UTI Bank has reported dismal results for the September quarter primarily on the back of a negative other income. While the bank has reported an improvement in its core lending activities, as indicated by the improvement in topline and operating margins, it had to write back provisions (against the usual practice of provisioning for NPAs) in order to report profits for the September quarter. The bank has witnessed a 14% growth in its topline while bottomline has fallen by 28%. However, the writeback was not enough to prevent this fall in bottomline.
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Provisions and Contingencies
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What is the company’s business?
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 Unit Trust of India (UTI), Life Insurance Corporation (LIC) and General Insurance Corporation (GIC). The bank has adopted a growth strategy relying on expanding reach through a wide network of ATMs. Currently it has one of the largest ATM networks in the country. While UTI Bank has been one of the first private sector banks in the country, its focus initially was the corporate segment. The bank in the last few years has changed that and is currently focusing on the retail segment to fuel growth going forward. Its exposure to the retail segment stands at 26% of total advances. The bank's strategy to tap the retail domain is via the use of ATMs. Following this strategy the bank has been able to set up a large network of ATMs, thus enabling it to widen its reach. The bank has also aggressively set up branches to augment reach further.
What has driven the performance in 1QFY05?
The banks continues to maintain strong growth in its topline (interest earned from advances and investments) on account of the growth seen in its asset base. The growth in asset base has been primarily driven by a 40% YoY growth in its advances and a 28% growth in its investment portfolio. the growth in advances has been mainly led by the strong growth in retail segment, which now accounts for 26% of total advances compared to 19% in the same period last year.
Also falling cost of deposits (mainly due to rising proportion of demand deposits) have helped the bank to improve further upon its net interest income and consequently its net interest margins (NIM). The NIM has improved to 3.12% compared to 3.05% in the same period last year. The daily average cost of funds for the bank has fallen to 4.7% compared to 5.8% same period last year.
On the other income front the company continues to show strong performance as far as its core fee based income is concerned. Core fee based income has risen by 90% in the September quarter on a YoY basis, thus indicating the strength in performance. However other income derived from profit from trading of G-Sec investments have been hit very hard. This is a consequence of the accounting loss booked on account of the transfer of government securities amounting to Rs 33 bn to the Held to Maturity (HTM) category, as permitted by Reserve Bank of India. However we would like to point out that due to this transfer the company has reduced its risk with regards to rising interest rates.
Despite the strong rise in core fee based income the losses on the G-Sec investments have meant a substantial reduction (other income has turned negative for the September quarter) in the other income of the company, thus impacting the net profits severely. The bank had to resort to a writeback of provisioning in order to show profits in the September quarter. the writeback combined with the impairment of a large in the September quarter has led to the deterioration in the asset quality of the bank. The net NPAs of the bank stood at 1.3% compared to 1.2% at the end of 1QFY05. The asset quality has however improved over the same period last year at which point it stood at nearly 2%.
What to expect?
The stock is currently trading at adjusted price to book value of 3.1 times. The management has indicated that due to the one time hit on the trading profits, it has been able to reduce its risk arising from rising interest rates. While this is a positive we still believe that from a short-term perspective the valuations of the stock are stretched. However for the long-term, the improvement in the core operational parameters of the bank indicate that it is well placed to meet the opportunities in the Indian context, especially since we believe that the investment cycle is picking up once again.
Axis Bank declared the results for the third quarter of the financial year ended March 2017 (3QFY17). The bank has reported 4.1% YoY growth in net interest income while net profits declined 73.4% YoY in 3QFY17.
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