Dear All,
Forwarding you the Result Flash on UCO Bank for 4QFY2011 with a Neutral recommendation.
For 4QFY2011, UCO Bank posted a disappointing set of numbers with net profit declining by 25.0% qoq and 40.5% yoy to Rs226cr. The numbers were substantially below estimates on account of sharp 76bp sequential fall in reported NIMs coupled with a 83.8% spurt in net NPAs. The profitability was also marred by the full hit of the provisions required for second pension option and gratuity for retired employees.
Key highlights:
· The bank’s growth was unusually high during the quarter as evident from 20.3% qoq growth in deposits in 4QFY2011, when deposit rates in the system as a whole were quite high. Even the advances growth momentum was strong with growth of 10.7% qoq and 18.8% yoy.
· NII de-grew by a huge 20.5% qoq to Rs844cr due to a sharp 76p qoq fall in reported NIMs to 2.35%. On a yoy basis also the growth slowed down considerably with growth of 13.5% compared to over 70% yoy growth in each of the last 4 quarters. Non-interest income growth was strong sequentially, registering a growth of 36.4% qoq.
· Operating expenses increased by 28.7% yoy driven by a 32.5% increase in employee costs and 21.2% growth in other operating costs. During FY2011, the bank made provision for enhancement in gratuity limits of Rs59cr (1/5th of total liability of Rs293cr). It also took a hit of Rs102cr towards additional liability for serving employees under the second pension option and Rs462cr towards liability for retired employees. Balance liability carried forward for gratuity stands at Rs234cr and for Pension at Rs406cr. As a result of decline in operating income and rise in operating expenses, the cost-to-income ratio of the bank deteriorated to 49% from 40% in 3QFY2011.
· The asset quality of the bank deteriorated substantially during 4QFY2011 with the Gross NPAs jumping up by 37% qoq and Net NPAs spurting by 83.8% qoq. Consequently, Gross and Net NPA ratios deteriorated to 3.1% and 1.8%, respectively from 2.6% and 1.1%, respectively in 3QFY2011. In accordance with a recent RBI circular, the bank has kept an amount of Rs210cr in counter cyclical provisioning buffer, representing a surplus of provision above the required 70% coverage on Sep30, 2010 gross NPAs. However, with reference to March 31,2011 gross NPAs, the reported provision coverage ratio declined to 51.6%.
· Total provisioning expenses were for the quarter rose by over 92% despite halving of Provision for NPAs from Rs2,037cr in 4QFY2010 to Rs936cr in 4QFY2011. This rise can be primarily attributed to provisions on account of employee benefits (pension and gratuity) being reflected here instead of employee expenses. The bank also took a hit on account of rectification in the classification of few investments, as pointed out by the Auditors in 3QFY2011.
· The bank’s CAR improved to 13.8% on the back of capital infusion by the government.
After the ~10% fall in stock post results, it is trading at 1.0x FY2013E ABV (equal to 5-year median multiple). However, we continue to maintain a Neutral view on the stock as we believe that there are other attractive opportunities available right now with better valuations and healthy growth prospects. We may revise our estimates post interaction with the management.
| Exhibit 1: 4QFY2011 Actual vs. Estimates | |||
| (Rs cr) | Actual | Estimates | Var (%) |
| Net interest income | 844 | 1,054 | (19.9) |
| Non-interest income | 292 | 244 | 19.9 |
| Operating income | 1,136 | 1,298 | (12.4) |
| Operating expenses | 556 | 522 | 6.7 |
| Pre-prov. profit | 580 | 776 | (25.3) |
| Provisions & contingencies | 341 | 387 | (11.9) |
| PBT | 239 | 389 | (38.5) |
| Prov. for taxes | 13 | 30 | (55.8) |
| PAT | 226 | 359 | (37.1) |
Source: Company, Angel Research
Exhibit 2: 4QFY2011 Performance summary
| (Rs cr) | 4QFY2011 | 3QFY2011 | % chg (qoq) | 4QFY2010 | % chg (yoy) |
| Interest earned | 3,068 | 2,894 | 6.0 | 2,436 | 26.0 |
| Interest expenses | 2,224 | 1,832 | 21.4 | 1,692 | 31.5 |
| Net interest income | 844 | 1,062 | (20.5) | 744 | 13.5 |
| Non-interest income | 292 | 214 | 36.4 | 254 | 14.9 |
| Operating income | 1,136 | 1,276 | (11.0) | 998 | 13.9 |
| Operating expenses | 556 | 511 | 8.9 | 432 | 28.7 |
| Pre-prov. profit | 580 | 765 | (24.2) | 566 | 2.5 |
| Provisions & contingencies | 341 | 456 | (25.2) | 177 | 92.7 |
| PBT | 239 | 310 | (22.8) | 389 | (38.5) |
| Prov. for taxes | 13 | 8 | 58.7 |
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