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UTI Bank: On the move

Dec 24, 2001

UTI Bank has grown at a spectacular rate in the last five years. The bankís operating income and earnings grew at a CAGR of over 50% and asset base too witnessed a CAGR of 59% during the same period. However, its net interest margin (NIM) fell sharply from 3.1% in FY97 to 1.6% in FY01. Over the years, UTI Bank has emerged as one of the leading private sector banks owing to its aggressive business expansion and tech initiatives in line with the other private sector banks. However, since its loan assets are highly tilted in favour of corporates, a downturn in the economic environment is impacting earnings quality of the bank. During the first half of the current year, its provisions and contingencies amount increased by 11 fold to Rs 746 m compared to 1HFY01. The bankís NPA coverage stood at just 20% as on March 2001. The higher provision in the fist half of the current fiscal is likely to increase its NPA coverage ratio.

To diversify the risk of over exposure to corporate clients, UTI Bank is diversifying into retail assets. It has appointed the Boston Consulting Group (BCG) to rework its strategies in corporate and retail banking. This is expected to assist the bank in maintaining its high growth rates. Its lower capital adequacy ratio (CAR), which stood at 9% as on March 2001, was trimming its growth rates. However, its recent placement of 26% stake in equity to CDC Capital Partners has increased the bankís CAR to 11.5%. This placement has reduced the promoterís stake in the bank to 45% from 61% and infused funds of Rs 1.6 bn into the bank. It is also in talks with Fortis, a Dutch-Belgian bank, on a possible preferential allotment at a premium to ramp up its equity base further and reduce the promoterís stake to 40%, as required by the RBI guidelines.

Among its new initiatives to enhance the asset base is to buy corporate assets from other banks, institutions and non-banking finance companies (NBFCs). The bank is looking at picking up a loan portfolio on the retail side too. It has two strategic alliances, Integrated Finance and Kinetic Fincap. These alliances help the bank to acquire retail assets, running the portfolio and also in recovery. To enhance the retail base further, the bank is aggressively opening ATMs across the country. Today it has one of the largest networks of 418 ATMs in 50 Indian cities. The bank has recently signed a MOU with BNP Paribas for sharing of its ATMs across the country. This would help the bank in earning additional fee based income.

UTI Bank has tied up with Export-Import Bank of India (Exim Bank) for co-financing exports and export-oriented companies. The two banks aim to provide value added services like export credits and loans to support the internationalisation efforts of small and medium sized externally oriented companies. The banks will offer available information and advisory services to assist corporate clients, seeking to create and enhance their international presence through exports. Apart from this, UTI Bank has entered into a new channel-financing route in partnership with Standard Chartered Bank and Citibank for steel sold by Tisco and SAIL.

To enhance its interest income further, the bank has decided to start currency chest operations across India. It has recently signed an agreement with the RBI to foray into this new segment. It plans to initially commence currency chest operations in the four metros and expand to other cities subsequently.

These new efforts of the bank would help it to maintain strong growth rates in interest income. However, a key challenge for the bank remains increasing the proportion of low cost deposits and retail assets. This would not only provide higher interest margins to the bank but would also reduce the risk of focusing on corporates. At the current market price of Rs 26, UTI Bank is trading at a P/E of 4x and Price/Book Value ratio of 1x. The bank is expected to report over 50% growth in earnings in the current year.

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