Stock Market Result Update on UCO Bank for 1QFY2012

Stock Market Result Update on UCO Bank for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, UCO Bank posted a healthy performance with net profit rising by 29.5% qoq and 12.4% yoy to `293cr, above our estimates, due to lower operating expenses and tax expenses than built in by us. The bank shed ~`18,000cr worth of bulk deposits during 1QFY2012. Lower slippages compared to 4QFY2011 and rise in reported NIM by 11bp qoq were the key highlights of the results. We maintain our Neutral recommendation on the stock.

Bank sheds low-cost deposits during 1QFY2012; NIM shows a marginal increase: During 1QFY2012, advances fell by 3.0% qoq (up 17.5% yoy) to `96,092cr, while deposits dipped by 12.2% qoq (up 7.3% yoy) to `127,534cr, led by shedding of `18,000cr of bulk deposits during the quarter. On the deposits side, CASA deposits grew by 12.9% yoy. On a sequential basis, CASA deposits fell by 2.6%; however, due to a much higher decline in overall deposits, CASA ratio increased by 97bp qoq to 24.2% in 1QFY2012. The effect of rising interest rates was felt in 1QFY2012, with cost of deposits increasing by 90bp qoq to 7.2%. However, yield on advances grew by 101bp qoq to 10.9%, leading to a sequential increase of 11bp in reported NIM to 2.5%. Asset quality deteriorated during the quarter, with gross NPA ratio rising by 37bp qoq to 3.5% and net NPA ratio rising by 31bp qoq to 2.2%. Annualised slippage ratio for 1QFY2012 stood at 2.1% (5.7% in 4QFY2011). Until now, the bank has only switched over accounts worth `50lakh and above to system-based NPA recognition.

Outlook and valuation: Structurally, the bank has had relatively higher exposure to large corporates, low CASA of ~24% and low fee/assets. Going forward, we expect the bank’s earnings to find support from increasing exposure to the SME and retail segments, improving other income and moderating asset-quality pressures, aided by increasing recoveries. However, at the CMP, the stock is trading at 1.0x FY2013E ABV, which we believe factors in the improvement expected in earnings quality. Hence, we remain Neutral on the stock.