UBL – Stable NII, Provisions or Capital Gains the Catalyst
The board is to convene on 19th April-17 to announce the 1QCY17 results. We expect the bank to post earnings of PKR 6,846mn translating into an EPS of 5.59 for 1QCY17. Interest on investments and advances expected to remain stable given the unchanged interest rate and no major maturity for the bank this quarter. The two key elements in question would be the provisions which swung drastically from a reversal in 9MCY16 to a charge at year end swinging by PKR 2,847mn and secondly the capital gains. With a revaluation surplus on available for sale securities of PKR 22,312mn, we expect the bank to utilize the surplus. A dividend of PKR 3.50/share is also expected along with the result.
Result Review: 1QCY17 Earnings @ PKR 6.14/share 1QCY17: Identical to 1QCY16
The bank’s board released 1QCY17 results today. Earnings arrived at PKR 7,520mn translating into an EPS of PKR 6.14 largely unchanged from SPLY. Catalysts came from the non funded income (27% rise QoQ) and lower provisions (down 96% QoQ). A dividend of PKR 3.00/share was also announced insinuating similar dividend level for the current year.
Net interest income declined by 2.2% QoQ with interest income eroding by 4.6% QoQ. The respite came from the 7.6% QoQ decline in interest expense following the recent uptrend in current accounts.
On the non funded income side, capital gains lead the way, however the amount recorded was lower by 39.3% YoY setting a precedent for the year albeit; providing significant support to the bottom-line. The decline in fee income on QoQ basis of 10.2% and 8.5% YoY is expected raise eyebrows given the head has been strong suit for the bank
A decline of 96% QoQ and 93% YoY in provisions has provided a substantial buffer also indicating the continuous improvement in asset quality.
Opex increase was limited to 4% QoQ and on a YoY basis a decline was of 1% was impressive given the series of measures taken last year by the management to improve cost structure.
Effective taxation clocked in at 34.7% for 1QCY17 compared to 36.2% seen in 1QCY16.
Conference Call organized by AHL
AHL held a conference call with the management of UBL this evening to discuss the bank’s performance and its strategy going forward in the rapidly changing banking environment. The briefing was led by the bank’s CFO, Mr. Aameer Karachiwalla, and Mr. Arif Saifie, (Financial Controller and Head of Investor Relations). Below are the key takeaways from the discussion:
The bank was optimistic on its advances growth, going forward with numerous disbursements in the pipeline. Infrastructure, power and other projects relating to CPEC are expected to fuel the loan book. The bank has achieved impressive margins on its SME book. The consumer book has recently shown slow growth while the auto loan book has been expanding. The ADR on the domestic book can be expected to rise to ~48% from ~43% currently.
The management maintained that fee income is likely to show an improvement on the back of higher innovation and greater focus on its digital strategy. Trade income has been slow recently and spreads on home remittances have been thinning but the bank has been increasing its market share.
The management indicated that they are working to enable branch network customers to avail services of branchless banking.
The bank’s view on the economic outlook is that that interest rates are unlikely to increase before the elections as the inflation number is not alarming enough to provoke a rate hike yet. The bank maintained that devaluation can take place as pressure exists owing to deteriorating trade deficit but the measure will not be beneficial in the long run as stable exchange rates will be more beneficial in the long run.
Deposit growth is expected to pick up as the bank has increased its advertisements to gather deposits. Management expects the growth to clock in at ~17% for CY17. The “Mukammal” account of the bank has shown impressive growth and the bank emphasized its strong focus on low cost deposits.
The Head of the bank’s International Operations emphasized that the bank’s operating model in New York is fundamentally different than that of HBL. For its clearing business the bank utilizes services of other banks such as Deutsche Bank and Citi Bank. It was emphasized that there is no specific investigation ongoing against the bank other than routine reviews undertaken by regulators worldwide.
Loan yields of the bank’s domestic book are currently around 7% while on the international book, yields are around 6.3%. Yields on the SME book are settled at ~8% while on the consumer portfolio they are around 15%-16%. The bank operates the largest PIB portfolio in the industry with average yield at ~8.8%. The management was optimistic on the yields remaining stable.
The management indicated that comprehensive strategies are being implemented to prevent the CAR from a further decline and they expect it to increase going forward.
Increased focus on alternate delivery channels and enhancing digital experience of the customers was emphasized. It was revealed that the bank has garnered more than 200,000 downloads on its new mobile app “UBL Digital”.
Our take on UBL - Buy
We recommend a “Buy” stance on the bank, with a TP of PKR 240, providing upside of 26% based on last closing price. The stock is currently trading at a P/B of 1.4 with a book value of PKR 136/share.
