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UTI Bank: On an uneven keel

Sep 11, 2001

UTI Bank’s stock has under-performed the Sensex since the beginning of 2001. While the BSE Sensex is off by 19%, the stock price of UTI Bank has come down by 39%. Failed merger talks, sliding operating margins and low capital adequacy ratio has hit the valuations of the bank. The bank reported over 50% growth in both interest income and net profits for the first quarter ended June ’01. Although its operating margins improved by 70 basis points to 10.4%, they are among the lowest in the banking sector. During the quarter, UTI Bank increased the provisions for non-performing assets (NPAs) to Rs 419 m from Rs 2 m in 1QFY01. This could be considered as its initiative to increase the provision coverage ratio, which stood at just 20% in FY01 when the bank had provided Rs 284 m as provision for NPAs.

UTI Bank seems to be on the right track to clean up its accounts. However, its high cost of funds is still a concern. Saving and current account deposits, which are considered low cost funds, accounted for just 15% of the bank’s total deposits outstanding as on FY01. This ratio is much below the average 25% for other private sector banks. Apart from this, the bank’s lower capital adequacy ratio (CAR) is also hindering the business growth (7.9% in 1QFY02). The ratio is below the 9% stipulated by the RBI. This has adversely affected the bank’s business growth in 1QFY02. Total advances of UTI Bank declined by 17% to Rs 40 bn from Rs 48 bn in FY01.

To shore up the CAR, UTI Bank aims to raise additional Tier-I equity capital through preferential allotment of shares. It is already in talks with a few foreign private equity investors to place 20% of equity capital. However, considering the sluggish market conditions, the bank is unlikely to get premium for its stock. Also, as per the recent SEBI guidelines banks are required to disclose their CAR along with the half yearly results. If the bank fails to raise the capital in the near term, its interest income growth is likely to be affected in the current year. This would also depress the valuations of the stock.

Ratio analysis
Capital Adequacy Ratio (CAR) 9.7%11.6%11.4%9.0%
NPA as a % of advances5.6%6.3%4.5%3.4%
Revenues/employee (Rs m) 6.2 7.0 6.5 7.5
Profits/employee (Rs m) 0.4 0.6 0.7 0.7
Net profit margin/employee6.5%8.3%10.5%9.7%
Deposits/employee (Rs m) 66.3 57.3 77.4 76.7
Deposits/branch (Rs m) 1,092.2 868.8 1,167.3 1,057.2

At the current market price of Rs 28 UTI Bank is trading at a P/E of 3.5x and Price/Book value ratio of 1x FY02 projected earnings. After the 20% equity dilution of the bank, the bank’s valuations would be on a higher side at 4.2x P/E and Price/Book value ratio of 1.2x. Although, these are still lower than ICICI Bank and HDFC Bank, the ability of the bank to improve the quality of its financials would determine its future valuations.

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