AKD Quotidian about — UBL: High payouts to drive Rerating

Karachi:  Following stellar CY11 profits of PkR14.8bn (EPS: PkR12.13), up 35%YoY, AKD Securities raises AKD Securities’ target price for UBL to PkR89/share from PkR70/share previously.

According to AKD Securities, despite a high base, AKD Securities believes UBL is on track to post a 5yr NPAT CACR of 11% while AKD Securities sees ROE averaging 184% vs. 18.1% across the previous 5yrs. This, coupled with the capacity to sustain a higher payout ratio over the medium-term (CY11 payout: 62%), should act as a catalyst for the stock’s rerating, in AKD Securities’ view. In this regard, AKD Securities also likes UBL’s improving asset quality (NPLS up just 5%YoY in CY11) while GCC loan book provides a hedge against any domestic downturn (2012 CCC growth is expected to trail only behind the BRICs). Over the longer term, UBL’s head start in branchless banking -Omni has hit breakeven – has the potential to add material impetus to earnings growth. UBL has gained 5.2% since result announcement to trade at a CY12F P/B of 1.0 PER of 5.8x and DIV of 10%, still one of the most attractive valuation multiples within the larger private banks. AKD Securities’ revised target price of PkR89/share (discounting factor: 18%) offers upside of 10.8%. Accumulate!

Stellar CY11 results: On a consolidated basis, UBL posted NPAT of PKR 14.8bn (EPS: PKR 12.13) in CY11, up 35%YoY. A final cash dividend of PKR 6/share was announced, bringing full-year payout to PKR 7.5/share (payout ratio: 62%). Key highlights of CY11 results include 1) strong 15%YoY NII growth, 2) 9%YoY decline in loan provision, 3) robust 25%YoY growth in non-interest income in non-interest expenses. In AKD Securities’ view, a high payout ratio is sustainable where AKD Securities sees CAR maintaining above 14% while more consistent bonus issue are also likely in view of tighter common equity requirements under Basel III (common equity to be 4.5% of RWAs in 2015 vs. 2.1% at present for UBL).

Multiple growth avenues: Overseas diversification should allow UBL to protect NIMs better than peers where AKD Securities expects NIMs to average ~6% across the next 5yrs. This should allow consistent NII growth which should be further buttressed by an expanding fee income franchise (Ommi has already hit breakeven while derivatives income has the potential to continue surprising). Recent acquisition of Khushali Bank Limited, as part of consortium, fits in with UBL’s strategy to tap the non-mainstream market while steadily improving UAE growth dynamics (EIU expects GDP growth of 3.5% in 2012 vs. 3.3% last year) should also aid UBL.

Much improved asset quality: NPL stock for UBL is up a contained 5% YoY in CY11 with provisioning coverage improving to 80% from 1QCY11 low of 70%. While UBL has availed cumulative FSV benefit of PKR 3.2bn, anticipated natural decline in NPL accretion (systemic NPLs have dipped QoQ in 4QCY11, a first in 5yrs) should see average credit costs dropping to ~1% even if some FSV benefit expires over the medium-term. In this regard, expiring FSV benefit may be matched against provisioning reversals emanating from loan recoveries/restricting.

 

UBL: Valuations
Year End Dec 31 CY09A CY10A CY11A CY12F CY13F
EPS (PKR) 7.75 9.00 12.13 13.76 15.25
EPS Growth 12% 16% 35% 13% 11%
Tier I BVS (PKR) 45.68 52.21 60.40 67.34 75.87
PB Tier I (x) 1.71 1.49 1.29 1.19 1.05
Total BVS (PKR) 55.0 61.4 70.2 77.5 85.5
P/B (Total SHEQ) (x) 1.4 1.3 1.1 1.0 0.9
PER (x) 10.1 8.7 6.4 5.8 5.2
Loan to Deposit 72% 60% 54% 53% 52%
Yield on earning assets 11.52% 10.46% 11.13% 10.38% 10.62%
Cost of Funds 5.09% 4.27% 4.70% 4.27% 4.33%
NIMs 6.43% 6.19% 6.43% 6.10% 6.30%
Post Prov Spread 3.8% 4.6% 5.1% 5.2% 5.4%
Cost/Income 40.9% 43.3% 41.7% 43.9% 44.7%
ROE (average) 16.3% 15.5% 18.4% 18.6% 18.7%
DPS (PKR) 2.3 4.5 7.5 7.5 8.0
Dividend yield 3% 6% 10% 10% 10%
Payout Ratio 29% 50% 62% 55% 52%
Source: AKD Research

 

 

UBL: Profit and Loss Account
(PKR million) CY09A CY10A CY11A CY12F CY13F
Interest Income 61,495 60,100 71,374 73,436 82,890
Interest Expense 28,323 25,434 31,339 31,213 34,362
Net Interest Income 33,172 34,667 40,035 42,223 48,527
Total Provisions 12,879 8,150 7,294 5,280 6,056
Post Provisioning NII 20,293 26,516 32,741 36,943 42,472
Fee income 6,736 7,022 7,783 8,367 8,994
Non-interest income 13,010 10,892 12,971 13,068 13,980
Total Income 33,303 37,409 45,712 50,011 56,451
Total non-interest expenses 18,911 19,720 22,079 24,290 27,933
NPBT 14,392 17,689 23,634 25,721 28,518
NPAT 9,488 11,021 14,855 16,843 18,667
Source: AKD Research
UBL: Balance Sheet
(PKR million) CY09A CY10A CY11A CY12F CY13F
Investments 137,735 231,717 301,107 338,089 384,652
Loans and advances 362,080 341,510 341,140 363,335 390,252
Total Assets 640,450 725,390 807,205 874,553 958,588
Deposits and Other Amounts 503,832 567,611 633,889 688,482 757,354
Total Liabilities 573,131 650,255 721,284 779,619 853,935
Net Assets 67,318 75,134 85,921 94,934 104,653
Total SHEQ 67,318 75,134 85,921 94,934 104,653
Total SHEO and Liabilities 640,450 725,390 807,205 874,553 958,588
Source: AKD Research

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