MUMBAI (Reuters) - An obscure Indian bank has been an unlikely beneficiary of Western sanctions against Iran, handling billions of dollars from frozen oil payments that boosted its interest margins, but is now having to prepare itself for life after the windfall.
UCO Bank (UCBK.NS), a Kolkata-based state lender that had been among India's poorer performers, saw revenue and profits surge after it was picked in 2012 to hold rupees for oil payments to Iran, a pile that has grown to more than $3 billion.
Late last month, Iran and six world powers reached an interim deal to curb Tehran's nuclear program in exchange for limited sanctions relief.
"The Iran business was a shot in the arm for us," UCO Chairman Arun Kaul told Reuters. "Still, scope for improvement is very large. We had become a marginal player in the banking industry, we are coming back now."
Sanctions were first imposed on Iran at the beginning of 2012, and tightened in February when the United States asked oil buyers to stop transferring payments to Tehran.
India has cut back sharply on purchases of Iranian oil in order to qualify for a waiver from U.S. sanctions, but has remained a major importer under an arrangement in which Indian buyers pay for Iranian crude in part by depositing rupees at UCO Bank.
The rupees are used to pay Indian exporters to Iran against letters of credit opened by Iranian private banks.
UCO is able to take advantage of the time lag between imports and exports, and the fact that the oil dues greatly exceed the value of shipments of Indian goods to Iran.
The funds are especially valuable because Indian banks do not pay interest on current account deposits but can lend them to other customers.
UCO's cost of deposit, the interest that the bank pays on its overall deposits, at end-September was 6.09 percent - among the lowest in the industry, while it earned 10.04 percent on loans in the same period. In comparison, cost of deposit for rival Oriental Bank of Commerce (ORBC.NS) was 7.65 percent.
UCO Bank posted a four-fold annual jump in September quarter earnings while net interest income grew 55 percent. Total assets increased 30 percent to 2.12 trillion rupees ($34 billion) at end-September from 1.63 trillion rupees in March 2011.
At around $3 billion, Iranian oil receipts account for roughly 12 percent of UCO's total deposits, according to Reuters calculation based on data on the bank's website.
It is not clear how long the current Iran oil payment arrangement will last, but Kaul said UCO hopes to get a further boost if oil shipments from Iran rise after the easing of sanctions.
In the meantime, UCO is trying to make growth less dependent on Iran.
"There is a huge, huge focus on branch expansion and new customer acquisitions. What UCO used to do in 10 years, we are doing in one year now," Kaul said in a telephone interview from Kolkata on Monday.
When Kaul took charge of UCO in 2010, the bank was reeling under what he said were among worst stressed assets in India's banking industry at the time, outdated technology and a weak low-cost deposit base that made it reliant on market borrowings.
Now he wants to focus on loans to individuals and small and medium enterprises to diversify and bring down its non-performing loans from 5.3 percent at end-September - among the worst in the industry.
Still, analysts such as Vaibhav Agarwal, at Angel Broking, say the concentration of business from the Iranian account is a key risk for the bank.
"The Iran business was a ray of hope for the bank," said a second banking analyst with a ratings agency, who did not want to be identified as he was not allowed to talk about an individual company. "If that arrangement does not continue then UCO will have to actively look at other ways to grow."
($1 = 62.2600 Indian rupees)
Editing by Tony Munroe and Alex Richardson