United Bank Limited
Result Review: 9MCY17 Earnings @ PKR 15.81/share
9MCY17: Earnings Suppression Continues
The bank announced earnings today for 9MCY17 at PKR 19.4bn (EPS: PKR 15.81/share), depicting a YoY decline of 10%. The downturn in earnings is primarily on account of higher interest expense recorded (18% surge YoY) and lower NFI (9% dip YoY). The board also announced a dividend at PKR 3.00/share, bringing the total 9MCY17 dividend to PKR 9.00/share.
Interest expense recorded an 18% YoY increase and settled at PKR 37.2bn during 9MCY17. However NII was supported with relief being provided by higher mark-up income (at PKR 80.6bn for the said period; 6% YoY improvement), indicating improving spreads.
The trend of lower dividend income and lower capital gains primarily contributed to the decline in NFI, which settled at PKR 17.9bn (9% decline YoY).
Decline in provisioning provided relief to earnings, coming down 64% YoY, clocking-in at PKR 442mn in 9MCY17 (9MCY16: PKR 1,243mn) possibly owing to reduction in NPLs (Non Performing Loans) during 1HCY17. Provisions for diminution in investments showed a drastic improvement, coming down 78% YoY and clocking-in at PKR 210mn for 9MCY17 (earlier: PKR 958mn).
An 8% YoY rise in OPEX during 9MCY17 further contributed to the dampening earnings, led by a 9% uptick in admin expenses during the said period.
Effective taxation was set at 39% in 9MCY17 compared to 40% for 9MCY16.
Currently, we have ‘BUY’ call on the stock with a Dec’17 target price of 240/share.
The UBL Management held a conference call to discuss the bank’s performance post release of 3QCY17 results and its strategy going forward. The briefing was led by the bank’s CFO, Mr. Aameer Karachiwalla, and Mr. Arif Akmal Saifie, (Financial Controller and Head of Investor Relations). Below are the key takeaways from the discussion:
The bank was optimistic on its deposits growth, with an expected 12% YoY growth by the end of the year. Currently deposit growth has been recorded at 6.3% during CYTD. The management emphasized that the strategy is to focus on CASA and a conscious effort has been made to dispose off expensive deposits. Domestic CASA currently stands at 84.5% (CY16: 83.8%), while the current account proportion is ~40%, highest in the domestic banking industry.
Advances have shown an impressive 11% growth during CYTD. The yields on the domestic lending book is around 100-120 bps + KIBOR and impressive spreads exist in the institutional lending book as well – at around KIBOR+150bps. The corporate book showed a growth of ~20% led by advances to Public sector entities, energy sector and infrastructure funding.
Interest expense rose 24% QoQ on account of increase in the cost of Repo funding.
NII was recorded 2% YoY decline during 9MCY17, however, the management is optimistic on higher YoY growth at the end of the year. The bank has been continuously bringing down its cost of deposits which currently stands at 2.6% (9MCY16: 2.7%).
NPLs have risen by 7% CYTD but the bank has stressed that the international team has been working rigorously to recover the NPLs and recoveries should flow in 4QCY17. Concerns exist regarding UAE loan book as the outlook on its economy is deteriorating. The bank was confident in gaining recoveries as its clients have effective and valid restructuring in place. Some loans are proving difficult to recover because of which provisioning has been made and the bank is focused on cleaning up its portfolio. The major hurdle lies in the loans given out to the real estate industry in the UAE where recoveries take time due to legal procedures. The bank does not expect further downgrade of loans.
The bank categorically denied any ongoing investigation on its international operations.
10% of the investment book of the bank lies in foreign securities (primarily sovereign bonds) whose yields lie around 5.5%-6%.
Branch network of the bank is expanding with about 30-40 branches adding and relocating domestically.
The bank has not taken any decision yet on its investment strategy – whether to invest in T-Bills or PIBs but recently the focus has shifted in favor of T-Bills.
The management clarified that no pension liabilities issue exists as the bank was privatized in 2002 and all such issues had been settled.
Our take on UBL - Buy
We recommend a “Buy” stance on the bank, with a TP of PKR 240, providing upside of 24% based on last closing price. The stock is currently trading at a P/B of 1.4 with a book value of PKR 136/share.
Following the release of 9MCY17 accounts, we revise our Dec’18 target price and maintain our “BUY” stance on the stock. Our TP for the bank is revised 6.9% downwards to PKR 223.4/share (earlier: PKR 240/share), which offers a 30.2% upside based on current prices. Projected earnings for CY17 are set at PKR 24.4bn (EPS: PKR 19.9). Our downwards revision in TP is premised on i) Slower growth in NFI and ii) Continuation of super tax in CY18. Albeit, we view that significant upside potential on the stock is still prevalent and is sourced from i) Growth in balance sheet through low cost deposits, ii) Improving asset quality, iii) Interest rate cycle reversal improving spreads going forward and iv) The bank cashing in from gap created in business growth owing to regulatory concerns of other large banks.
