Uco Bank Recommendation Target Price

Rs. 67.35 Buy Rs. 150

Market Data As On 13th October 2011 Total Equity Shares 62.752 Cr. Equity Share Capital RS. 627.52 Cr. Market Capital Rs. 4226 Cr. Face Value Rs.10 BSE Code 532505

Industry Overview
The growth of the banking sector is highly dependant on overall growth of the economy. The Indian economy had clocked 8.5% growth last fiscal. GDP growth decelerated to 7.7% in Q1 FY11 from 8.8% in the corresponding quarter last year. During the last 5-6 months we have seen inflation remain close to double digit, which forced the Reserve Bank of India to increase repo and reverse repo rate consistently. Because of such a high interest rate scenario, loan growth is expected to slow down. However we expect that interest rate cycle is near its peak level and RBI will pause from hereon. Also we have seen that because of global economic crisis, the commodity prices have shown the downward trend. We expect the inflation to come down at 7.5% by FY12. India being a highly under banked country, have enormous potential for growth. Only 40% of Indian population possesses bank accounts. All this points towards the low level of financial inclusion in the country. Because of which we have seen that during the last two years the deposit base of all the banks have grown 1820% across the board, and we expect that going forward the growth in Deposits will remain at 16-18% during FY12-14. Historical evidence suggests that loan growth has limited correlation with interest rates and a higher correlation with economic growth. As long as real GDP growth is likely to be between 7-8%, we expect loan growth to be strong in long run.

Company Overview
Uco bank is a Public sector bank (with Government of India holding 63.59% stake), the bank is primarily involved in commercial banking and other related services. The bank also provides merchant banking, asset management and other related services. The bank has pan India presence with 2206 branch offices, 608 ATMs all over India. It has implemented 100% Core Banking Solutions (CBS) into its operations CBS implementation will enhance efficiency of the Bank. Average age of Banks Employees shall come down in next 3 to 4 years, as existing staff retires and makes way for younger professionals. UCO can enhance its Other Income by introducing and cross selling of newer products like mutual funds, insurance and other wealth management products.

Shareholding Pattern

Shareholding Pattern
16.44%

Promoter & Promoter Group 10.33% FII DII Public & Body Corporates 5.10% 68.13%

Strong Growth in Deposits & Advances

Deposits - Advances
200000 150000 Rs. in Cr. 100000 50000 0 Advances Deposits C-D Ratio 74 73 72 71 70 69 68 67 66 65

FY06 37817 54544 69.33

FY07 47471 64860 73.19 Advances

FY08 55627 79909 69.61 Deposits

FY09 69669 100222 69.51

FY10 83371 122416 68.1 C-D Ratio

FY11 100561 145278 69.22

Uco bank has shown tremendous growth during the last 5 years in its business. Uco Banks Deposits grew at CAGR of 21.64% during last five years and Advances grew at CAGR of 21.60%. Uco banks CASA is just around 25% which is probably least in the sector. However, with increase in retail deposit rate and increased focus to tap the retail customers, bank will be able to improve its CASA ratio and thereby will improve its NIM. In its move to increase CASA, Uco bank has recently waived all charges on saving bank accounts. We expect that banks business will grow at 16-18% YOY due to its focus on retail customers, increase in C-D ratio, higher proportion of CASA, implementation of technology and financial inclusion,.

Percent

Strong Network
Uco bank has Pan India presence with 2206 branches and 608 ATMs all over India. Internationally, Bank has four branches, 2 each in Singapore and Hong Kong. It also has two Representative offices at Kuala Lumpur, Malaysia & Guangzhou, China. This will help the bank in improving its business along with increase in deposits. In past, we have seen that 100% CBS has help all private sector and some of public sector banks in improving its business. Going forward we expect, 100% CBS will help UCO in improving its business per branch and business per employees significantly.

Branches 2500 2000 1500 1000 500 0 FY05 FY06 FY07 FY08

Business Per Branch 120 100 80 60 40 20 0 FY09 FY10 FY11 In Cr.

Capital Adequacy
During the FY11, Uco Bank received Rs. 940 Cr. capital infusion from Government of India. The banks capital adequacy ratio is at 13.71%, which is above the minimum level prescribed by RBI, this will help the bank in meeting their future growth requirements.

Capital Adequacy
16 14 Percentage 12 10 8 6 4 2 0 FY08 FY09 FY10 FY11 11.02 11.93 13.21 13.71

Asset Quality
Uco Banks NPA were gradually decreasing from FY06 to FY10. In FY11, bank shifted to system based recognition of NPA. RBI has mandated Banks to convert into 100% system driven NPA recognition process by Sept 2011. Once this mandate is implemented, provisioning of NPA shall come down.

