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Suresh Krishnamurthy

Mr M. Damodaran, Chairman, UTI and Mr Niall S. K. Booker, CEO, HSBC India _Holding a major stake in the UTI Bank, the former has the key to shareholding consolidation by the latter.

FRESH investments in the stock price of UTI Bank can be considered now. Investments at this price hold the potential to deliver attractive returns.

Sustainable re-rating

The acquisition of a 20 per cent stake in UTI Bank by HSBC is a vote of confidence for the business model pursued by the top management. This is also positive from the perspective of long-term earnings growth. With strong institutional and strategic shareholders on board, the growth will not be constrained because of lack of access to capital. This will sustain the re-rating of the stock at the bourses. At least over the next 12 months, the valuation gap between HDFC Bank — the fastest growing peer — and UTI Bank, is likely to narrow although the former will continue to trade at a premium because of superior performance.

At the same time, the deal is not likely to lead to rapid consolidation of the shareholding in UTI Bank towards a single entity such as HSBC. The consolidation of shareholding in favour of a single investor is likely to take time and would entirely depend on UTI's plan to offload its 33 per cent stake.

UTI's plan may now depend on when the foreign direct investment regulations, allowing a stake of 74 per cent in banks for foreign entities, will be permitted. The Government has committed itself to relaxing the limits in principle but it may take time. In this context, consolidation-related gain in share price is unlikely in the near-term. Another factor is LIC's desire to acquire the stake held by UTI. These issues may take time to be resolved and reduce the possibility of consolidation in the short term.

Union with HSBC?

However, if HSBC and UTI Bank unite within the next few years, they are likely to emerge stronger. HSBC is smaller than UTI Bank in terms of business volumes. HSBC's business volumes are about Rs 20,000 crore compared to Rs 25,000 crore for UTI Bank. In terms of quality of assets, there is not much to differentiate between the two. The only difference is in rate of growth — UTI Bank has been growing more rapidly than HSBC in the last three years. A union of HSBC and UTI Bank will nearly double the size of UTI Bank with the potential to reduce the cost of operations and grow earnings faster.

However, it is too early to talk of a union between HSBC and UTI Bank. HSBC has held minority stakes in Chinese banks for a period of more than a year. A similar scene may be seen in India. UTI Bank has also stated that it wishes to remain a stand-alone bank.

Long-term value

It is critical to see if the UTI Bank stock holds the potential to deliver reasonable returns even from the present price levels. That appears possible if the growth rate in advances and deposits recorded by the bank in recent years continues. UTI Bank's record is impressive. For instance, it recorded growth in customer assets of about 40 per cent in the last three years. This is only marginally lower than the growth of 44 per cent recorded by HDFC Bank.

However, while HDFC Bank trades at a price-to-earnings multiple of more than 20 times, the UTI Bank stock still trades at a price-to-earnings multiple of only about 11 times its earnings for the 12-month period ended September 2003.

Besides, if consolidation materialises over a longer-term that will also unlock value for the shareholders. Further, the entry of HSBC Bank is likely to have erased lingering doubts about the attractiveness of UTI Bank as an acquisition candidate. Therefore, investors can enter the stock now.

However, UTI Bank's performance in the next six months needs to be watched to find out if the pace of growth is being sustained. This is crucial to judge if the higher price-to-earning multiple will be justified even in the absence of any consolidation in shareholding over the next 12 months.

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