UTI Bank: Firing all cylinders!

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?

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