UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs725
Current market price: Rs645

Price target revised to Rs725

Result highlights

• UTI Bank's Q1FY2008 profit after tax (PAT) was slightly lower than our expectations of Rs188 crore at Rs175 crore, up 45.2% year on year (yoy). The PAT was lower than expected due to higher than expected operating expenses during the quarter.
• The net interest income (NII) was up by 38.8% to Rs446.8 crore compared with our estimate of Rs471 crore. UTI Bank's reported net interest margin (NIM) expanded by four basis points yoy but declined by 34 basis points quarter on quarter (qoq). A sequential fall in the NIM was expected as the bank had invested in low yielding priority sector securities. However, the sequential increase in the cost of funds has been sharp which has resulted in a lower than expected NII.
• The bank has again reported a robust growth, with assets up by 49% yoy and 8% qoq, driven by a strong advances growth of 60% yoy and 12% qoq. The deposits have grown by 45% yoy and 3.9% qoq with an improvement in the current and savings account (CASA) ratio on a year-on-year (y-o-y) basis.
• The non-interest income was up 70.8% yoy and 13.7% qoq to Rs342.3 crore, much above the expectations of Rs273 crore mainly driven by a higher trading income of Rs70 crore, which grew by 346% yoy and 64% qoq. The core fee income was up 67.6% yoy.
• The operating expenses were up by 76% yoy to Rs421.2 crore mainly driven by higher staff expenses, which reported an 85.6% y-o-y and 66.3% sequential growth.
• Although UTI Bank has grown at a robust pace in the last couple of years, yet there are no alarming signs of any deterioration in its asset quality. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.59% from 0.61% in Q4FY2007.
• UTI Bank has announced its plan to come out with a follow-on public offer (FPO) for 7.43 crore equity shares (26.3% of its existing equity base) to raise around $1 billion. We have assumed the FPO price to be Rs600 per share, up from Rs550 assumed earlier (as the minimum or floor price for the FPO has been decided at Rs575 per share). This would help the bank to raise around Rs4,459 crore.
• The NIM normally dips for the bank in the first quarter and then gradually picks up. The fee income, business growth and asset quality remain healthy, hence there is no major concern for the bank on the operational side. The capital raising would allow the bank to grow for the next three years without any further dilution. We feel UTI Bank has excellent growth potential which coupled with its strong management and earnings quality should allow it to trade at a slightly higher than its historical book value (BV) valuation band of 2.5-2.7x, as all the parameters that decide the valuations have improved considerably. At the current market price of Rs645 the stock is quoting at 20x its FY2009E earnings per share (EPS), 8.9x its FY2009E pre-provisioning profits (PPP) and 2.4x its FY2009E BV. We maintain our Buy recommendation on the stock with a revised price target of Rs725 at which level it will trade at 2.74x FY2009E BV.