By: Global Securities Pakistan Limited
United Bank Limited (UBL) posted strong earnings growth of 18% YoY in CY14 against the 3yr average growth rate of 12%. The growth was achieved on back of an expansion in Net Interest Margins (NIMs), which went up 26bps YoY to 5.16% amidst fairly stable discount rate for most of CY14. Consequently, NII grew by 18.53% in CY14 in contrast to average decline of 1.9% YoY in the two previous years. The increase in NII was achieved as growth in interest revenue earned far outpaced growth in interest expensed, primarily as a consequence of high yielding PIBs held within UBL’s investment portfolio (35% of deposits, 65% of investments), and aided by an 11.1% increase in the bank’s loan book against 3yr CAGR of 10.1%.
Diversified Earnings Mix: UBL’s income is derived from returns across various areas of business, making it less sensitive to interest rate changes as compared to its industry peers. A dissection of the bank’s revenue stream breaks down income into core and non-core components, where the two have lingered around 81% and 19% of total income level over the last three years respectively. Digging down elements of core income in further detail, the contribution of investments to total income has increased over the years to making up 44.24% of total income of the bank in CY14. Given the persistence of current monetary easing scenario is likely to put banking sector NIMs under pressure, we believe UBL’s profitability is well insulated for the next three years due to its high exposure in PIBs. On the non-funded income front, Fees and Commissions have grown by 36.6% over the last three years, making up 10.93% of total income against a 9% share in CY12. This increase has been achieved as a result of accretion in transaction volumes of Omni and remittance business, where 25% YoY earnings growth was witnessed in the former during CY14.
NPLs to Remain in Check: UBL’s NPLs to gross loans have witnessed a declining trend, hinting towards better asset quality. Coverage ratio of UBL currently stands at an impressive 84.92%, well above the five year average coverage ratio of 80.45%. To further the case, NPLs have grown by 2.32% YoY in CY14, far outpaced by growth in deposits at 8.12% YoY. UBL’s exposure in war-torn Yemen is 8-10% of the bank’s GCC loan book, which can lead to higher NPLs and provisions being booked going forward despite the fact that the bank had provided for the same in its CY14 accounts. Based on the damage caused by the war, the quantum of the loss can magnify resulting in greater than provisioned for losses.