Gross & Net NPA

3.5 3 2.5 2 1.5 1 0.5 0 FY06 FY07 FY08 FY09 FY10 FY11 1.18 1.17 2.21 2.1 2.14 1.98 3.27 3.17 2.97 3.13 1.99 1.84

Gross NPA

Net NPA

Consistent Growth in Net Interest Income

Net Interest Income & NIM
6000 Rs. in Cr. 4000 2000 0 NII NIM FY05 1409 2.97 FY06 1566 2.72 FY07 1695 2.51 NII FY08 1488 1.87 FY09 1644 1.97 NIM FY10 2324 2.19 FY11 3845 3.07 3.5 3 2.5 2 1.5 1 0.5 0

Uco Banks net interest income has shown remarkable performance during last five years. Net interest income has grown at CAGR of 19.68% during last five years. Currently, Uco Banks CASA is merely at 24%. Uco Bank has recognized this and is focused on increasing its CASA. Bank has waived all charges on saving and current accounts in its drive to increase CASA. We expect that going forward bank will manage to improve its CASA which will reduce its overall cost of deposits.

Peer Comparison
Particulars Deposits (In Cr.) CASA (%) ROE (%) ROA (%) C-D Ratio (%) Business per Employee (In Cr.) Profit per Employee (In Lacs) NIM (%) Price/B.V P/E Ratio Dividend Yield (%) Bank of India 2,98,886 29.18 17.33 0.80 72.22 12.84 6.20 2.92 1.17 6.82 2.07% Union Bank of India 2,02,461 31.76 18.68 1.05 72.56 10.43 7.50 3.33 1.18 6.36 3.10% Dena Bank 64,210 35.42 26.71 1.00 70.33 10.77 6.15 3.17 0.62 3.57 2.86% Uco Bank 1,45,278 22.00 20.70 0.66 69.22 11.36 4.19 3.07 0.82 4.68 4.44%

Data as on 31st March 2011 and Price as on 13th Oct 2011)

Percent

Actual Yearly Performance

(Rs. In Cr.) Interest Earned Other Income Total Income Interest Expended Operating Expenses Operating Profit Provisions PBT Tax Net Profit Equity EPS (Rs.) 2008-09 8121.38 1019.90 9141.28 -6476.68 -1462.98 1201.62 -631.28 570.34 -86.84 483.50 549.36 6.62 2009-10 9526.32 965.93 10492.25 -7202.20 -1584.42 1705.63 -656.47 1049.16 -36.98 1012.18 549.36 18.42 2010-11 11370.80 925.41 12296.21 -7525.89 -2075.36 2694.96 -1750.40 944.56 -38.02 906.54 627.52 14.29

Actual Quarterly Performance

(Rs. In Cr.) Interest Earned Other Income Total Income Interest Expended Operating Expenses Operating Profit Provisions PBT Tax Net Profit Equity EPS (Rs.) Sept 2010 2735.23 229.31 2964.54 -1733.66 -526.67 704.21 -580.02 124.19 -5.00 119.19 549.36 2.17 Dec 2010 2894.23 214.16 3108.39 -1832.14 -510.98 765.27 -455.70 309.57 -8.33 301.24 549.36 5.48 Mar 2011 3068.49 292.06 3360.55 -2224.21 -556.45 579.89 -340.77 239.12 -13.22 225.90 627.52 3.48 June 2011 3401.46 275.42 3676.88 -2592.81 -472.31 611.76 -309.74 302.02 -9.49 292.53 627.52 4.66

Financial Forecast
(Rs. In Cr.) Interest Earned Other Income Total Income Interest Expended Operating Expenses Operating Profit Provisions PBT Tax Net Profit Equity EPS (Rs.) 2011-12 13500 1000 14500 9500 2000 3000 1700 1300 250 1050 627.52 16.73 20112-13 16000 1150 17150 10500 2600 4050 1700 2350 500 1850 627.52 29.48

Valuations
Market Cap of UCO is 1.50 times its Operating Profit, it seems to be on much lower side compared to other PSU Banks. UCO bank is following footsteps of its peers and has implemented technology and infused younger staff, benefits of these steps shall accrue in couple of years. Once these benefits start accruing, UCO shall command Market Cap of atleast 3 to 4 times its Operating Profit as witnessed presently in the case of Banks like BOI and Union Bank. We feel that UCO shall command a PE of atleast 5 times its FY13 EPS of Rs.30 and shall quote at Rs.150 We recommend to Buy the stock with an outlook of next 2 years.

RESEARCH TEAM Dixit Doshi Research Analyst Tel: 43472750 Disclaimer

Swechha Salgia Research Analyst

Hardik Jain Director

Bhavesh Premji Head Research website: www.whitestonepms.com

Email: info@whitestonepms.com

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