Worth Banking On - UCO Bank

There is a great concern about how the world’s economy might go for a double dip phase of recession. The trigger point may be the Greece debt crisis but it is hard to imagine that it will not spread to the financial system. Therefore, at this point of time, it makes sense in investing in stocks that provide stability to your portfolio due to good dividend yield and potential capital appreciation of 20-25 per cent in the next six months from their current prices.

UCO Bank is one such bank which fulfills these criteria. In addition, it is available at a discount to its peers and is trading at just 1.01 times its price to book value. This is on the back of the outperformance from its scrip in the last three months. Since March the bank’s stock has been up by 25 per cent while the Sensex and BSE Bankex are up by only 3 per cent and 8 per cent respectively.

UCO Bank is a Kolkata-based mid-sized public sector bank (PSB) and has recently come out with its Q4FY10 results that have been able beat the street expectations. For the quarter ending March 2010 the net interest income (NII) of the bank increased by 99 per cent on a yearly basis and was Rs 743.93 crore. This substantial increase in interest income is mainly attributable to an improvement in the net interest margin (NIM) of the bank. Its NIM at the end of the recent quarter was 2.38 per cent compared to 1.85 per cent during the same period a year ago.

This expansion was mainly because of the shedding of high-cost deposits and increase in yield on advances. The bank was able to lower its high cost deposits from 27 per cent to 5 per cent. This surge in NII helped the bank to almost triple its bottomline. For Q4FY10 it recorded profit of Rs 380 crore as against Rs 102.68 crore in Q4FY09. This would have been higher had there been no drop in the non-interest income that slid down by 28 per cent to Rs 254 crore. The best part of the bank’s performance is that this growth has not been at the cost of deteriorating asset quality.

Its gross non-performing assets (NPAs) stood at 1.99 per cent in Q4FY10 as against 2.21 per cent in the corresponding period last year. The net NPAs of the bank stood at 1.17 per cent as against 1.18 per cent last year. There have been other factors too that have brought about a change in the fortunes of the bank and these include an improvement in the mindset of the management regarding the working style of the bank. New systems are being implemented to set targets and achieve them. A better recovery system has been put in place and additional emphasis is being given to train employees.

In terms of valuation, the bank is currently trading at a price to book value (P/BV) of 1.01 times as compared to that of other PSBs like the UBI and the Central Bank of India which are trading at P/BV of 2.32 and 1.32 respectively. Apart from the performance and valuation, another trigger for the scrip is the infusion of funds by the government that will enable it to maintain a comfortable level of CAR for supporting the credit requirement of the productive sectors.