Good Pick in Volatile Market, Low Risk - Sure Gains
In this current volatile market, investors are losing their risk appetite. But those who haven’t lost heart and know equity investment still holds an edge over other asset classes, are constantly on the lookout for stocks capable of giving good dividend yield and have good upside potential. For such investors, UCO Bank (UBL), which is trading at a discount of 50 per cent from its January peak, sure would be a good pick. UBL can provide the much-needed stability to the portfolio as it has a dividend yield of 2.4 per cent and can give returns of 20-25 per cent from the current price level.
In its recently announced quarterly and yearly results, UBL posted a net profit of Rs 412 crore (FY08), up 30 per cent from Rs 316 crore. In the same period, the total business of the bank went up by 20.66 per cent to Rs 1,35,536 crore against Rs 1,12,331 crore reported last year. UBL’s deposits increased by 23.2 per cent to Rs 79,909 crore from Rs 64,860 crore, while advances rose by 17 per cent to Rs 55,627 crore from Rs 47,471 crore in the previous year. Growth in advances for not up to the industry average of 25 per cent.
There was a deliberate attempt by the bank management to go slow on credit because it wanted to save capital for the compliance of Basel II requirements. Now, UBL is Basel II compliant and has a capital adequacy ratio of 11.02 per cent. The net interest income of the bank declined by 6.5 per cent at Rs 1,419 crore from Rs ,1518 crore last year. The net interest margin (NIM) also fell to 1.87 percent from 2 per cent in the same period. The change in economic environment of the country is claimed to be the reason behind this.
Loans given earlier given at lower rates have pulled down net interest margin. At the same time, cost of deposits has also increased, affecting the bank’s net interest margin in both ways. But the worst is over for the bank and things have begun improving from this fiscal. The management has initiated concrete measures to diversify its loan portfolio and is focusing on education loan where there is no business cycle. UBL has posted a growth of 38 per cent on education loan advances in 2007-08. For the first time, the bank has brought down its net NPA (non-performing assets) to less than 2 per cent (1.98 per cent). It was the result of conscious efforts to contain NPA. Any recovery from this written-off accounts directly adds to the bank’s bottom line. UBL recovered Rs 102 crore this fiscal (FY08) against Rs 60 crore in the lastfiscal. For next year, the bank has set a recovery target of Rs 150 from its Rs 1,300 crore written-off accounts. This will also help it clean its balance-sheet.
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