AKD Securities Equity Research – AKD Daily

Karachi, December 16, 2014 (PPI-OT): UBL: Reiterate liking post correction

While UBL is up 27%CYTD, it has shed 10% since the SBP re-initiated monetary easing with a 50bps DR cut to trade at a CY15F P/B of 1.5x and P/E of 8.4x. With reinvestment risk on the horizon, AKD Securities trims AKD Securities EPS estimates by 9% on average where AKD Securities revised Dec’15 target price stands at PkR201/share, down from PkR225/share earlier.

That said, AKD Securities retains AKD Securities liking for UBL on a strong balance sheet, diversified income streams and adequate asset quality; factors that could enable UBL to outperform the industry where overall growth could turn sluggish over the next few years due to a high base and lower interest rates.

In this regard, AKD Securities believes the market has overplayed general weak sentiment in GCC markets to unnecessarily penalize UBL (30% of loan book in GCC) where, as per management, nascent asset quality concerns in international markets are off the mark. AKD Securities sees UBL posting a double-digit NPAT CAGR across the next 5yrs with room for positive surprises on credit costs, capital gains and cost efficiency. AKD Securities revised target price of PkR201/share offers 19.5% upside. Accumulate!

9MCY14 result review: UBL posted NPAT of PkR17.07bn (EPS: PkR13.94) in 9MCY14, higher by 25%YoY. Key result highlights included: 1) robust 18%YoY NII growth, 2) 33%YoY decline in total provisions, 3) 12%YoY non-interest income growth (+24%YoY ex-capital gains) and 4) contained 10%YoY increase in non-interest expenses. In 3QCY14 alone, UBL posted NPAT of PkR5.76bn (EPS: PkR4.71), higher by 20%YoY but sequentially flat. Alongside the result, UBL announced a third quarter interim dividend of PkR2.5/share to bring 9MCY14 payout to PkR7.5/share (payout ratio: 54%).

Reinvestment risk: Benchmark interest rates were reduced to 9.5% in Nov’14. With inflation expected to remain soft (SBP full-year FY15 est. 6.5%-7.5%YoY) and the external a/c poised to depict strength, monetary easing is expected to continue in 1HCY15. Although AKD Securities sees limited risks to near-term earnings due to the floating rate floor on savings deposits and locked-in return on PIBs, there is significant reinvestment risk in CY17F. AKD Securities sees UBL closing out CY14 with full-year NPAT of PkR22.6bn (EPS: PkR18.43), higher by 17%YoY, but earnings growth could average 8%-10%pa across the next 2-3 years if sub-10% interest rates prevail, even after assuming a pickup in the credit cycle.

Asset quality incl. GCC: Despite some fresh infection in 3QCY14 (on local syndicate exposure in energy space), UBL’s NPL ratio/coverage is under control at 11.6%/85% where AKD Securities does not see further slippages on the domestic front in the near-term. On the international side (primarily UAE and Qatar), as per management there is no asset quality concern due to sovereign backing in many instances and a more selective lending stance over the last few years.

Furthermore, the planned international equity portfolio is not yet off the ground. In AKD Securities view, the market has overplayed general weak sentiment in GCC markets to unnecessarily penalize UBL. In this regard, AKD Securities takes UBL’s international presence (30% of loan book in GCC) as a key positive in the current operating environment where winners across the medium-term will likely be the larger banks with strong balance sheets and diversified income streams.

Investment perspective: While UBL is up 27%CYTD, it has shed 10% since the SBP re-initiated monetary easing with a 50bps DR cut to trade at a CY15F P/B of 1.5x and P/E of 8.4x. Although AKD Securities sees limited risks to near-term earnings, there is significant reinvestment risk in CY17F where earnings growth could substantially slowdown.

Accordingly, AKD Securities trims AKD Securities Dec’15 target price for UBL to PkR201/share but still retain an Accumulate stance where AKD Securities believes the recent correction in UBL’s share price has been overplayed and that the bank holds the ingredients to outperform peers over the medium-term.

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