UCO Bank 3QFY2014 performance highlights and results update
February 6, 2014, Thursday, 06:05 GMT | 02:05 EST | 11:35 IST | 14:05 SGT
UCO Bank reported a strong earnings growth of 207% yoy (on strong CA floats made available during last several quarters due to Indo-Iran trade payments). Operating performance was slightly below our estimates, with NII growth at 33% yoy (flat sequentially) and pre-provisioning profit growth at 37% yoy. MAT credit recognition resulted in a tax expense of just Rs.10cr for 3QFY2014 (going ahead, the Management expects normal tax rates from 4QFY2014).
Asset quality witnessed stability on lower slippages: During 3QFY2014, the bank’s loan book grew at a healthy pace of 16.5% yoy, while deposit growth was moderate at 13.4% yoy. Sanctions on Iran, which were the main reason behind the Indo-Iran rupee trade arrangements resulting in CA floats of Rs.18,000-20,000cr for the bank, have been partly lifted now. However as per the Management the rupee trade arrangement is likely to continue in the near-to-medium term. Complete lifting of sanctions on Iran, the probability of which is much higher than what was earlier, remains an overhang on sustainability of such arrangements and the resulting CA floats for the bank. Higher cost of deposits resulted in a 17bp qoq decline in the reported NIM to 2.83%. During 3QFY2014, the bank reported stability on the asset quality front, with sequentially flat absolute gross and net NPAs aided by lower slippages (annualized slippage rate came in at 1.9%, as compared to 3.0% as of 2QFY2014). Recoveries/upgrades during the quarter came in flat sequentially at Rs.414cr and were partly aided by Rs.160cr realization from sale of assets worth Rs.322cr to ARCs. PCR remained largely stable qoq at 54.3%. Additionally, the bank restructured advances worth Rs.1,419cr during the quarter (of which three chunky accounts from infrastructure and iron & steel industry contributed a major chunk), thereby taking its outstanding restructured book to Rs.12,817cr. Going ahead, the Management has indicated at stable to improving outlook on the asset quality front, on back of expectations of a recovery/upgrade in a chunky account, assets put up for sale to ARCs worth Rs.1,900cr and minimal pipeline for slippages.
Outlook and valuation: At CMP, UCO Bank trades at 0.7x FY2015E ABV, though relatively higher than peers. However, substantial CA float made available on Indo-Iran trade payments, stable to improving outlook on asset quality (as indicated by the Management) and low treasury income volatility have resulted in healthy earnings visibility (EPS CAGR of 71.7% over FY2013-15E, on a low base of FY2013) and significant improvement in return ratios for the bank (RoEs are expected to return to 17-18% levels by FY2014-15E), which makes a reasonable case for a premium valuation. Hence, we recommend an Accumulate rating, with a target price of Rs.68.