Angel Broking neutral on UCO Bank

“For 4QFY2011, UCO Bank posted a disappointing set of numbers with net profit declining by 25.0% qoq and 40.5% yoy to Rs226cr on account of a sharp 76bp sequential fall in reported NIMs as well as an 83.8% spurt in net NPAs. Profitability was also marred by the full hit of the provisions required for second pension option and gratuity for retired employees.”

“During 4QFY2011, the bank’s advances grew by 10.7% qoq and 18.8% yoy, and deposits grew 20.3% qoq and 18.7% yoy during 4QFY2011. Reported NIM declined sharply by 76bp qoq due to a 77bp qoq increase in cost of deposits, as 87% of incremental deposits were high-cost wholesale deposits and CDs. NIM compression was exacerbated by a 23bp decline in yield on advances due to high slippages. The annualised slippage ratio was as high as 5.7% during 4QFY2011 from an average of 2.5% in 9MFY2011 and 1.6% in FY2010. Net NPAs surged by 83.8% qoq and reported provision coverage ratio fell to 51.6% from 66.2% in 3QFY2011 as the bank reverted to incremental NPA provisioning based on prudential norms vs. the 70% PCR norm.”

“Structurally, the bank has had relatively higher exposure to large corporate, low CASA of ~23% 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 maintain our Neutral recommendation on the stock,” says Angel Broking research report.

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