Regional player

While UBI’s small size and insipid financials do not excite, its IPO pricing is attractive.

United Bank of India (UBI), one of the two unlisted public sector banks, is coming out with a public offer. The IPO will fetch UBI Rs 330 crore at the upper price band, which the bank intends to use to augment its capital base and fund future growth. With around 1,500 odd CBS branches, the bank is well poised to propel higher business volumes, going ahead. Besides scaling up operations, it would like to shed its image as an east-focused bank by expanding operations pan-India.

Growing book, margins not so
UBI witnessed robust business in the past wherein business volumes have grown faster than the industry average; deposits and advances have grown at 21 per cent and 33 per cent CAGR, respectively over the last five years. Its advances portfolio comprises corporate (57 per cent), retail (12 per cent), agriculture (12 per cent) and micro, small and medium enterprises (14 per cent).
 

IMPROVING NUMBERS
in Rs crore	FY08	FY09	H1 FY10
Net Interest Income	905	1,162	619
Other Income	466.00	491.00	265.00
Total income	1371.00	1653.00	884.00
Operating profit	439.00	671.00	354.00
Net profit	145.00	359.00	231.00
P/BV (x) @ Rs 60	-	4.03	0.63
P/BV (x) @ Rs 66	-	4.43	0.70

Almost half of the total deposits have maturities of more than three years, which provides leeway to the bank to disburse more towards long term borrowers. Going ahead, UBI plans to increase its credit portfolio by focusing on the retail and corporate segments. UBI gets around 80 per cent of deposits from Eastern and North-Eastern regions, which traditionally contributed higher proportion of low-cost deposits to the bank. However, net interest margins (NIMs) have averaged 2 -2.4 per cent since 2007-08, with a downward bias recently, corresponding to a general decline in the proportion of its low-cost CASA deposits in this period. The share of CASA deposits has slipped consistently from 42 per cent in 2006-07 to 34 per cent in first half of 2009-10.

UBI adjusted its lending rate downwards five times in the last 14 months and higher term deposits ensured NIMs slipped to 2 per cent at the end of first half of 2009-10, which is lower than industry average. With term deposit rates correcting faster, the December quarter NIMs could reach 2.3-2.4 per cent by March 2010 quarter.

Conclusion
At 12.93 per cent capital adequacy ratio (CAR), the bank is capitalised to meet any increase in credit-cycle pick-up. Post issue, its CAR would further improve to 13.5 per cent with Tier 1 at 8.1 per cent. During 2008-09, capital support of Rs 250 crore from the government through the subscription of its perpetual non-cumulative preference shares helped shore up UBI’s capital base. Expect UBI to maintain loan growth of around 25-30 per cent. The bank was successful in reducing its net NPAs from around 2.4 per cent in 2004-05 to around 1.3 per cent as of September 2009, barring the rise seen in 2008-09 due to the general slowdown. Its provision coverage ratio including technical write-offs stands at 71 per cent and is within RBI’s mandated 70 per cent levels.

Overall, although the financial performance of UBI has improved, it is not impressive. Secondly, its small size and regional focus do not provide comfort. This perhaps explains why the IPO has been priced at lower valuations. On a restructured capital base, at the upper band of Rs 66, the stock is available at 0.7 times its book value, which is lower than most comparable peers. Good news for retail investors is that the shares are being offered at a 5 per cent discount to the cut-off price.