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UTI Bank: Balanced show - Views on News from Equitymaster
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UTI Bank: Balanced show
Jul 12, 2007

Introduction to results
  • Interest income grows by61% YoY on the back of 60% YoY growth in advances and higher PLR.

  • Net interest margin stable at 2.7%.

  • Visible rise in operating costs with cost to income ratio moving up to 53.4%.

  • Bottomline grows by 45% YoY aided by lower provisioning and improved fee income growth.

  • Net profit margins decline from 12.6% to 11.4%

Rs (m) 1QFY07 1QFY08 Change
Interest income 9,539 15,370 61.1%
Interest expense 6,321 10,901 72.5%
Net Interest Income 3,218 4,469 38.9%
Net interest margin (%) 2.7%  2.7%   
Other Income 2,245 3,423 52.5%
Other Expense 2,392 4,212 76.1%
Provisions and contingencies 1,248 1,009 -19.2%
Profit before tax 3,071 3,680 19.8%
Tax 618 921 49.0%
Profit after tax/ (loss) 1,205 1,750 45.2%
Net profit margin (%) 12.6% 11.4%  
No. of shares (m) 281.6 282.6  
Diluted earnings per share (Rs)   25.3  
P/E (x)*   25.2  
*On a trailing 12-month basis

Aggressive on growth
UTI Bank is one of the most aggressive players in the private sector banking industry having nearly doubled its share in non-food credit over the last 6 years from 0.9% in FY00 to 2.0% in FY07. The bank in the last few years has changed its focus from the corporate segment and is currently focusing on the retail segment to fuel growth going forward. Its exposure to the retail segment stood at 22% of total advances at the end of FY07. The bank's strategy is to aggressively tap the retail domain via the use of ATMs. Following this strategy, the bank has set up a network of 2,428 ATMs, the third largest in the country.

What has driven performance in 1QFY08?
Retail – Deposit centric: While most banks spoke about their retail advance growth in the past few quarters, the focus of retail business seems to have clearly shifted to low cost retail deposits as against high risk retail assets. The trend towards slowing its retail advance growth and going back to adding more large corporates to its customer base is not novel to UTI Bank’s business strategy. However, the same is more visible this quarter. It must be noted here that the overall growth in advances for the bank is at rates more than double the sector average (25% YoY). Despite a sizeable advance book, UTI Bank showed no signs of slowing down in its incremental advance growth, clocking over 50% YoY growth for the eighth consecutive quarter in 1QFY08. Also, a rise in the proportion of CASA (current and savings accounts) suggests a cost conscious strategy with respect to deposit accretion.

Cost focused growth..
(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 258,360   412,850   59.8%
Agriculture 19,635 7.6% 36,744 8.9% 87.1%
Retail 64,848 25.1% 89,176 21.6% 37.5%
SMEs 82,675 32.0% 123,855 30.0% 49.8%
Large corporates 91,201 35.3% 163,076 39.5% 78.8%
Deposits 420,940   610,910   45.1%
CASA 149,380 35.5% 230,620 37.8% 54.4%
Term deposits 271,560 64.5% 380,290 62.2% 40.0%
Credit deposit ratio 61.4%   67.6%    

On the net interest margin front, the bank has sustained it at 2.7% as in 1QFY07, although lower than the previous quarter (2.9% in 4QFY07). The costs of funds having shot up by nearly 100 basis points this quarter, and the yields having been impacted by the change in composition of assets (towards low yielding ones) - capped the NIM growth. The bank has clarified that the downward pressure on spreads has arisen partly on account of the acquisition of short term priority sector assets towards the end of the final quarter of the previous year, for purposes of regulatory compliance. As these assets go off the bank’s books, the NIMs can be expected to rise.

While both retail and corporate segments contributed an appreciable proportion of the fee income growth, UTI Bank has also succeeded in growing its market share in cash management services (CMS) and improving its stronghold on placement and syndication of corporate bonds and project advisory services. The number of CMS clients has grown to 2,322, from 1,432 a year earlier (cash remittance throughput up 153% YoY). Besides, given the fact that the bank has 90% of its investments in the HTM (held to maturity) category and AFS (available for sale) duration of less than a year, its treasury portfolio is one of the best hedged in the sector.

Delinquencies - Taken care of: The aggressive growth in retail assets had earlier shown a red signal to the bank in the second and third quarter of FY07, as there had been a visible growth in incremental delinquencies in absolute terms. The same has, however, got camouflaged in percentage terms due to the higher growth in advances. While it is heartening to see that the bank’s net NPAs as a percentage of advances have remained stable at 0.6% in 1QFY08 against 0.7% in 1QFY07, the bank has also succeeded in arresting the incremental delinquencies this quarter.

Cost heavy: UTI Bank that had one of the lowest cost to income ratio in the Indian banking sector has seen its operating costs escalate over the past few quarters, understandably due to accretion of franchise and branches. During FY07, it added 111 branches and 450 ATMs and followed that with addition of 13 branches and 87 ATMs in FY08. The same has spurted its cost to income ratio from 47% in 4QFY07 to 53.4% in 1QFY08, largely due to the high employee intake in the past few quarters. This will impact the bank’s efficiency ratios in the medium term. The bank also opened its overseas branch in Hong Kong in February 2007 and in Dubai in April 2007. This is in addition to its existing overseas branches in Singapore and Shanghai. The total assets under overseas operations were US$ 731 m as at the end of March 2007.

Capital raising on the anvil: The bank’s CAR from 11.5% in 1QFY08 is not sufficient to sustain growth at the current rates and for Basel-II compliance by March 2008. In order to shore up its Tier-I capital, the bank intends to issue fresh equity during FY08. Its overseas equity issue has been deferred and awaits acceptance of the preferential allotment to its major shareholders.

What to expect?
At the current price of Rs 645, the stock is fairly valued at 2.9 times our estimated FY10 adjusted book value. While UTI Bank continues to outperform our expectations in terms of asset growth and fees, we remain skeptical about the downside in margins. Although the fact that the bank has chosen to guard its asset quality rather than chase high yielding assets is a matter of comfort, this may put its net interest margins at risk. Nevertheless, the bank’s consistency in fee income growth makes it a safe play in the rising interest rate scenario. We shall have to revise our estimates for the bank once there is more clarity about is equity issuance. Our outlook on the bank continues to remain positive from a long-term perspective.

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