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Recommendations India

UCO Bank 4QFY2014 performance highlights and results update

June 2, 2014, Monday, 05:46 GMT | 00:46 EST | 09:16 IST | 11:46 SGT
Contributed by Angel Broking

UCO Bank reported strong earnings at Rs.285cr against Rs.50cr in 4QFY2013 (on strong CA floats made available during last several quarters due to Indo-Iran trade payments). The operating performance was largely in line with our estimates with NII growth of 15.7% yoy (flat sequentially) and Pre-provisioning profit growth of 33.0% yoy. Tax expense came in at Rs.184cr for 4QFY2014 as against Rs.6cr in 4QFY2013.

Healthy business growth; Asset quality improves on higher recoveries and upgrades: During 4QFY2014, the loan book for the bank grew at a healthy pace of 16.6% yoy, while deposit growth was also healthy at 15.1% yoy. Overall CASA ratio for the bank declined 242bp yoy to 29.5%. Sanction on Iran was the main reason behind the Indo-Iran rupee trade arrangements resulting in CA-floats of Rs.18,000-20,000cr for the bank for the past few quarters. Complete lifting of sanctions on Iran remains an overhang on the sustainability of such arrangements and the resulting CA floats for the bank. Yield on advances for the bank declined 21bp qoq at 9.8%. Lower yields on advances resulted in a 13bp qoq decline in the reported NIM. During 4QFY2014, the bank reported stability on the asset quality front, aided by higher recoveries and upgrades though slippages spiked qoq (annualized slippage rate came in higher at 5.5%, as compared to 1.9% as of 3QFY2014 and 5.3% in 4QFY2013). Recoveries/upgrades during the quarter came in much higher sequentially at Rs.1,860cr (against an average of Rs.343cr for the last few quarters). The PCR improved by 270bp qoq to 57% (up 494bp yoy). The Gross NPA ratio decreased 88bp qoq to 4.3%, while the net NPA ratio decreased 68bp qoq to 2.4%. Additionally, the bank restructured advances worth Rs.709cr during the quarter, thereby taking its outstanding restructured book to Rs.11,650cr.

Outlook and valuation: The bank has a substantial CA float made available on Indo-Iran trade payments. Also stable to improving asset quality and low treasury income volatility is resulting in healthy earnings visibility (EPS CAGR of 57.6% over FY2013-16E, on a low base of FY2013). Moreover return ratios for the bank have improved (RoE, after declining to 9.1% in FY2013, improved to 17.9% in FY2014 and is expected to stay at current levels for FY2015. However at CMP the stock trades at a premium valuation of 0.9x 2016E ABV compared to its peers. Hence, we recommend a Neutral rating on the stock.