Elixir Securities Limited – Elixir Insight

Karachi, August 01, 2017 (PPI-OT): United Bank Limited – Analyst Briefing Takeaways

UBL reported consolidated EPS of PKR 4.67/share in 2QCY17, down 17.7% YoY. Despite higher securities carry (owing to 1.94x jump in repo borrowings YoY to PKR 345bn), NII declined by 9.5% YoY.

NII decline is attributable to investments’ re-pricing as PIBs matured in 3QCY16, translating into a 0.97% YoY drop in NII/Deposits during 2QCY17. Non-Interest income grew by 4.5% YoY primarily owing to higher gain on securities realized at PKR 1.6bn, compared to PKR 835mn in SPLY.

Non-mark up expenses shot by 9.1% YoY. However higher admin costs are the result of branch expansion during 2016, as the bank opened 29 branches out of which 22 were opened during 4QCY16.

UBL’s management highlighted that 1HCY17 FX income dropped 13% YoY owing to PKR stability, which has affected profitability on FX trades. Further, fee income dropped 5% YoY due to lower margins on oil import LC’s and lower revenues from bancasurrance segment.

We have an Overweight stance on the stock, with our revised Jun-18 PT of PKR 265/share, representing potential capital upside of 27%; in addition to a dividend yield of 6.25%.

Short Term Strategy is Focused on Gradual Maturity of PIB Portfolio: United Bank Limited (UBL) expects to ride out the low interest rate cycle by gradually maturing its current PIB portfolio yielding 8.8% as of 2QCY17. Over the longer term, as spreads on advances have squeezed from KIBOR + 2% during CY12-14 to KIBOR + 1%, the bank is shifting towards the higher yielding SME and consumer segment. However since the consumer segment, at PKR 10bn, is growing from a very small base relative to total advances, we expect advances growth to bear fruit longer into the future. The bank also expects FX income and fee income to remain flattish during CY17 owing to PKR stability, lower margins on oil import LCs and lower revenues from bancassurance.

Deposit Base to Grow Following Branch Expansion: Administrative expenses remained flat at 3.0% of average deposits, despite jumping 9.1% YoY owing to branch expansion during CY16. Branch expansion doubled from CY15 to CY16 to 29 branches opened during the year, out of which 22 were opened during 4QCY16, leading to a lagged effect on admin expenses reflected in 1HCY17. However the bank has consistently managed to grow Deposits / Branch at a 3 year average of 10%, culminating in PKR 974mn in deposits per branch. We expect admin costs/deposits to normalize going forward as deposits grow with a lagged effect following branch expansion.

Earnings Attrition to Remain Muted Going Forward: UBL has historically maintained lower leverage compared to big tier banks with ROEs supported by a higher duration investment portfolio and lower admin costs/deposits resulting in higher PAT/Deposit. However with a 30% YoY decline in PAT/Deposits in 2QCY17, leverage has shot up to 7.7x from 7.2x a year earlier. Going forward, we expect recent branch expansions to result in higher deposit growth, with the bank shoring up leverage to maintain ROEs as NII decline (due to investments re- pricing) seems to be the status quo. Over the second half, we expect ROEs to average 16.4% v 16.0% averaged in the first half due to super tax. We expect full year earnings to decline marginally by 3% with EPS clocking in at PKR 22.1/share for CY17.

Investment Case: We maintain an Overweight stance on UBL with our revised Jun-18 TP of PKR 265/share, representing potential capital upside of 27% from current levels in addition to a dividend yield of 6.25%.

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