Morning Call about United Bank Limited Banks – Arif Habib Limited

Karachi, July 23, 2012 (PPI-OT): Lower provisioning drives net income up by 39%YoY

United Bank Limited (UBL) last week reported its financial result for 1HCY12.

According to Arif Habib Limited, during the period the bank posted net profit of PKR 9,318 million (EPS: PKR 7.61) compared to PKR 6,705 million (EPS: PKR 5.48) in the corresponding period last year, an increase of 39%YoY. In 2QCY12 the bank’s net earnings declined by 8.5% QoQ to PKR 4,453 million (EPS: PKR 3.64) as increase in minimum PLS rate became effective from May-12. The growth in 1HCY12 is primarily emanating from a 79% YoY decline in provisioning against classified advances and a 31%YoY rise in non-funded income. Along with the result the bank has declared a 2nd interim cash dividend of PKR 2.0/share, taking the total payout in 1HCY12 to PKR 3.0/share.

Recommendation

Arif Habib Limited has revised Arif Habib Limited’s Dec-12 Target Price for UBL to PKR 89.3/share as the bank’s provisioning against NPLs were below Arif Habib Limited’s estimations. The bank’s classified advances during 1HCY12 remained stagnant at PKR 52 billion after adjusting for government guaranteed loans resulting in infection ration to drop to 13%. Moreover, exceptional growth in non-funded income on account of 21% growth in fee and commission and 4.5x higher dividend income is leading to earnings growth of 18% in CY12. At last closing price of PKR 91.2/share, the stock is trading at a CY12F PBV and dividend yield of 1.26x and 8.8%, respectively.

Financial Highlights   PKR million  
 1HCY121HCY11YoY2QCY121QCY12QoQ
NII

19,213

19,261

-0.2%

9,613

9,600

0.1%

Provisions against NPLs

960

4,484

-78.6%

353

607

-41.8%

Fees and Commission

3,965

3,280

20.9%

2,098

1,866

12.4%

Dividend income

1,443

322

348.1%

633

810

-21.9%

Non Interest income

7,680

5,881

30.6%

3,586

4,094

-12.4%

Admin Expenses

11,286

9,674

16.7%

5,760

5,526

4.2%

PBT

13,808

10,229

35.0%

6,578

7,230

-9.0%

PAT

9,318

6,705

39.0%

4,453

4,865

-8.5%

EPS

7.61

5.48

3.64

3.97

  
Source: Company financials and AHL Research

Financial Highlights of 1HCY12

• UBL deposits during the period grew by 12% since Dec-11, with fixed deposits augmenting by 15% and current and saving deposits by 9%. Meanwhile advances and investments have grown by 9% and 8% respectively. This has resulted in the bank’s ADR to drop to 58% and IDR to 47.5%

• The bank’s net interest income remained stagnant at PKR 19.2 billion as spreads decline due to a 200bps reduction in policy rate and increase in minimum PLS rate from 5% to 6%, however, this was mitigated by a 16% increase in average earnings assets.

• Non-funded income of the bank expanded by 31% YoY to PKR 7.68 billion as dividend income rose by 4.5x to PKR 1.44 billion, on account of dividend from investments in money market funds. Moreover, fee and commission income during the period jumped by 21% YoY to PKR 3.9 billion on the back of rise in commission from remittances and trade.

• The management believes that OMNI and its acquisition of Khushali Bank will support further expansion in its non-funded income. Moreover, the bank has decided to opt for bonus dividend instead of cash dividend for 2HCY12 from money market fund, as the rate was enhanced in FY13 budget.

• In 2QCY12, the bank’s Non-performing loans dropped to PKR 55 billion from PKR 59.7 billion in 1QCY12 as the bank has reclassified PKR 4.9 billion government backed loans. UBL is still classifying government guaranteed loans to the tune of PKR 2.7 billion. After adjusting for these, the bank’s NPL has remained stagnant at PKR 52 billion since Dec-11. The bank’s provisioning against nonperforming loans has declined by 79% YoY to PKR 960 million. Consequently, infection and coverage ratios have improved to 13% and 80% respectively.