Dear Clients,

United Bank Limited (UBL) held its conference call today to discuss financial performance of 1QCY21 and outlook. UBL posted PAT of PKR 7.6bn (EPS: PKR 6.2) in 1QCY21, up 53% YoY, owing to lower provisioning expense of PKR 354mn (-90% YoY) and higher capital gains of PKR 1.9bn (+4.1x YoY).

Key takeaways

– NIMs clocked in at 4.0% in 1QCY21 as against 4.6% during SPLY and 4.1% in 4QCY20 owing to repricing of assets

– NFI increased by 24% YoY mainly on account of capital  gains of PKR 1.9bn mainly on foreign bonds (UAE and Bahrain) and domestic equity portfolio. Additionally, lower provisioning expense also lent support to the bottom-line

– UBL’s ROE and CAR increased 548bps and 430bps YoY to 19.6% and 23.8% in 1QCY21, respectively

– The asset quality has improved during 1QCY21 as the infection ratio reduced to 12.9% as opposed to 13.7% in Dec20

– UBL’s investment portfolio comprises Fixed Income PIBs (PKR 273bn yielding 9.6%), Floater PIBs (PKR 341bn yielding 7.8%) and T-Bills (PKR 510bn yielding 7.4%)

– Domestic deposits posted a growth of 19% YoY to PKR 1.3tn. Current account deposits rose 25% YoY and saving account deposits increased 15% YoY. CASA mix of the bank arrived at 85.6% in comparison to 84.6% in corresponding period last year

– Bancassurance commission, ATM fee and remittances fee increased by 22% YoY, 32% YoY and 15% YoY, respectively

– The bank is building operational efficiencies, evident from 4% YoY increase in admin expense and marginal improvement in cost to income ratio of 43.0% in 1QCY21 as opposed to 43.5% in corresponding period last year

– UBL plans to improve branch profitability with cost synergies and building digital strategy aiming at creating a wider payments system

– We have an Outperform rating on UBL with a target price of PKR 145/sh. The stock offers a dividend yield of 11% and is currently trading at a one year forward PB of 0.66x.

Q&A

1. What is the outlook on provisioning for UBL?

The bank is expecting relatively higher provisioning from domestic operations in the next 3 quarters, however, the overall provisioning would be lower than the last year as provisioning of international operations would remain subdued as UAE and Qatar have extended COVID19 loan deferral schemes.

2. What is the expected timeline for the implementation of IFRS-9?

Implementation for IFRS-9 would most likely be deferred till the next year and the impact on UBL would be a measly PKR 3.0-4.0bn.

3. What is the origin of capital gains for UBL in 1QCY21?

The bank booked a capital gain arising from foreign bonds (UAE and Bahrain) and equity portfolio, also highlighted above.

4. When is the interest rate hike expected?

The bank is foreseeing a gradual rate hike of 50-100bps in 2HCY21.

5. What is the bank’s guidance on loan and deposit growth?

The bank expects advances to grow by 6-8% in remaining quarters and is aiming for a deposit growth of 16-18% for CY21. This will likely enable UBL in maintaining its deposit market share of 8%. Loan growth would be driven by the disbursement of TERF that is expected in Aug-Sep’21.

6. Is there a possibility of rate cut or monetary support by SBP during third wave of pandemic?

It is very much unlikely.

7. What is the outlook on NIMs?

NIMs have normalized and would likely remain c. 4% this year.

8. How does the bank plan to grow Islamic business?

The bank is cognizant of the growing potential in Islamic banking industry and plans to add 10 -15 Islamic banking branches. This would be a combination of conversion and new branches.

9. What is the dividend payout strategy for UBL?

The bank intends to maintain the dividend payout at 50-60% for this year.

KASB Research