UTI Bank: Retail grows, NIM woes! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

UTI Bank: Retail grows, NIM woes!

Jul 14, 2005

Performance Summary
UTI Bank has opened the current financial year on a ‘not so positive’ note posting a bottomline performance of 31% YoY growth in 1QFY06, as compared to 35% growth in 1QFY05. Retail advances (87% YoY growth) have been the main driver of the bank’s galloping asset growth over the last few quarters. The bank’s efficiency, is however, not visible in its net interest margins that have considerably subsided over the last year and concerns are also felt on the asset quality front. Sustenance of growth in fee income (45% YoY) however, provides substantial cushion to the bottomline.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 4,275 6,218 45.5%
Other Income 1,101 1,500 36.2%
Interest Expense 2,604 3,994 53.4%
Net Interest Income 1,671 2,224 33.1%
Other Expense 1,294 1,690 30.6%
Operating Profit 377 534 41.6%
Operating profit margin (%) 8.8% 8.6%  
Provisions and contingencies 407 635 56.0%
Profit before tax 1,071 1,399 30.6%
Tax 365 473 29.6%
Profit after tax/ (loss) 706 926 31.2%
Net profit margin (%) 16.5% 14.9%  
No. of shares (m) 232.3 278.1  
Diluted earnings per share (Rs)* 12.2 13.3  
P/E (x)   19.60  
* (annualised)      

Aggressive on growth
UTI Bank is one of the new generation private sector banks and is promoted by some of the largest financial institutions in the country, namely UTI-1 (28%), LIC (11%) and General Insurance Corporation (GIC). 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 28% 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 1,667 ATMs, the third largest in the country. The bank has had a successful GDR issue in FY05 that brought its CAR to 11.7% from 11.1% in FY04.

What has driven performance in 1QFY06?
Retail grows, NIM woes:  Very successfully catching up with its larger peers in the industry, UTI bank has continued to grow its advance book at an aggressive pace (58% YoY), the prime concentration being retail. The retail segment of the bank’s advance portfolio has grown by an impressive 86% YoY and currently comprises 28% of the advance book. The net interest margin (NIM) for 1QFY06 has however decreased to 2.7% from 3.1% in the corresponding quarter of FY05. The bank has clarified that the pressure on margins is because of having bought short-term loans (having lower yields) during the last few quarters, as the GDR issue was on the anvil. It however believes that it now has a very credible and encouraging pipeline of corporate advances, indicative of the very visible upswing in the credit cycle in the country, and as these translate into loan assets replacing existing short term advances, the NIMs will begin to rise. Growth in low cost deposits (32% of deposit book) has caused the average cost of funds to decrease by 10 basis points to 4.9% in 1QFY06 as compared to 4.8% in 1QFY05.

Growth over the quarter
(Rs m) FY05 % of total 1QFY06 % of total Change
Retail 24,686 17.9% 43,200 28.0% 75.0%
Corporate 113,123 82.1% 111,086 72.0% -1.8%
Total advances 137,809   154,286   12.0%
CASA 120,459 38.0% 97,980 32.0% -18.7%
Term deposits 196,660 62.0% 208,208 68.0% 5.9%
Total deposits 317,119   306,188   -3.4%

Fee cushion:  The bank has also been able to garner a substantial portion of its other income (grew 36% YoY) through the fee income route (76% of other income) by growing its market share in cash management services and improving its stronghold on placement and syndication of corporate bonds and project advisory services. Also, given the fact that the bank has 85% of its investments in the HTM category, its treasury portfolio remains well hedged.

Mounting expenses:  Growth in operating overheads to the tune of 31% YoY can be attributed to a significant increase in infrastructure investments, including increase in the branch network (350 branches) and ATMs (1667 ATMs). The benefit of these will be visible going forward.

Low on provisioning:  Although the incremental delinquencies of the bank have been arrested, causing the gross NPA to advance ratio to reduce to 1.8% in 1QFY06 from 2.5% in 1QFY05, low provisioning has caused the net NPAs to slip further from 1% to 1.2%, during the same period. The provisions together with accumulated write-offs as a proportion of gross NPAs amounted to 72% at end of 1QFY06. However, if the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPAs stand at 35%.

What to expect?
At the current price of Rs 236, UTI Bank’s stock is trading at 2.8 times its 1QFY06 adjusted book value and 2.3 times our estimated FY07 adjusted price book value, which is at the higher end of the valuation spectrum. The GDR issue at the end of FY05 has improved the bank’s CAR from 9% in 2QFY05 to 11.7% post the issue. The bank is also likely to be a beneficiary of the government’s stand on liberalizing foreign holding in private banks, which may cause HSBC (which holds 12% stake in UTI Bank) to hike its stake post 2009. Though the stock has crossed our FY06 price target, we believe that the bank remains attractive from the long-term perspective, once higher margins and better asset quality starts filtering into its valuations.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Aug 4, 2020 (Close)


  • Track your investment in AXIS BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks