Recall that UBL reported a PAT of PKR 5.4Bn (EPS: PKR 4.3), up 15.3/16.1% on YoY/QoQ basis. For the full year CY20, the bank recorded a PAT of PKR 20.8Bn (EPS: PKR 17.1), up 9.1% YoY. Reason behind the improved earnings was lower than expected provisioning charge of PKR 1.8Bn booked in 4QCY20. The result was accompanied by a cash dividend of PKR 9.5/sh in 4QCY20 (the bank did not pay out any dividends in 2Q & 3Q due to SBP restriction), taking CY20 payout to PKR 12.0/sh.
As per the management, they are focusing on digital transformation and operational efficiencies, 6-8% growth in advances and deleveraging on international front.
The bank has witnessed deposit growth of 11.8% YoY to PKR 1,640Bn (an increase of PKR 173Bn), with CASA ratio standing at 85.4% and CA ratio settling at 42.4%, a decline of 0.6% compared to CY19. In addition, the domestic CoD was around 4.5% compared to 5.5% in CY19 mainly due to lower interest rates.
UBL saw a decline in loan book by 16.6% YoY to PKR 530Bn mainly led by reduced exposure in international loan book. Domestic advances for the bank declined by PKR 67Bn whereas international advances declined by a massive 28% to PKR 601Mn. The bank’s Advances to Deposits Ratio (ADR) now stands at a low of ~32.3% and the management expects a decent growth of 6-8% YoY in CY21. Moreover, the bank is strategically focusing on risk and reward transaction where the loan would be provided based on the risk of the transaction. In addition, the bank sees recent development in power sector to be a positive step by the government and it will generate liquidity where deleveraging could be seen in the debt of power sector.
The bank’s investment portfolio soared by 34.3% YoY to PKR 1,129Bn in CY20. The management disclosed that the PIB portfolio is 41% and 59% concentrated in Fixed (PKR 237Bn, yield of 9.6%) and floating (PKR 341bn, yield of 7.6%) bonds respectively, while PKR 345Bn are invested in T-Bills with a yield of 7.3%.
The bank took a charge of PKR 14.9bn on international side including the IFRS 9 GP of PKR 3.6Bn. As a result, international coverage for the bank including FSV now stands at 95.5%. On the domestic side, the bank took charge of PKR 1.9Bn in CY20, improving asset quality to 6.3% compared to 5.3% in SPLY. The bank has managed to reduce its cost to income ratio to 43.5% and the management expects it to decline further going forward. As per the management, their domestic book is clear and if macros remain stable, no further provisioning is expected from the international front as well.
The management expects an increase of 100-150bps in interest rates in the second half of CY21.
We have a BUY stance on the stock with Dec’21 TP of PKR 150/sh.
Courtesy – BMA Capital Management Ltd.