UCO Bank - Should you invest ?
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Even though UCO bank posted a strong growth of 93.60% in its net profits in Q2 FY12, it doesn’t seem to be promising. After declaring the results on Oct 31, 2011, the scrip is down 19% just in the last one month. From levels of Rs 75, it is now trading at Rs 61.45.
After attending the Analyst Meet on Nov 28, 2011, we still feel that the scrip is not a good bet. Investors must wait and watch for its next quarter results to believe that the worst is over for the bank.
The following are the key parameters of the bank's financials:
| Particulars (Rs / Cr) | Q2FY12 | Q2FY11 |
| Net Profit | 230.75 | 119.19 |
| CASA (%) | 26.33 | 25.27 |
| NIM (%) | 2.84 | 3.23 |
| CAR (%) | 13.55 | 13.6 |
| Provisions | 474.88 | 580.02 |
| Gross NPA (%) | 3.64 | 2.39 |
| Net NPA (%) | 2.11 | 1.18 |
| Return on Assets (%) | 0.6 | 0.36 |
The bank's asset quality has worsened. The Gross NPAs increased by 125 bps to 3.64%, while the Net NPAs increased by 93 bps to 2.11%. The asset quality deteriorated because of the rising interest rate environment and because of the movement to system-based NPA, which got finished in the September 2011 quarter.
In Q2 FY12, the bank's Net Interest Margin (NIM) also contracted by 39 bps to 2.84%. This is because the cost of deposits increased by 175 bps to 7.16%, while the yield on advances increased by 152 bps to 11.43%. Its Capital Adequacy Ratio (CAR) decreased marginally by 5 bps to 13.55%, with the Tier 1 CAR at 8.59%.
As on Sept 30, 2011, the global deposits of UCO Bank increased by 8.52% to Rs 131312 cr, while the advances grew by 12.88% to Rs 97278 cr on a YoY basis. Its CASA ratio (domestic) stood at 23.66%, up by 106 bps on a YoY basis.
The revenue from the retail segment during Q2 FY12 grew by 84% to Rs 668 cr, while the profits from the segment saw a growth of 218% to Rs 46.81 cr. The corporate segment also saw a growth of 105% to Rs 103 cr in profits.
The bank has exposure to the Aviation sector. Its exposure to Air India is approximately at Rs 1000 cr, while that to Kingfisher Airlines is Rs 300 cr. This could further affect the company.
In the Analyst Meet, the management said that it is taking a conservative approach, and provisions for NPA have been made sufficiently. They feel that the worst is almost over for the bank. The management expects to see a growth in advances and deposits by 18% and 15.50% respectively, which is in line with the RBI's expectation.
However, we feel that it is too early to say that the bank is out of the pressured situation, and advise investors to wait for the Q3 FY12 numbers, which will provide further cues for UCO Bank's financial position. Asset quality and sustainable NIM are the key areas where the bank is facing serious headwinds. At present, we would recommend that investors stay away from the scrip.
| Revenue | Profit |
| Segment (Rs / Cr) | Q2FY12 | Q2FY11 | % change | Q2FY12 | Q2FY11 | % change |
| Treasury Operations | 842.94 | 764.87 | 10.21 | 80.02 | 44.95 | 78.02 |
| Corporate / Wholesale Banking | 2213.18 | 1822.98 | 21.4 | 102.97 | 50.21 | 105.08 |
| Retail Banking | 668.79 | 362.35 | 84.57 | 46.81 | 14.69 | 218.65 |
| Other Banking operations | 5.88 | 14.34 | -59 | 5.88 | 14.34 | -59 |
| Total | 3730.79 | 2964.54 | 25.85 | 235.68 | 124.19 | 89.77 |