‘CMS hubs’ and ‘Retail Asset Centres’ to cater to the corporate and retail segments respectively.

Key impressions from the research meeting:
View on monetary policy: The banking sector is expected to maintain a status quo with regard to asset growth since the RBI has incorporated very marginal changes in the monetary policy. The only concern that needs to be circumvented is the rising oil prices. The sector is flush with liquidity at the moment and going forward, the bank believes that the RBI is well positioned to manage the same. Foreign fund inflow, though not very strong in the form of FII inflows, continues by way of invisibles and remittances.

Call on interest rates: While the bank has an upward bias towards interest rates in the medium-term, it will continue to be stable in the longer term, unless influenced by unforeseen or external events.

Micro aspects
Catapulting growth to aid NIM: Despite a reasonable decline in cost of funds, UTI Bank has faced margin pressures over the last few quarters in FY05. The bank explained that this was on account of having temporarily parked funds in short-term advances because of the impending GDR issue. The short term advances (including priority sector lending) are typically low yielding and thus, reduced the NIM (net interest margin) of the bank (from 3.2% in FY04 to 2.8% in FY05). However, going forward, the bank expects the NIM to improve considerably in FY06, having parked the GDR funds in profitable assets.

Fee income – promising prospects: With a growth of 97% YoY, fee income accounted for 91% of the bank’s other income in FY05 (35% in FY04). However, it must also be taken into account that the substantial fall in treasury income (89% YoY) has marginalized the contribution of treasury to other income, thus hiking the share of fee-based income. The bank garners fee-based income from four prime segments viz. credit (loan processing fees), institutional banking, merchant banking and retail banking (ATMs, cards, third party sales etc.). Going forward, the growth in institutional, merchant and retail banking is expected to be robust, given the lower base while the proceeds from ‘credit’ segment will depend upon the incremental offtake. The bank also has the largest debit card base and will be launching credit cards in the current fiscal

Asset quality – status quo: Although the net NPAs (1.07% of advances) are not very substantial, UTI Bank has maintained a status-quo in terms of asset quality. Also, the bank has been consistently writing back provisions in FY05 (provisioning fell by 77% YoY). The bank clarifies that it had made excess provisioning in FY04 on the back of treasury gains, which it had to write back in FY05 (due to treasury losses impacting bottomline). However, since the total write-offs coupled with NPA provisioning account for 74% of the gross NPAs (i.e. the coverage ratio is 74% as against industry average of 60%), the bank is well positioned to maintain its asset quality and will continue to retain NPA levels at 1% of advances.

Capex plans: The bank plans to add atleast 75 branches in FY06 and have franchises in 400 cities in the country. For overseas expansions, the bank has made applications for branch licences in Dubai. Although, currently at the application stage, the bank believes that once operational, the overseas branches will generate substantial fee based income.

Our view
At the current price of Rs 240, the bank is trading at a rich valuation of 2.7 times its FY05 adjusted book value. 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, after the modification in RBI guidelines for voting rights in private banks (making it commensurate with shareholding), UTI Bank has become an attractive target for stake acquisition (especially for HSBC that already holds 12% stake in it). However, we believe that most of the positives have already been factored into the price and the potential upside hereon is very limited (taking into account the risk-return trade off).

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