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UTI Bank: All set to grow - Views on News from Equitymaster
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  • Oct 5, 2000

    UTI Bank: All set to grow

    UTI Bank is one of those private sector bank which has shown outstanding financial performance in the past few years. The bank has also implemented the latest technology and is expanding its network to provide the best services to its customers.

    Recently Reserve Bank of India (RBI) has hiked the cash reserve ratio by 50 basis points to 8.5% and bank rate by 100 basis points to 8%. Rising interest rates are becoming a matter of concern for all commercial banks in terms of impact it has on fixed income portfolio of the banks (particularly government securities). Almost all the government banks have huge portfolio of government securities. The Reserve Bank of India (RBI) is thinking to remove the compulsory provisioning requirement on government securities for depreciation in their value. This may be good for banks depending on the accounting norms they adopt for making provisions. But it is not good for the industry or borrowers. The quality of the portfolio, which banks hold, depends on the way in which the industry is functioning. In short term the RBI’s move may help the banks but in the long term this would not hold true.

    Particulars UTI
    Total Investments (Rs bn) 20.7 57.5 44.2
    % Investment in G Secs. 66.2% 56.0% 63.7%
    Depreciation in investments 0.1% 0.1% 0.6%
    UTI Bank has invested around 66% of its total investments (70% in FY99) in government securities in FY00. The ratio is comparatively higher than its peers, leading to higher provision for depreciation in the value of investments.

    During the year the bank’s deposits increased by 88% to Rs 57 bn and advances grew by 62% to Rs 35 bn. Although saving bank account deposits accounts for around 5% of total deposits, it is growing at a rate of more than 100%. If this trend is maintained in the current year, the bank should be able to grow its deposits at the same rate in FY01. As on September 15th of FY01 the bank has collected deposits of Rs 75 bn and forwarded advances of Rs 37 bn. It expects the growth of more than 85% in deposits. However lower contribution from saving deposits has resulted in high cost of borrowings to the bank.

    Further by installing ATMs across the country, the bank will be able to increase its saving bank account deposits, as the operation of ATM is not possible without opening a saving bank account. As on 15th September 2000, UTI Bank has around 135 ATMs (12 in Mumbai) across the country. It plans to increase its network of ATM to 300 by the end of the current year. Geographical location and convenience plays an important role in the success of ATMs. Today people like to open their bank account with such banks, which has conveniently located ATMs. Further the Internet banking services launched in May 2000 will aid in increasing the number of saving accounts. As of now it has around 3,000 Internet banking customers and registration are growing at about 1,000 customers per month. The increased emphasis on low cost saving accounts should result in improvement in net margins, which are on the lower side at present.

    The bank is strong in its cash management services. It gets the maximum number of transactions from its promoter UTI. It has the largest client base of 25 in the country. UTI does business of around Rs 150-Rs 200 bn every year and UTI Bank brings 85% of the cash into their corporate accounts. The bank’s cash management service is growing by leaps and bound. By the end of the current year, the bank is planning to reach a level of 100% from the current 85% in its cash management services for UTI.

    The bank has extended cash management services to supply management. Supply management could be explained by this example. For a multinational company like HLL, there are continuous transactions happening between a company, dealer and a vendor. They require a continuous transfer of cash. The bank uses the cash management tool to handle this supply management wherein cash could be easily transferred to and from the branches. It is planning to make cash management tool web enabled which will facilitate increase in volumes. The bank is optimistic about generating good revenues from this tool. It also leverages its synergies with other promoting institutions GIC and LIC through cash management services (not on all India basis). All these initiatives will improve the share of fee-based income in its total income, which will be favourable to bottomline growth

    UTI Bank has planned to become tech-savvy by adopting the latest technology. The bank has moved to centralised database from distributed database few months’ back. It has opened a data centre at Chembur. As of now around 15 branches of the bank are centralised and by end of March 2001, more than 50% of the total branches are expected to be centralised. The migration from traditional database requires a good amount of investment in technology. It is the first bank in India to install Infosys’ latest version of banking software called ‘Finacle’ (It has earlier installed ‘Bancs2000’ of Infosys).

    Comparative Valuations
    Particulars UTI
    Market Price (Rs) 36.0 236.2 140.0
    P/E (x) 9.3 39.8 26.2
    Price/Book value(x) 2.0 7.6 2.4

    UTI Bank gets comparatively lower valuations among the private sector banks. The re-rating in the valuations will come with the bank becoming tech savvy and expanding its network. Also focus on retail market by offering all types of financial products could improve the topline growth of the bank resulting in higher profits and improved margins.



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