Stock Pick From The Finance Sector

Here Is Why:

• It has seen a strong financial performance on the bottomline front for the September 2013 quarter
• Improvement in NIM on a sequential basis indicates its ability to manage its cost of funds well
• Substantial CASA floats and de-bulking of its balance sheet creates an upward bias for the NIM

Readers may be surprised to see a PSU bank being recommended in the times of rising interest rates. The foremost factor behind our recommendation of UCO Bank is its strong financial performance for the September 2013 quarter, where its bottomline surged by 4x on a YoY basis despite higher provisioning. Apart from that, it has seen moderate asset quality pressures in the quarter as compared to its peers. On the NIM front too, the bank has managed to show improvement despite the rising interest rate scenario. What makes the counter more lucrative is the current account and savings account mobilisation, which is likely to help it sustain its margins.

As regards the financial performance for the September 2013 quarter, the NII, grew by 54.9 per cent on a YoY basis to Rs 1569 crore. This boosted the operating income and operating profits, which rose strongly by 45.1 and 63.4 per cent respectively on a YoY basis. Helped by strong operating performance, the bank made much higher provisions of Rs 759 crore as compared to Rs 597 crore in the September 2012 quarter. As a result during H1FY14, the provisioning expenses grew around 50 per cent YoY and the provision coverage ratio (PCR) improved by 228 basis points to 54.4 per cent. However, despite the higher provisioning, the bank reported a 285.9 per cent growth on a YoY basis to Rs 400 crore. Though the growth was on a low base of Q2FY13, where the bank had reported a 55 per cent YoY earnings decline, it is nevertheless a commendable performance.

During Q2FY14, the bank registered a moderate rise in its business, as the advances and deposits grew by 14.6 per cent and 16.1 per cent respectively. This was just in line with the average industry growth. The CASA deposits grew strongly by 58.2 per cent YoY, aided by strong growth current deposits, which can be attributed to the substantial float being made available on the opening of rupee accounts with the bank for facilitating Indo-Iran trade payments. The CASA ratio increased 23 basis points on a sequential basis and 858 basis points YoY to 32.3 per cent.

As a result, the NIM for the quarter stood at 2.84 per cent as against Rs 2.73 per cent in June 2013 and just 2.24 per cent in September 2012. The NIM is likely to improve or is at least expected to at least sustain at the current levels hereon. This would be aided mainly by the shift in reliance from bulk deposits to retail franchise and substantial CA floats made available on Indo-Iran trade payments, with an increase in retail and SME loans.

After witnessing severe asset quality pain over last two years until March 2013, the asset quality performance for the bank was reasonable as compared to its peers. The Gross NPAs stood at 5.3 per cent (5.6 per cent in June 2013) and the Net NPAs stood at 3.1 per cent (3.2 per cent in September 2013). The slippage amounted to Rs 976 crore in Q2FY14 as compared to Rs 629 crore in Q1FY14, but were much lower than the quarterly average of around Rs 1300 crore over FY2013. Of the slippages during the quarter, around Rs 400 crore came from four accounts in the infrastructure sector. As the economy picks up pace, we expect to see an improvement in the infra assets too.

While the asset quality is improving, the margins are also likely to improve going ahead. With the Tier-I CAR standing at just 8.44 per cent, capital adequacy is admittedly an issue. However, this is manageable so far, and should not be a bother at the current levels. On the valuations front, it is currently trading below its price-to-book value ratio of 1x. We recommend a ‘buy’ on the counter with a target price of Rs 90 in the next one year.