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UTI Bank: Firing all cylinders!

Jul 13, 2006

Performance summary
Initiating FY07 on a very positive note, UTI Bank announced a strong and consistent performance for the first quarter ended June 2006 today. On the one hand the bank’s sustenance of net interest margin and fee income growth inspires confidence, on the other, the perceptible lack of capital (CAR) lingers as a cause for concern. However, improvement in asset quality, despite growth, is a comfort factor.

Rs (m) 1QFY06 1QFY07 Change
Income from operations 6,218 9,539 53.4%
Other Income 1,500 2,245 49.7%
Interest Expense 3,994 6,321 58.3%
Net Interest Income 2,224 3,218 44.7%
Net interest margin (%) 2.7% 2.7%  
Other Expense 1,690 2,392 41.5%
Provisions and contingencies 635 1,248 96.5%
Profit before tax 2,034 3,071 51.0%
Tax 473 618 30.7%
Profit after tax/ (loss) 926 1,205 30.1%
Net profit margin (%) 14.9% 12.6%  
No. of shares (m) 278.5 278.5  
Diluted earnings per share (Rs) 13.3 16.7  
P/E (x)*   16.4  
*Trailing 12 months

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 1.7% in FY06. 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 stands at 30% of total advances. 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 1,891 ATMs, the third largest in the country. Despite the GDR issue in FY05, the bank’s CAR stood at a low 10.3% in 1QFY07.

What has driven performance in 1QFY07?
Untamed asset growth: Putting to rest all concerns of a slow down in incremental credit offtake, UTI Bank has registered a splendid 65% YoY growth in advances in 1QFY07 on the back of 82% YoY and 59% YoY growth in its retail and corporate portfolios respectively (retail accounted for 30% of total advances). This is despite the fact that the bank resorted a hike its PLR after the RBI’s reverse repo revision. What is further noticeable is the fact that a large part of the funding is from CASA (current and savings deposits) of which zero-cost current accounts alone comprised nearly 45% in 1QFY06. The bank had 15 RACs (retail asset centres) at the end of the period. The bank will be launching its credit cards in 2QFY07.

CASA funded growth…
(Rs m) 1QFY06 % of total 1QFY07 % of total Change
Advances 156,670   258,360   64.9%
Retail 43,200 27.6% 78,420 30.4% 81.5%
Corporate 113,470 72.4% 179,940 69.6% 58.6%
Deposits 310,200   420,940   35.7%
CASA 97,990 31.6% 149,380 35.5% 52.4%
Term deposits 212,210 68.4% 271,560 64.5% 28.0%
Credit deposit ratio 50.5%   61.4%    

On the net interest margin front, the bank has faced pressure over the last 3 quarters due to the presence of high cost short-term liabilities in its books. Going forward, we expect this to ease, as the bank accesses long-term borrowing or opts for equity capital. The bank has further clarified that the downward pressure on spreads has arisen partly on account of the rapid growth in advances (which has led to a larger part of this growth being funded out of term deposits), as also because of the increase in interest rates during the quarter. It also needs to be noted that as liabilities are of a shorter average duration than assets, they get repriced faster than assets. As the growth rate of the bank gets moderated and interest rates plateau, the NIMs can be expected to rise again.

Other income- fee cushioned: A 61% YoY growth in fee income took the contribution of fee-based income to the bank’s total income to 34% in 1QFY07 from 31% in the corresponding quarter of FY06. While both retail and corporate segments contributed an appreciable proportion of the fee income growth, the bank has also succeeded in growing its market share in cash management services and improving its stronghold on placement and syndication of corporate bonds and project advisory services. Besides, given the fact that the bank has 90% of its investments in the HTM category and an AFS duration of less than a year, its treasury portfolio is one of the best hedged in the sector.

Quality uncompromised: Despite an aggressive growth in asset book, the bank’s net NPAs as a percentage of advances were 0.7% in 1QFY07 against 1.2% in 1QFY06. The fall in gross NPA levels also suggests lower slippages. The bank has in recent years written off impaired assets aggressively. The provisions held together with accumulated write-offs amount to 77% gross NPAs in 1QFY07. If the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPAs amounts to 42%.

Capital raising inevitable: Given the bank’s low capital base (CAR 10.3%) in 1QFY07 and the compulsion to comply with Basel-II by 4QFY07, capital raising by way of equity or long-term debt is inevitable. What remains to be seen is whether the bank opts for hybrid capital to avoid equity dilution.

What to expect?
At the current price of Rs 272, UTI Bank’s stock is trading at 2.1 times our estimated FY08 adjusted price book value. The bank’s consistency in fee income growth and asset quality and resistance to a rise in GSec yields in its treasury book makes it a safe play in the banking sector. A long-term capital raising in FY07 will also relieve the bank of high cost short-term liabilities, thereby easing out the pressures on the margins side. The bank is amongst our top picks in private sector banking space.

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