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Suresh Krishnamurthy

Despite promise of reasonable growth in profits, the pricing of the offer appears slightly on the higher side. This is because UCO Bank has one of the lowest spreads in the business. Also, the probable dividend yield on the stock may be lower than that of its peers.

INVESTMENTS in the initial public offer of UCO Bank can be considered. The offer is priced in line with the market valuation of peers such as Andhra Bank, Syndicate Bank and Allahabad Bank. UCO Bank is one of the mid-sized banks in the country with total business of about Rs 47,300 crore.

The bank does lag on the technology front with fewer ATMs and lower proportion of computerised branches. Its spreads are also one of the lowest in the industry.

However, the bank's non-performing assets ratio, return on net worth, cost of funds and credit-deposit ratio are not significantly inferior to its peers such as Indian Overseas Bank, Syndicate Bank and Andhra Bank. Its strong growth in advances and deposits in the past few years is another positive factor.

Suitability: The risks involved in an investment in this offer can be considered high. Factors such as relatively lower spreads and technological inferiority can affect the growth rate of the bank. This may lead to a lower share price appreciation over a longer term compared to its peers. As such, investments in this offer can be considered as relatively more risky compared to that of other banks.

A turnaround bank

Until March 1999, UCO Bank was loss-making and burdened by large non-performing assets. However, the bank has since then effected a turnaround in its operations. This has been primarily aided by the fall in interest rates and the consequent increase in the value of its portfolio of government securities.

However, its banking operations also registered an improved performance during the period. Notably, the volume of operations improved significantly. Between March 2000 and March 2003, net advances rose by 28.3 per cent, which is nearly double the average of listed public sector banks. A deposit growth rate of nearly 20 per cent during this period is also superior to that of its peers.

With volume of operations registering high growth, the profitability of its banking operations too improved even though the spreads were under pressure. The bank was also able to effect a reduction in gross non-performing assets during the period. The cumulative impact of these developments helped the bank become profitable.

Promise ahead

The days ahead, however, could be tough for UCO Bank. This is because it lags on the technological front vis-à-vis its peers.

In terms of the proportion of ATMs and computerised branches, the bank again is behind many of its peers. This could be an impediment in growing its base of low-cost deposits.

In the past few years though, UCO Bank has not face any trouble in growing its low-cost deposits despite technological inferiority.

Demand and savings deposits have grown at the rate of 14.3 per cent, which is higher than the industry average. However, it could get tougher in future. Without growth in low-cost deposits, spreads will continue to remain under pressure.

On the other hand, a continued decline in the proportion of non-performing assets augurs well. If this leads to a decline in charges for non-performing assets, profitability will improve.

Importantly, if the growth in volume of business is as good as it has been in the past, it would bolster profit growth further.

Moderately valued

Despite promise of reasonable growth in profits, the pricing of the offer appears slightly on the higher side. This is because UCO Bank has one of the lowest spreads in the business. In addition, the probable dividend yield on the stock may be lower than that of its peers.

However, if the above average industry growth rate notched by UCO Bank in the past persists, then it could lead to improvement in share price. In this context, the improved showing in the first quarter of 2003-04 augurs well.

The IPO is priced at Rs 12. On the earnings of Rs 270 crore for the 12-month period ended June 2003, the earnings per share works out to Rs 3.38 on the post-issue equity. The price to earnings multiple works out to 3.6 times. This is on a par with the stocks of some of its peers.

The offer can be considered moderately valued with high risks. Investors can subscribe to the offer in small lots.

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