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UTI Bank: Buoyant on treasury - Views on News from Equitymaster
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UTI Bank: Buoyant on treasury
Oct 14, 2005

Performance summary
UTI Bank, for the second quarter of FY06, has delivered strong results, supported by a stupendous growth in retail and corporate advance books alike. Replacement of high cost borrowings with low cost deposits has helped the bank improve margins over the previous quarter. Apart from this, extraordinary treasury gains have further buoyed its bottomline growth for the quarter (135% YoY). We also attended the bank’s analyst meet yesterday and our result analysis includes excerpts from the meeting.

Rs (m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Income from operations 4,493 6,876 53.0% 8,768 13,094 49.3%
Other Income (35) 1,781   1,064 3,281 208.4%
Interest Expense 2,685 4,321 60.9% 5,290 8,315 57.2%
Net Interest Income 1,808 2,555 41.3% 3,478 4,779 37.4%
Net interest margin (%)       3.1% 2.7%  
Other Expense 1,387 1,975 42.4% 2,681 3,665 36.7%
Provisions and contingencies (347) 716   59 1,351 2189.8%
Profit before tax 733 1,645 124.4% 1,802 3,044 68.9%
Tax 269 554 105.9% 634 1,027 62.0%
Profit after tax/ (loss) 464 1,091 135.1% 1,168 2,017 72.7%
Net profit margin (%) 6.7% 24.3%   13.3% 15.4%  
No. of shares (m)       232.5 278.4  
Diluted earnings per share (Rs)*       10.0 14.5  
P/E (x)         17.9  
* (annualised)            

Aggressive on growth
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 UTI-1 (28%), LIC (11%) and General Insurance Corporation (GIC). 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 28% 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 1,737 ATMs, the third largest in the country. The bank has had a successful GDR issue in FY05 that brought its CAR to 11.7% from 11.1% in FY04.

What has driven performance in 2QFY06?
Advances on strong traction: UTI bank registered its highest ever growth in advance book this quarter (75% YoY), with the retail segment (grew 90% YoY) being the perpetuator. The bank has successfully capitalised on the RAC (retail asset centre) model to capture growth opportunities and at the same time not compromising on the asset quality. It may be recalled that the bank had set up RACs for dedicated disbursement of retail credit (distinct from branch distribution) so as to avoid any undue favours to the branch deposit customers and compromises on loans appraisals. The same seems to have paid off well now. Also, the corporate book has grown by 70% YoY. Although the bank’s net interest margins (NIMs, 2.8% in 2QFY06) have contracted on a YoY basis, the same have improved over the previous quarter (2.6% in 1QFY06 ). The bank witnessed pressure on margins in the last two quarters because of short-term advances (having lower yields) prior to its GDR issue. It however, believes that it now has a very credible and encouraging pipeline of corporate advances, indicative of the very visible upswing in the credit cycle in the country. As these translate into loan assets replacing existing short term advances, the NIMs will begin to rise. Growth in low cost deposits (35% of deposit book) has caused the average cost of funds (4.9%) to marginally decline over 1QFY06 although the same is higher than that of 2QFY05 (4.7%).

Credit deposit ratio up...
(Rs m) 2QFY05 % of total 2QFY06 % of total Change
Advances 104,980   184,040   75.3%
Retail 26,980 25.7% 51,230 27.8% 89.9%
Corporate 78,000 74.3% 132,810 72.2% 70.3%
Deposits 212,120   340,550   60.5%
CASA 68,300 32.2% 120,050 35.3% 75.8%
Term deposits 143,820 67.8% 220,500 64.7% 53.3%
Credit deposit ratio 49.5%   54.0%    

Treasury - benign on margins: The bank had to book accounting losses in 2QFY05 for transferring a large portfolio of GSecs to the HTM (Held-to-Maturity) category. This explains the reason for the extraordinary treasury gains in this quarter and its impact on the bank’s bottomline. It may be more appropriate to note that the bottomline has grown at a CAGR of 30% over the last two years. The treasury gains in this quarter were primarily contributed by the bank’s equity portfolio, which may not be sustainable in the longer term. However, given the fact that the bank has 85% of its investments in the HTM category, its treasury portfolio remains well hedged.

Fee cushion: The bank registered a modest growth of 20% YoY in its fee income during 2QFY06. It must however be noted that the lower growth is because of a high base effect (in 2QFY05, the bank had an extraordinary income from securitisation). Without considering the same, fee income grew by 46% YoY in 2QFY06, both retail and corporate segments contributing an appreciable proportion of it. 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.

Proactive provisioning: After several quarters of write offs of provisioning, the bank has provisioned aggressively in this quarter despite having arrested delinquencies. This caused the net NPAs to slip further from 1.3% in 2QFY05 to 1.0% in 2QFY06. The provisions together with accumulated write-offs as a proportion of gross NPAs (NPA coverage) amounted to 74% at end of 2QFY06.

What to expect?
At the current price of Rs 258, UTI Bank’s stock is trading at 2.1 times our estimated FY08 adjusted price book value. The GDR issue at the end of FY05 has improved the bank’s CAR from 9% in 2QFY05 to 11.7% post the issue. The bank is also likely to be a beneficiary of the government’s stand on liberalizing foreign holding in private banks, which may cause HSBC (which holds 12% stake in UTI Bank) to hike its stake post 2009. Though the stock has crossed our FY06 price target, we believe that the bank remains attractive from the long-term perspective, once higher margins and better asset quality starts filtering into its valuations.

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