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Uco Bank announced its 2QFY2011 results today, registering a 54.2% qoq and
42.6% yoy decline in net profit to `119cr, below our estimates of `165cr due to
provisioning expenses of `580cr against estimates of ~`450cr. However, the
bank’s performance on parameters of NII and non-interest income was better
than our expectations. We maintain a Neutral recommendation on the stock.
Strong on operating front, but asset quality disappoints: Advances grew by 3.9%
qoq and 21.9% yoy, while deposits increased by 1.8% qoq and 19.8% yoy
during 2QFY2011. The bank’s CASA ratio improved to 25.3% (from 23.5% in
FY2010), driven by current and savings deposit growth of 19.2% yoy and 27.2%
yoy, respectively. On a sequential basis, calculated NIM improved by 17bp to
2.97%. This resulted into robust NII growth of 90.6% yoy. On the asset quality
front, the bank faced pressure, with gross NPAs increasing by 6.7% qoq to
`2,058cr and net NPAs increasing by 9.4% qoq to `1,005cr. The bank witnessed
large slippages of `678cr (v/s `416cr in 1QFY2011), implying an annualised
slippage ratio of 3.3% as compared to slippage ratio of 1.6% in FY2010. The
provision coverage ratio, including technical write-offs, improved to 62.1% from
58.0% in 1QFY2011.
Outlook and valuation: Structurally, the bank has had relatively higher exposure
to large corporates, low CASA of ~25% and low fee/assets. Going forward, we
expect the bank’s NIM to find support from increasing exposure to the SME and
retail segments, improving other income and moderating asset quality pressures,
aided by increasing recoveries. However, at the CMP, the stock is trading at 1.2x
FY2012E ABV, which we believe factors in positive directional improvement in
earnings quality. Hence, we maintain a Neutral recommendation on the stock.
Strong advances growth with improvement in CASA
Advances increased by healthy 21.9% yoy and 3.9% qoq to `84,971cr,
considerably above the industry’s sequential growth of ~0.6%. Deposits were also
moderately up by 19.8% yoy and 1.8% qoq to `1,21,001cr. As a result, the creditdeposit
ratio stood at 70.2%, registering an improvement of 146bp from
1QFY2011. The key drivers for growth in advances were corporate loans and
agricultural loans, which grew by 35.7% and 29.1% yoy, respectively.
The bank’s CASA ratio improved to 25.3% (from 23.5% in FY2010), driven by
current and savings deposit growth of 19.2% yoy and 27.2% yoy, respectively
Improvement in CD ratio drives NII growth
The bank’s CD ratio improved by 146bp sequentially to 70.2%. The bank’s cost of
deposits declined by 149bp from 6.92% in 1HFY2010 to 5.43% in 1HFY2011,
while the yield on advances declined by 56bp to 9.93%. Consequently, the bank’s
NII increased by 90.6% yoy and 6.9% qoq to `1,002cr (from `937cr in
1QFY2011). Reported NIM improved sharply to 3.51% in 2QFY2011 from 3.07%
in 1QFY2011. Going forward, the bank is expected to face NIM pressure in a
rising interest rate environment on account of its relatively low CASA.
Non-interest income declines due to a high base effect
Total non-interest income increased sharply by 20.5% qoq to `229cr, but merely
1.6% yoy due to lower treasury gains. Non-interest income, excluding treasury,
increased by 34.6% qoq to `214cr. As expected, the bank recorded a lower
treasury gain of `15cr during 2QFY2011, which was 51.6% lower sequentially due
to rising interest rate environment.
Asset quality under pressure
On the asset quality front, the bank faced pressure, with gross NPAs growing by
6.7% qoq to `2,058cr and net NPAs increasing by 9.4% qoq to `1,005cr.
The provision coverage ratio improved to 62% (from 58% in 1QFY2011), including
technical write-offs. The bank has to increase the same to 70% by March 2011.
Gross and net NPA ratios were stable during the quarter at 2.39% (2.36% in
1QFY2011) and 1.18% (1.14% in 1QFY2011), respectively.
The bank witnessed large slippages of `678cr (v/s `416cr in 1QFY2011), implying
an annualised slippage ratio of 3.3% as compared to slippage ratio of 1.6% in
FY2010.
The bank additionally restructured advances worth `157cr during 1HFY2011,
taking the total amount of restructured advances to `6,008cr, forming 7.1% of
advances and 103% of net worth.
Operating costs rise
Operating costs increased by 37.4% yoy and 9.4% qoq to `527cr during the
quarter. The cost-to-income ratio stood at 42.8%, substantially below its
eight-quarter average of 50% on the back of robust growth in operating income.
Staff cost and other expenses increased by 26.1% yoy and 12.6% yoy, respectively.
The bank has to provide `250cr towards gratuity as per the revised norms, of
which `40cr has been provided during 2QFY2011. As per the management,
pension liability is estimated to be `850cr–1,000cr, out of which `100cr has been
provided in 1HFY2011.
During the quarter, the bank opened four branches, taking its total branch network
to 2,158. Total number of ATMs stood at 528, of which 28 were added during the
quarter. The entire branch network of the bank is already under CBS.
Reasonably well capitalised
As per Basel-II norms, the bank’s capital adequacy ratio (CAR) was comfortable at
13.6%, with Tier-I ratio of 7.8%. Government shareholding in the bank stands at
63.6%, indicating the headroom available for increased Tier-I capital. The bank
was planning an FPO earlier but now the plans are put on hold.
Investment arguments
Improvement in core profitability
The bank had a relatively lower NIM of 1.9% in FY2010 due to low CASA ratio of
~25% and high exposure to relatively low-yielding corporate loans, which
constituted 69% of its total loan book. While reported NIM has risen to 3.5% in
2QFY2011 due to a decline in cost of wholesale deposits, going forward, an
increase in retail and SME loans is expected to partly stem the fall in NIM due to
rising deposit rates. We have factored in NIM (calculated) of 2.8% and 2.6% for
FY2011 and FY2012, respectively. Moreover, management has guided for an
improvement in other income on account of revision in charges, higher recoveries
from written-off accounts and more active treasury operations going forward.
Improvement in operating environment to lead to lower credit
cost
The bank's gross and net NPAs stood at 2.4% and 1.2%, respectively, in
2QFY2011, with cumulative restructured advances at `4,720cr (6.0% of loans,
138% of net worth). However, with improved economic environment, we expect
strong recoveries and lower slippages going forward, which is expected to result in
a decline in provisioning expense as a percentage of average assets from 1.1% for
FY2011 and 0.6% for FY2012, after taking into account the increase in provision
coverage to 70%.
Outlook and valuation
Structurally, the bank has had relatively higher exposure to large corporates, low
CASA of ~25% and low fee/assets. Going forward, we expect the bank’s NIM to
find support from increasing exposure to the SME and retail segments,
improving other income and moderating asset quality pressures, aided by
increasing recoveries. However, at the CMP, the stock is trading at 1.2x FY2012E
ABV, which we believe factors in positive directional improvement in earnings
quality. Hence, we maintain a Neutral recommendation on the stock.
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