UTI Bank: Every reason to cheer! - Views on News from Equitymaster

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UTI Bank: Every reason to cheer!

Oct 13, 2006

Performance summary
UTI Bank announced results for the second quarter and half year ended September 2006 today, clocking a superlative performance once again. While the bottomline for both the periods under review grew by 30% YoY, the same was aided by a healthy growth in low cost deposits, fee income and improvement in asset quality. The concerns on the net interest margin and capital adequacy fronts also seem to have been taken care of.

Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from operations 6,876 10,500 52.7% 13,094 20,040 53.0%
Other Income 1,781 2,048 15.0% 3,281 4,293 30.8%
Interest Expense 4,322 6,849 58.5% 8,315 13,170 58.4%
Net Interest Income 2,554 3,651 43.0% 4,779 6,870 43.8%
Net interest margin (%)       2.7% 2.9%  
Other Expense 1,975 2,955 49.6% 3,665 5,346 45.9%
Provisions and contingencies 716 588 -17.9% 1,352 1,836 35.8%
Profit before tax 2,360 2,744 16.3% 4,395 5,817 32.4%
Tax 555 738 33.0% 1,027 1,355 31.9%
Profit after tax/ (loss) 1,089 1,418 30.2% 2,016 2,626 30.3%
Net profit margin (%) 15.8% 13.5%   15.4% 13.1%  
No. of shares (m) 278.5 280.5   278.5 280.5  
Diluted earnings per share (Rs) 15.6 20.2   14.5 18.7  
P/E (x)*         21.9  
*Trailing 12 months

Aggressive on growth
UTI Bank is one of the most aggressive players in the private sector banking industry having nearly doubled its share in non-food credit over the last 6 years from 0.9% in FY00 to 1.7% in FY06. 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 30% 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 1,891 ATMs, the third largest in the country.

What has driven performance in 2QFY07?
Judicious asset growth: Despite a sizeable advance book, UTI Bank showed no signs of slowdown in its incremental advance growth, clocking over 50% YoY growth for the fifth consecutive quarter in 2QFY07. What is even more enthusing is that the bank has managed to do this without laying an overemphasis on the risk-heavy retail credit assets (29% of advances in 1HFY07) and backed it with a healthy growth in CASA (current and savings accounts). Infact at the end of 1HFY06, the proportion of current and savings accounts in the bank’s deposit book stands at 50:50, which is very benign for containing its cost of funds.

CASA funded growth…
(Rs m) 1HFY06 % of total 1HFY07 % of total Change
Advances 184,040   291,210   58.2%
Retail 51,230 27.8% 85,140 29.2% 66.2%
Corporate 132,810 72.2% 206,070 70.8% 55.2%
Deposits 340,550   489,860   43.8%
CASA 120,050 35.3% 195,790 40.0% 63.1%
Term deposits 220,500 64.7% 294,070 60.0% 33.4%
Credit deposit ratio 54.0%   59.4%    

On the net interest margin front, it may be recalled that the bank had faced pressure over the last 3 quarters due to the presence of high cost short-term liabilities in its books. The same has, however, eased with the bank accessing long-term Tier–II borrowing and resorting to a PLR hike. 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. On a conservative note, we have estimated the bank’s NIMs to stabilise at 2.1% in FY08E.

Fees- critical to bottomline: A 66% YoY growth in fee income took the contribution of fee-based income to the bank’s total income to 36% in 2QFY07 from 31% in the corresponding quarter of FY06. This brings its very near to its closest competitor HDFC Bank in terms of fee income contribution. 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.

Caution on quality: While it is heartening to see that despite an aggressive growth in asset book, the bank’s net NPAs as a percentage of advances have fallen to 0.7% in 2QFY07 against 1.0% in 2QFY06, there are signs of incremental delinquency over the previous quarter (1QFY07). However, the bank has in recent years written off impaired assets and provided for impairments aggressively. The provisions held together with accumulated write-offs amount to 70% gross NPAs in 2QFY07. If the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPAs amounts to 38%.

Spurt in costs: UTI Bank has one of the lowest cost to income ratio in the Indian banking sector. The same has, however, spurted from 46% in 2QFY06 to 52% in 2QFY07 due to the employee intake this quarter (1,559 employees were recruited in 2QFY07) that was the largest personnel increase so far in the bank. This may also impact the bank’s efficiency ratios in the medium term.

Capital adequacy: During the quarter, the bank raised US$ 150 m by way of issuing upper Tier – II bonds overseas and Rs 2 bn by way of perpetual debt in the form of non-convertible debentures qualifying for Tier-I capital. This improved the bank’s CAR from 10.3% in FY06 to 11.5% in 1HFY07, making it comfortable for Basel-II compliance by 4QFY07.

What to expect?
At the current price of Rs 410, UTI Bank’s stock is fairly priced at 2.7 times our estimated FY09 adjusted price book value. As against most of its peers in the private sector banking space, which have an embargo on branch expansion for a year (due to the discrepancies on IPO issuances), the bank has got fresh approval from RBI for opening 100 new branches and 226 ATMs in the current year. The bank’s consistency in fee income growth and asset quality and resistance to a rise in GSec yields in its treasury book makes it a safe play in the banking sector. While our outlook on the bank continues to remain positive from a long-term perspective, its current valuations certainly call for caution.

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