Growth in Current Accounts: The Cutting Edge
Major upside potential in the stock can be seen on the back of the bank operating with the highest current account proportion in the industry, alongside a robust CASA. Current account proportion of the bank currently stands at 40.5% compared to 38.7% SPLY. The bank’s CASA ratio in 9MCY17 has settled at 72.6% (compared to 69.6% SPLY). Moreover the bank’s increasing focus on low cost deposits is reflected by the YoY impressive growth in non-remunerative current accounts which has recorded a 13.1% growth in 9MCY17.
With the bank’s focus on low cost deposits intact, we project the non-remunerative current accounts to settle at PKR 507bn at the end of CY17, depicting a 16.6% YoY growth while saving deposits are set to record a 14.5% YoY growth. Resultantly, through the focus on low cost deposits, the bank has managed to significantly reduce its cost of deposits, which currently stands at 2.6% against an average of 3.4% in the period CY12-CY16. Furthermore, we view that the spread compression cycle has bottomed out. Currently spreads for the bank are hovering around 3.6%. However we forecast an interest rate cycle reversal in CY18, and alongside low cost of deposits, we can see an uplift in spreads, clocking in at an average of 4.3% for the period CY18-CY22.
Asset Quality - Out of the shadows
The bank has been very focused in consistently improving its asset quality. The infection ratio of the bank had reached a worrying level where it had sky rocketed to 13.6% in CY12. However since then effective credit risk management has enabled the bank to significantly improve its asset quality, with the infection ratio currently standing at 7.7%. That said, CY17 has seen a lackluster performance in asset quality. NPLs have risen 6.8% CYTD to clock in at PKR 49.2bn. It is pertinent to mention that this uptick is composed of a 5% increase in the overseas NPL book. The management revealed in the conference call conducted post 3QCY17 results that concerns exist on the UAE loan book where the economy is facing deteriorating conditions. The real estate sector in the UAE is where the bank is facing hurdles in making recoveries due to legal procedures which cause delays. Some loans are proving difficult to recover because of which provisioning has been made and the bank is focused on cleaning up its portfolio. Infection ratio of the UAE loan book currently hovers around just above 10%. The management indicated recently that increased provisioning can be expected from the UAE loan book in 4QCY17. However, they remained optimistic in gaining significant recoveries going forward as it was emphasized that its clients have effective and valid restructuring systems in place.
The investment book of the bank has depicted a whopping growth of 27% YoY during 9MCY17 to clock in at PKR 1.1tn compared to PKR 884bn SPLY. The IDR of the bank has currently settled at a sky high level of 84.4% compared to 73% SPLY. Although the bank has not formally stated anything about its investment strategy explicitly, with PIB maturities coming in and liquidity on their hands, we expect the bank to continue expanding its investment book in favour of T-bills as it has been doing so. T bills as a proportion of the total investments currently stands at 36% as compared to 13% at the end of CY16, while the PIB book currently accounts for ~49% as compared to 68% at the end of CY16. The bank operates the largest PIB book (average maturity is 2.5 years) in the industry with average yields hovering around 8.8% with an optimistic outlook on the yields remaining stable, going forward. We project T bills to comprise ~43% of the investment book at the end of CY17, and clocking in at PKR 486bn (CY16: PKR 109bn).
9MCY17 Result Review
UBL announced earnings for 9MCY17 at PKR 19.4bn (EPS: PKR 15.81/share), depicting a YoY decline of 10%. The downturn in earnings is primarily on account of higher interest expense recorded (18% surge YoY) and lower NFI (9% dip YoY). Interest expense recorded an 18% YoY increase and settled at PKR 37.2bn during 9MCY17. However NII was supported with relief being provided by higher mark-up income (at PKR 80.6bn for the said period; 6% YoY improvement). The trend of lower dividend income and lower capital gains primarily contributed to the decline in NFI, which settled at PKR 17.9bn (9% decline YoY). Decline in provisioning provided relief to earnings, coming down 64% YoY, clocking-in at PKR 442mn in 9MCY17 (9MCY16: PKR 1,243mn). Provisions for diminution in investments showed a drastic improvement, coming down 78% YoY and clocking-in at PKR 210mn for 9MCY17 (earlier: PKR 958mn). An 8% YoY rise in OPEX during 9MCY17 further contributed to the dampening earnings, led by a 9% uptick in admin expenses during the said period. Effective taxation was set at 39% in 9MCY17 compared to 40% for 9MCY16. UBL also announced a dividend at PKR 3.00/share, bringing the total 9MCY17 dividend to PKR 9.00/share.