UCO Bank: BUY
Fresh investments can be considered in the stock of UCO Bank. The stock trades at a price-to-book value of slightly below one. This appears attractive when compared to its peers such as Syndicate Bank, Andhra Bank and Indian Overseas Bank that are quoting a price-to-book multiple of more than about 1.5.
The bank has done remarkably well on several vital business parameters over the last few months. Advances, for the quarter ended December 2005 have clocked a growth of over 45 per cent, outpacing the industry average of about 30 per cent. There is also improvement on the bad loans front.
The valuation of UCO Bank has, however, lagged behind its peers ever since the stock was listed. There are, however, good reasons for the discount. UCO Bank has for long been suffering from low margins, which impacted its profitability. This situation has continued this year also.
Net interest income rose only by about eight per cent in the December quarter even as advances growth was impressive. This is where the initiative to raise long-term debt fits in. The increased leverage will help in improving the profitability for shareholders. In addition, the discount in valuation compared to peers is relatively higher than warranted as indicated by the dividend yield of 3.2 per cent.
There is also scope for improvement. The bank's increasing thrust on retail business would protect margins going forward. UCO Bank has taken several initiatives to improve its fee income too. Several initiatives rolled out by the bank on the technology front also promise growth in the medium term. An investment with a medium-term perspective can be considered.
