Brief note on United Bank financial performance: AHL Research

The UBL Management held a conference call today to discuss the bank’s performance post release of 1HCY20 results and its strategy going forward. The briefing was led by the bank’s new appointed CEO Mr. Shazad Dada, CFO, Mr. Aameer Karachiwalla, Head of Investor Relations, Mr. Arif Saifie, and Chief Risk Officer Mr. Imran Sarwar. Below are the key takeaways from the discussion:

Brief Takeaways

· UBL announced earnings 1HCY20 at PKR 10.9bn (EPS: PKR 8.94), depicting an uptick of 19% YoY while posting a healthy 24% QoQ jump. While NII has shown impressive growth, heavy provisioning has returned once again for the bank. No dividend was announced as per SBP guidelines for capital conservation.

· The President reiterated the bank’s strategy to improve the international business front. He laid great emphasis on further enhancing the digital front of the bank and highlighted the importance of operational efficiencies to keep costs under control. Mr. Dada praised the SBP and MoF’s efforts to support the economy of the country post outbreak of the pandemic. The bank will focus on customer acquisition across the platform from agri financing to MNCs.

· The bank continued its de-risking strategy on the international book as international advances (19% of total) are down 24% CYTD to settle at USD 626mn while Domestic advances are down 6% CYTD to settle at PKR 462bn. However international NPLs are up 11% CYTD in USD terms (coverage of 77.8%) while domestic NPLs are up just 3% CYTD (specific coverage of 85.5%). Overall infection for the bank stands at 13.2% against 10.9% as at Dec’19 while specific coverage stands at 80.3% (82.5% as at Dec’19).

· The bank’s fixed PIB portfolio yields 9.3% on average and has an average maturity of 2 years, majority of which lies in the HTM category while floater PIBs yield an average of 13.4%. Substantial gains exist on AFS bonds but the bank does not plan to realise them soon. T bills yield an average of 10.2%.

· Provisioning expenses once again returned to haunt the bank, clocking in at PKR 6.3bn during 2Q and PKR 10bn during 1HCY20. International provisioning expenses during 1HCY20 clocked in at a massive PKR 8.3bn including an IFRS-9 general provision charge of PKR 1.5bn. Two major clients were classified during the period which inflated NPLs. The management reiterated the bank’s strategy of building coverage to ~100% on the overseas book (with FSV benefit) and expects provisioning expenses to remain on the higher side during the rest of the year. The bank has FSV benefit availed on just 5 accounts. The management cautioned that the GCC economy is still struggling and NPLs can surge. Dubai is relatively stable but Abu Dhabi loans are a concern. Corporate lending on the overseas book is likely to take a back seat going forward while focus on FIs and treasury is likely to increase. Compression of the international loan book will continue. A total of USD 145mn worth of loans have been restructured on the overseas book, primarily from the UAE.

· Going forward the management expects ADR to remain in the low 40% zone (currently 38.2%). Loans depicted a slowdown during 2Q due to some seasonal repayments. The management reviews the portfolio weekly post the outbreak of the pandemic and highlighted its mid-markets as a major source of concern going forward. Corporate book has shown resilience. Ending of the lockdown significantly improved the consumer book of the banks.

· The management expects to maintain its DPS payout ratios in 4Q when banks will resume their dividend payments.

· NIMs clocked in at 5.3% during 2QCY20 but are expected to recede going forward – around ~20-30 bps. Re-pricing of floater bonds and Treasury Bills is due in August which will put some pressure. The management emphasized its strategy of maintaining its concrete current account ratio (45%).

· CAR stands at 21.1% as at 1HCY20 compared to 18.9% as at CY19.unity have no trust over the local administration which has failed miserably to minimize the hardships being faced by Karachiites hence, the government must pay heed to business community’s impartial demand to engage the army on top priority otherwise, the devastating situation in Karachi would also depict in country’s economy keeping in view the mammoth contribution of more than 70 percent revenue being generated from Karachi.

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