JS Securities Limited – Morning Briefing

Karachi, June 15, 2017 (PPI-OT): UBL: Recent correction makes valuation attractive, ‘Buy’

Steep 14% correction in United Bank’ (UBL) stock price since its recent high in May 2017 (8% underperformance to KSE-100 index) has made room for value investors to make fresh allocations in the stock given enticing valuations on offer.

Therefore, we reiterate our ‘Buy’ rating on the stock as it presents 26% capital upside to our Target Price of Rs293, and stands as our top pick in the sector.

Our liking is premised on (1) tall NIMs on the back of its PIB portfolio, (2) strong presence in the Branchless Banking segment and (3) low Cost to Income ratio, taking our 3-year earnings CAGR (2017E-2020F) to 11%. Concerning recent hard times for Qatar, we believe UBL’s book value poses muted threat of infections from the said region given (1) lending exposure of ~4%, (2) well-diversified lending portfolio and (3) strong economic indicators of the country. We flag (1) delays in interest rate hike, (2) sluggish Fee income growth and (3) asset re-allocation risk as key risks to our valuations.

Fundamentals intact, ‘Buy’ with TP at Rs293

Steep 14% correction in United Bank’ (UBL) stock price since its recent high in May 2017 (8% under performance to KSE-100 index) has made room for value investors to make fresh allocations in the stock given enticing valuations on offer. Therefore, we reiterate our ‘Buy’ rating on the stock as it presents 26% capital upside to our Target Price of Rs293, and stands as our top pick in the sector. The bank’s sustainable Tier-I ROE of 20% warrants multiple re-rating as peers (generating similar ROE) currently trade at 1.8x, while UBL’s P/B discount to peers (with similar Tier-I ROE) has expanded to 10%. We believe the prevailing discount is unjustified given the bank’s strong fundamentals remain intact. Our liking is premised on (1) tall NIMs on the back of its PIB portfolio, (2) strong presence in Branchless Banking segment and (3) low Cost to Income ratio, taking our 3-year earnings CAGR (2017E-2020F) to 11%.

Regional risk remains low

Concerning recent hard times for Qatar, we believe UBL’s book value poses muted threat of infections from the said region given (1) the bank’s relatively small lending exposure of ~4% in Qatar, amounting to ~Rs20bn, (2) well-diversified lending portfolio including the corporate and SME segment (Airlines, Automobiles, Food etc) and (3) strong economic indicators of the country. Nonetheless, in case of severe developments adding to the ongoing crisis, UBL may face fresh NPL accretion from the region. On the domestic front however, we flag (1) delays in interest rate hike, (2) sluggish Fee income growth and (3) asset re-allocation risk as key risks to our valuations. UBL’s asset mix keeps the bank’s profitability relatively immune to potential interest rate changes as the bank holds a sizable PIB portfolio with duration of 3 years and yield of 10%, contributing ~40% to the bank’s topline (highest amongst JS Banking Universe). Key upside risks to our investment case include (1) higher-than-anticipated asset growth led by deposit mobilization and (2) additional project financing in the bank’s books.

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