• UBI derived almost 30 per cent of its total income from treasury operations for the period ended September 30, 2009 and March 31, 2009. The same has declined from over 36 per cent for the Fiscal 2008. The volatility in the treasury income on account of income as well as write-backs from the treasury portfolio would thus continue to impact the earnings going forward. Any adverse development on this front could dent the performance of the share price at the bourses. 
  
  
• United Bank loan book has recorded a satisfactory compounded growth rate of almost 35 per cent over the five years commencing  FY 2004 to FY 2009. At the same time, the deposits registered a growth of more than 21 per cent. 
  
  
• Even though the advances grew at a much faster rate than deposits, it  resulted into an improvement in the credit deposit (CD) ratio which  improved from a mere 35 per cent in FY2004 to more than 65 per cent in FY 2009 though an equivalent impact at the bottom-line could not be felt. This can be attributed to higher cost of funds on account of higher share of high interest paying deposits and higher cost of operations that resulted into lower Net Interest Margins. Notably, the NIM’s have declined to 2 per cent, which is lower than the industry average. These also depressed the return on net worth (RONW) and return on assets (RoA) which stood at 14 per cent and 0.7 per cent as of March 2009. 
  
  
• As of September 30, 2009, term deposits represented more than 66 per cent of the total deposits and current and savings (CASA) deposits constituted almost 34 per cent. As  significant portion of  assets have long-term maturity profile, the bank could be vulnerable to potential funding mismatches. 
  
  
• Lastly, though the gross NPA ratio has reduced from as high as 4.66 per cent in March 2006 to 2.5 per cent in September 2009, the proportion  of NPA’s still remains uncomfortably high. This is also reflected in the Net NPA of 1.3 per cent, which is higher than that of its comparable peers such as Allahabad Bank, Andhra Bank and Corporation Bank whose  net NPA’s are lesser than 1 per cent.  
  
  
• A further deterioration in the asset quality too cannot be ruled out. Aggravating this concern is the 5.3 per cent of the total advances that are already restructured assets of the bank and its high exposure to priority sector lending. Notably, UBI has written off accumulated losses to the tune of Rs2.8 billion  in FY05 and does not have any has and accumulated losses on its balance sheet as on September 2009. 
  
  
• As of September 30, 2009, priority sector credit constituted more than 36 per cent of the bank’s adjusted net bank credit whereas the loans to agricultural and micro and small enterprises borrowers constituted 12 per cent and 14 per cent respectively. Being a nationalized bank it is required to extend at least 18 per cent of the adjusted net bank credit to the agriculture sector. All these factors have already weighed on the financial performance of the bank and may continue to do so in future. However, any improvement on the above could lead to significant outperformance by the bank.

• Low Cost Deposit due to High Current and Saving Account (CASA) Deposits : Higher exposure to the Northern Eastern region (@ 50 per cent) of the country has helped UBI to build a satisfactory low-cost deposit base. This is also reflected in the huge gap in the deposit and the advance ratio for the Eastern region. To put matters in perspective, the deposits stood at Rs 4,36,441 million as compared to just Rs 1,46,862 million of advances as of September 30, 2009. For the same period term deposits represented more than 66 per cent of the total deposits. While the current and savings (CASA) deposits constituted almost 34 per cent. Notably, the cost of funds for Fiscal 2009 was 5.78 per cent, lower than the average cost of funds of nationalised banks (@ 6.18 per cent) and all banks in India (@ 6.05 per cent).
  
  
• Wide Distribution Network and increasing exposure to retail and corporate sectors : With a pan India presence through 1,505 branches in 28 States and in 4 Union Territories, the bank is aggressively looking to increase its exposure in the high margin retail and corporate sector. This is also reflected in the significant growth of the  loans and advances to the corporate sector which increased by 20.18 per cent in FY 2008 and 36.32 per cent in FY 2009. The loans and advances to the retail sector (which includes housing loans) increased by 14.30 per cent compared with a 7.43 per cent increase in Fiscal 2008. However, as a share to  total (gross) loans and advances it represents only 12 per cent to the total outstanding loans as of March 31, 2009. Increasing exposure will not only only lead to higher margins but also result into higher cost of operations.

Concerns

• Low NIMs : Despite access to low cost deposits, the bank’s NIM’s are comparatively lower due to higher cost of operations and higher non-performing assets. Aggravating matters is the high exposure to priority sectors that are known to have weak financial profiles. 
  
  
• Volatility in Interest Rates to depress returns : Volatility and changes in market interest rates could impact the interest the bank earns on its  assets differently from the interest it pays on its liabilities. The difference could result in an increase in interest expense relative to interest income leading to a reduction in its net interest income. Resultantly, volatility in interest rates could materially and adversely affect its business and financial performance.
  

CONCLUDING NOTES

At the upper end of the price band, the shares are on offer at a P/E of less than 5 for FY 2010, and an adjusted P/B of less than 1, which suggests that there is some price leeway for post listing gains.

The discerning long-term investor however, should recognize the sleight of hand in these financials that have been made possible by writing off accumulated losses against equity, rendering its EPS and P/E multiple far more attractive than its operational efficiency (?) could ever have afforded it to have been. 

 

theIPOguru’s  Verdict  :

INVESTOR TYPE