Stock Market Result Update on UCO Bank for 2QFY2012

Stock Market Result Update on UCO Bank for 2QFY2012 with an Neutral recommendation.

For 2QFY2012, UCO Bank reported a 93.6% yoy increase (down 21.1% qoq) in its PAT to `231cr, above our estimates, mostly due to higher net interest income than estimated by us. Reported net interest margin witnessed a sequential improvement of 38bp. We maintain our Neutral recommendation on the stock.

Bank further sheds low-cost deposits during 2QFY2012; NIM improves by 38bp: During 2QFY2012, advances declined by 0.6% qoq (up 12.4% yoy) to `95,549cr, while deposits increased by 3.0% qoq (up 8.5% yoy) to `131,312cr. The bank shed `2,000cr worth bulk deposits during 2QFY2012 (`20,000cr in 1HFY2012). On the deposits side, CASA deposits registered growth of 11.3% yoy. On a sequential basis, CASA deposits increased by relatively higher 3.9% compared to overall deposits growth, leading to an increase in CASA ratio by 212bp to 26.3% in 2QFY2012. The bank’s cost of deposits decreased by 8bp qoq to 7.2%, while yield on advances increased by 56bp qoq to 11.4%, leading to a 38bp qoq increase in reported NIM. Asset quality of the bank, however, continued to be under pressure as the bank switched over accounts worth `50lakhs and below to system-based NPA during 2QFY2012. Gross NPA ratio as of 2QFY2012 stood at 3.6% (3.5% in 1QFY2012), while net NPA ratio stood at 2.1% (2.2% in 1QFY2012).

Outlook and valuation: Structurally, the bank has had relatively higher exposure to large corporates, low CASA of ~26% and low fee income (0.6% of total assets as of FY2011). Going forward, we expect the bank’s earnings to find support from its 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 0.9x FY2013E ABV, which we believe factors in the improvement expected in earnings quality. Hence, we maintain our Neutral recommendation on the stock.