UTI Bank: 1QFY04 net up 45% - Views on News from Equitymaster

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UTI Bank: 1QFY04 net up 45%

Jul 22, 2003

UTI Bank, one of the leading private sector banks, has reported a robust performance in the June quarter. The bank has witnessed a 18% growth in its topline while bottomline growth has been even better at 45%. UTI Bank's performance in the June quarter has been highlighted by the strong improvement in operating profits and consequently operating margins. While operational gains have aided bottomline growth, what is commendable about the bank's performance is the fact that bottomline has grown strongly despite higher provisioning.

(Rs m) 1QFY03 1QFY04 Change
Income from Operations 3,344 3,939 17.8%
Other Income 599 1,503 151.0%
Interest Expenses 2,746 2,737 -0.3%
Net interest income 599 1,202 100.7%
Other Expenses 599 817 36.3%
Operating Profit (0) 385  
Operating Profit Margin (%) 0.0% 9.8%  
Provisions and Contingencies 21 917  
Profit before Tax 577 971 68.1%
Tax 218 449 106.3%
Profit after Tax/(Loss) 360 522 45.0%
Net Profit Margin (%) 10.8% 13.2%  
No. of Shares (m) 191.8 230.2  
Diluted Earnings per share* 6.3 9.1  
P/E Ratio   8.0  

Growth in topline has been mainly fueled by a strong growth in income from investments. Total investments of the bank have risen by 25% in this period, this explains the strong growth in income from investments. Advances on the other hand have grown by 9% on a YoY basis. Retail assets (246% growth in the June quarter), has been the growth driver for UTI Bank's advances. The growth in retail assets indicates that the bank's wholesale or corporate loan portfolio has shrunk. However, apart from the growth in topline, net interest income growth has been a key feature of the bank's financial performance in 1QFY04. Net interest income has grown by 101% in 1QFY04, mainly driven by topline growth as well as fall in interest costs. Net Interest Margin (NIM) stands at 2.8% compared to 1.7% a year ago. Net interest margins however, continue to remain lower than industry leaders like HDFC Bank.

NIM improvement has been brought about by increasingly leveraging on retail deposits. The bank has been able to reduce its average cost of funds from 8.1% to 6.4%. UTI Bank has also managed to improve its operating margins considerably. The bank has expanded reach by increasing the total branches to 203 and ATMs to 900. The operating costs of the bank have increased significantly and we believe that the improvement in operating income has been mainly due to strong topline growth.

Strong other income growth has helped the bank increase its profit before tax considerably. However, in the June quarter the bank has witnessed a fall in fee income, whereas trading income has risen significantly. Since the sustainability of trading income is in question, going forward the bank may not be able to maintain the strong earnings growth unless there is improvement in fee based income as opposed to trading income. The bank's other income had fallen in FY03, as trading income had reduced significantly. However, in 1QFY04 there has been a strong increase in the bank's fee based income. Fee income growth had been considerable (47%) in FY03 on a YoY basis.

UTI Bank has considerably increased its NPA provisioning in 1QFY04. The bank has been able to bring down its net NPAs to advances ratio to 2.2% compared to 2.4% last year. But we must point out that compared to its peers like HDFC Bank and IDBI Bank, net NPA ratio is still relatively high.

The stock is currently trading at Rs 73, a P/E ratio of 8x its annualised 1QFY04 earnings. While the bank has reported strong results in the June quarter, we would like to point out that this has come about primarily due to strong growth in investment income. The slow growth in advances indicates that competition may be weighing heavily on the bank. UTI Bank continues to lag its peers on the NPA front. The stock has seen significant activity in the recent past due to rumours of a stake sale by parent UTI.

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