Maintaining margins will be key challenge for UTI Bank- July 14
UTI Bank’s results should allay some fears about the effect of rising interest rates on credit growth, at least for private sector banks. Its advances have risen sharply, and so has interest income, though higher interest costs have impacted margins. Net interest margins (NIM) are flat in the June ’06 quarter on a year-on-year (YoY) basis.
But on a sequential basis, margins are showing signs of pressure. NIM has come down from 2.96% in the March ’06 quarter to 2.68%.During the quarter, advances have risen by a solid 65%, with retail advances leading with 82% growth. The latter now accounts for nearly a third of total advances. Interest income has risen sharply by 53% to Rs 953.9 crore during the quarter, led by interest on advances rising by 71.4% to Rs 550.3 crore.
However, the increase in interest expenses was higher, rising by 58.3% to Rs 632.1 crore. The net effect has been an increase in net interest by 45%, which is still commendable by industry standards. Apart from interest income, a key component of a bank’s operating income is fee income, which grew by 60.7% to Rs 184 crore.
The high growth in net interest income ensured that despite provisions nearly doubling to Rs 124.8 crore, net profit growth is respectable at 30%. Going forward, some moderation in advances’ growth may happen from the current levels of 65%.
But future profitability would depend on its ability to maintain margins by passing on higher interest costs in full to customers. Fee income at 34% of oper-ating income provides a cushion to margins.
Buybacks are back in fashion now Companies are sensing an opportunity to buy back shares, after the recent crash, which has seen small and mid-cap stocks bearing the brunt. They have a window of opportunity, in which they can buy back shares at low prices, a plan that can go awry only if prices fall further. Some companies who have either completed or are planning a share buyback are SRF, Revathi Equipment, and SB&T International.
A buyback is usually done when a company has surplus funds and it also wishes to reduce its equity capital, rather than pay out dividends. Companies also do a buyback when they perceive their share price as being undervalued. A buyback lowers the equity base over which earnings are spread, thereby increasing the per share earnings for residual shareholders. Thus, with the same P/E multiple, its share price should trade higher. Godrej Consumer Products had executed a series of buybacks that were partly responsible for an improvement in its market valuation over the years.
One view could be that promoters are hiking their stakes in these companies at low prices. That may be so, but at the same time, they also believe that their company share prices are under-valued. Either way, it sends out a positive signal to shareholders, as long as this is the best use for its surplus funds.
