Defending the crown

UTI's buyout of IL&FS MF schemes is an attempt to stall erosion of market share

The process of consolidation in the mutual fund industry continues with the UTI Mutual Fund buying out the schemes of IL&FS Mutual Fund. UTI Mutual Fund is currently the market leader with an asset base of Rs 19,661 crore as at the end of January 2004, according to AMFI.

However, it has been closely pursued by Prudential ICICI and Templeton Asset Management, each with assets of Rs 16,000 crore under management.

Besides, UTIMF's growth rate has lagged that of its peers - when UTIMF was formed after the split about a year back, it had approximately Rs 17,000 crore worth of assets under management. This has grown to Rs 19,661 crore - a rise of just 15.6 per cent.

The rest of the industry has grown at more than double the rate at 38.5 per cent. Prudential ICICI and Templeton have grown at even faster rates of over 50 per cent. It's safe to say, therefore, that UTI's leadership position is under threat.

The acquisition of IL&FS's schemes will stave off that eventuality as it has resulted in a 13 per cent increase in UTIMF's assets under management to over Rs 22,000 crore.

But these figures could be lower at the end of the fiscal year as investors normally book profits at that time. Moreover, IL&FS's Nifty index fund has seen a massive jump in asset base to almost Rs 400 crore (from Rs 10 crore not very long ago), which according to analysts is on account of dividend stripping. These assets could disappear from the books before the end of the fiscal.

The deal is expected to be priced at market rates, or approximately 3-3.5 per cent of assets under management. This works out to between Rs 80 and Rs 90 crore.

UTIMF's income from management fees and trustee fees stood at Rs 151 crore in the eight months period till September 2003. On an annualised basis, this works out to Rs 227 crore, but the net income would obviously be lower after adjusting for the fund's expenses.

IL&FS' assets under management have grown by 99 per cent in the past one year. The hope clearly, is that some of this growth will continue, helping UTI to slow down some of the erosion in its market share.

Canara Bank

Canara Bank has declared impressive results for the quarter ended December 03, with net profits jumping 27.7 per cent to Rs 372.69 crore. How has the bank been able to accomplish the growth in today's environment, with profits from sale of investments falling off?

The bank has gained from the fact that high-cost deposits have matured, which, coupled with a growth in savings and current accounts, has helped to bring down the average cost of deposit by 87 basis points to 5.53 per cent at the end of December 03. As a result, interest expended dropped by 6 per cent to Rs 1056.26 crore, compared to Q3 in the previous year.

A key factor that helped to ensure a modest two per cent growth in interest earned to Rs 1698.77 crore in Q3, despite interest on advances dropping 90 basis points to 9.18 per cent, has been rapid expansion of the relatively small retail lending base.

Retail lending now constitutes 16 per cent of net credit. The key area of focus in retail lending is housing finance, which has seen skyrocketing growth due to a relatively small base in the previous years.

Meanwhile, other income has surged 24 per cent to Rs 503.03 crore in the quarter ended December 03. With the capital gains arising due to a cut in the interest rate cycle almost drawing to an end, treasury income as a proportion of other income has dropped ten percentage points to 56 per cent, although it's still significant at Rs 281.69 crore for the quarter ended December 03.

Importantly, higher margins and fee based income is being developed rapidly by the bank, and this should help to drive future growth in earnings.

Operating profit grew 30 per cent to Rs 685.38 crore in the quarter ended 03 and operating profit margins were 550 basis points higher at 31 per cent, again mainly as a result of lower interest expended.

An area of concern, however, is gross non performing assets which, unfortunately, continue to grow. Gross NPAs have grown 125 per cent during this financial year to amount to Rs 1641 crore as on December 03, while net NPAs too have grown 55 per cent to Rs 3627 crore.

Also, while provisioning has been maintained at 66 per cent, future recoveries of NPAs may not benefit the bank if the growth in gross NPAs is not checked.

With contributions from Mobis Philipose and Amriteshwar Mathur