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Suresh Krishnamurthy

Mr P. J. Nayak, CMD

FRESH investments can be considered in the stock of UTI Bank. The stock trades at a price-to-earnings multiple of about 10 times its earnings for the year ended March 2004.

Given the growth recorded by the bank in the past several quarters and the continuation of the growth momentum, the stock's valuation is attractive.

More from retail

UTI Bank's `highest' ATM -- Retail thrust pays rich dividends.

UTI Bank's advances in the quarter ended June 2004 picked up by about 5.8 per cent compared to the advances at end-March 2004. This is much higher than the 3.6 per cent growth for the banking system during the same period.

In terms of year-on-year growth, the industry has grown at 20 per cent and UTI Bank at slightly more than twice the pace.

Similar to all other banks, UTI Bank has been relying on their retail thrust to deliver growth. That has paid off. Retail advances has risen sharply in the quarter-ended June 2004. Even after recording such a high rate of growth, retail advances are still only about one-fourth of total advances.

Given that demand for retail loans is showing phenomenal growth, UTI Bank can continue to rely on this segment without any concern that it may be over exposed.

The retail focus is also bestowing benefits on the deposits side of the business. Saving deposits also increased at a blistering rate during the quarter ended June 2004.

Rising low-cost deposits, predictably, brought the cost of deposits down and spreads rose to above 3 per cent. The spreads are not very high compared to what is earned by a few other banks but is still quite healthy. Spreads in the quarter ended June is also higher than what it was in the previous year. This compensated for the lower income from treasury operations during this quarter.

In addition, the outlook points to a much higher level of spreads during the rest of the year suggesting that the growth momentum will be maintained.

First quarter blips

There are a few numbers in the financial performance of UTI Bank in the first quarter of 2004-05, which seem unfavourable. These include:

Reduction in the quantum of merchant banking business.

According to UTI Bank, these are, however, due to seasonal and one-time factors and are not due to a change in the quality of performance. UTI Bank feels year-on-year comparisons are more meaningful.

UTI Bank's financial performance also supports such a view. For instance, demand deposits fell in the quarter ended June 2003 compared to the quarter ended March 2003, but subsequently rose sharply.

With respect to the merchant banking business, UTI Bank indicated that the fee from merchant banking business has increased this year relative to the previous year and the fall in volumes does not indicate the performance of the division.

These factors highlight the potential for upside during the course of the year. If proportion of demand deposits and spreads rise, profit growth during the rest of the year will be equally strong.

Attractively valued

UTI Bank's earnings per share has been growing at a pace in excess of 30 per cent in the past several quarters. There is a strong possibility that the growth will be sustained. The bank also appears to have the potential to stay the course over a longer-term and the shareholders could be the beneficiaries of any consolidation activity in the banking sector. The threat of HSBC being forced to liquidate part of its stake in the bank by any new RBI rules has also receded. This is because Actis, another institutional shareholder in the bank, has been able to sell its stake of 5 per cent at Rs 130 per share to other investors.

This suggests the existence of institutional demand for the bank's shares. With the threat of a supply-induced fall in price receding, investors can now accumulate the shares with a long-term perspective.

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