Tax benefits inflate UTI Bank's profits - Views on News from Equitymaster

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Tax benefits inflate UTI Bank's profits

Oct 18, 2000

UTI Bank has reported a YoY 158% jump in its net profits to Rs 191 m in 2QFY01. However profit before tax of the bank increased by mere 11% and the operating margins declined by more than 600 basis points to 10.2%. The higher growth in profits was due to tax benefits to the bank from investment in preference shares and tax free bonds.

(Rs m)2QFY002QFY01Change
Operating Income 1,136 2,106 85.5%
Other Income 174 289 66.2%
Interest Expenses 945 1,892 100.1%
Operating Profit (EBDIT) 190 214 12.7%
Operating Profit Margin (%)16.7%10.2%
Other expenses 127 238 87.3%
Depreciation 27 32 16.6%
Profit before Tax21023311.3%
Provisions & contingencies59636.1%
Tax 77 (20)
Profit after Tax/(Loss) 73.9 190.8 158.2%
Net profit margin (%)6.5%9.1%
Diluted number of shares 131.9 131.9
Diluted Earnings per share*2.25.8

During the 1HFY01, total deposits and advances of the bank witnessed a remarkable growth rate of 136% and 81% respectively. Although the low cost deposits of the bank recorded a growth of 102%, the interest margins are declined considerably.

The retail focus of the bank through a wider branch and ATM network has contributed in increasing the operating income. Currently the bank has 61 branches and 148 ATMs. Also the banks' impetus on fee based income has resulted in 66% growth in the other income.

At the current market price of Rs 37, UTI Bank is trading at PER of 6.4 times its 2QFY01 annualised earnings. The Bank's Price/Book value ratio of 2 times is comparatively less than HDFC Bank's 8 times. The bank's focus on retail and corporate services through range of products is expected to improve its interest income. Also investment in technology will help it to cut down the operating cost resulting in improvement in net margins. However, the interest spread could remain under pressure due to increasing competition among the banks and financial institutions.

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