UTI Bank, one of the largest private sector banks in the country, announced its results last week. The bank, while reporting a substantial growth in topline as well as bottomline for FY03, has also written off a considerable amount of NPAs in FY03. Though the bank may have reported a reduction in provisioning for FY03, in absolute terms net NPA to advances ratio has reduced in FY03. In this article we enumerate key takeaways of the analyst meet held by the bank last week.
Topline growth has been primarily brought about by the growth in advances. Like almost all other banks in the country, UTI Bank also has relied on retail asset growth in order to fuel advances growth. While total advances have grown by 34% in FY03, retail advances have grown by 354%, albeit on a lower base. However unlike other banks, which have concentrated primarily on housing loans in order to grow their retail assets, UTI Bank’s main focus area remains auto loans. Of the total retail portfolio, the bank’s exposure to auto loans is close to 57%.
The bank management has stressed that it’s focus remains on high yielding retail assets like auto loans. It has also stated that the yields on its retail assets are close to 14%. While topline growth has been healthy, net interest income has grown at a much faster rate. This is primarily due to reduction in interest costs during the year. Average cost of funds of the bank has reduced to 7.5% (8.7% in FY02) resulting in an improvement in Net Interest Margin (NIM) to 2.1% (1.7%). Coming to the bank’s operations, UTI Bank’s operating expenses have shown a significant jump in FY03. This is primarily due to the expansion in the bank’s infrastructure witnessed both in terms of branches as well as ATMs in FY03.
While the pace of expansion is expected to slow down going forward, the bank management had earlier indicated that further expansion is still on the cards. However despite this, we are likely to see an improvement in operating margins going forward. While the bank’s operating performance looks in line with its expansionary phase, on the profitability side it has been greatly helped by the reduction in NPA provisioning for FY03. However, despite the fall in provisioning, net NPA to advances ratio stood lower at 1.9% (2.7%). The management also mentioned that it had written off a sum of Rs 1.2 bn from its gross NPAs in FY03.
This is the reason why the bank has not been able to show an improvement in provision coverage for FY03. Provision coverage for FY03 stood at 28% (34%). A write off, unlike provisioning, is done from the reserves and hence the impact of the write off is not seen in the income statement. Thus lower provisioning has greatly helped the bank post a healthy bottomline growth in FY03. But what is commendable about the bank’s bottomline growth is that unlike other public sector banks it has been less reliant on other income.
UTI bank has reported a 47% growth in fee income, while trading profit growth has been a negative 16%. This indicates that the bank has been able to grow its fee income from core lending activities admirably. At the same time, treasury income has fallen indicating that profit booking in G-Sec portfolio has reduced to a large extent. This means that going forward, the bank is likely to show more stability in other income, and a large part of it is likely to be from fee income from core lending activities.
Going forward the bank is likely to increasingly sweat its infrastructure in order to garner more business at the same time expanding reach further. UTI Bank’s interest cost is expected to reduce further in line with industry standards. The management has indicated that the duration of its retail liabilities is nine months, which means that its retail liabilities will be re-priced at faster clip, leading to a fall in interest cost. This will further improve NIM, thus aiding profitability further.
UTI Bank is also relying on its huge network of ATMs in order to gain further revenues in the form of ATM sharing business. It has already tied up with a few banks to tap this market. Going forward UTI bank’s write-off has, to a certain extent, ensured that further provisioning will be smaller than seen in FY03. This is likely to aid bottomline growth. Also, despite the write-off, the bank’s capital adequacy ratio stands at 10.9% well above the stipulated 9%, thus ensuring enough opportunities to grow its asset portfolio further. At Rs 45 the stock is trading at a price to book value multiple of 1.2x based on FY03 earnings.