AKD Quotidian about — UBL: On a roll!

Karachi, July 24, 2012 (PPI-OT): Following its recent run of above-line results, AKD Securities raises AKD Securities’ target price for UBL to PKR 105/share.

According to AKD Securities sees 10% NII CAGR going forward, driven by average NIMs of 5.8% across the next 5yrs and steadily declining credit costs – all translating into NPAT CAGR of 13.4% and average ROE of ~20%. For the first time ever, UBL announced a cash dividend in 1Q and interim dividends should now becoming a recurring theme – capital space is adequate and a 50% payout ratio should still see CAR in excess of 13.5% going forward. Having gained 73%CYTD, outperforming the KSE-100 Index by 45% in the process, UBL trades at a CY12F P/B of 1.15x, P/E of 6.0x and D/Y of 8.8%. AKD Securities’ revised target price of PKR 105/share offers an upside of 16%. Accumulate!

1HCY12 Result Review: 1HCY12 NPAT came in at PKR 9.4 billion (EPS: PKR 7.67), up a very strong 47%YoY. Alongside, a DPS of PKR 2/share was announced, bringing 1HCY12 payout to PKR 3/share (payout ratio:39%). Main impetus to earnings growth came from a 77%YoY decline in loan provisions, 27%YoY fee income growth (higher commission on remittances and general banking services), strong capital gains and a spike in profit from associates. NII was flat while admin expenses were up a steep 17%YoY (+9%YoY after adjusting for new branches/one-offs).

Asset Quality: Unconsolidated NPL stock of PKR 55 billion is up 6%YoY but down 8%QoQ with the sequential improvement likely arising from declassification of circular debt-related receivables. As a result, the NPL ratio has trimmed to 13.7% from 15.4% in the previous quarter and coverage has inched up to 75% from 70%. Management believes thus far availed FSV benefit of ~ PKR 3.5 billion (EPS impact: PKR 1.85) is not particularly worrisome even if it comes in for gradual expiry going forward.

Medium Term Outlook: AKD Securities projects 5yr NPAT CAGR at 13.4% driven by 1) 10% NII growth CAGR, 2) lower credit costs and 3) steady growth by an already excellent fee income franchise. This should translate into average ROE of ~20% across the next 5yrs which should now keep UBL consistently in the > 1x P/B range. Further rerating may be driven by dividend payouts where interim dividends are likely to become the norm, in AKD Securities’ view. While risks remain (despite improvement Dubai exposure remains a source of concern), AKD Securities does not see significant incremental stress on asset quality even if macros slip.

Valuations and Investment Perspective: Having gained 73%CYTD, outperforming the KSE-100 Index by 45% in the process, UBL trades at a CY12F P/B of 1.15x, P/E of 6.0x and D/Y of 8.8%. While robust recent outperformance may potentially lead to near-term profit booking, AKD Securities believes the stock still retains strong upside from a medium-term perspective. AKD Securities’ revised target price of PKR 105/share offers and upside of 16%. Accumulate!