UBL has posted consolidated 1QCY21 NPAT of PKR7.6bn (EPS: PKR6.21), up 56%yoy and 44%qoq. This is an exceptional result by UBL and significantly above our projected earnings of PKR4.30/sh. Another key feature of the result was the higher than expected dividend payout of PKR4.0/sh vs. our expectations of PKR3.0/sh. Strong core performance is a function of (i) sharply lower total provisioning at PKR376mn – levels not seen since mid-CY17, (ii) flat NII vs. expected sequential contraction, and (iii) sizeable realisation of capital gains (PKR1.9bn) – excluding which this would still be an earnings beat.
NII remained flattish at PKR17.5bn (up 1%qoq and down 2%yoy). This is, however, much better than expectations where interest earned rose 2%qoq alongside a 4%qoq increase in interest expenses. This indicates that asset re-pricing towards lower rates has concluded, with NII to lift sequentially going forward.
A key feature of the result was low provisioning expenses, which bottomed to PKR376mn, vs. an elevated run rate of PKR2.8bn per quarter since 2017 (largely due to a book cleanup in the GCC). While there is likely an element of impairment reversal, this could indicate an inflection point for UBL’s asset quality where pressures in the UAE and Qatar business might have significantly eased off following an improvement in the GCC economies.
Fee income stood flat yoy, while declining 7%qoq to PKR3.5bn, in line with expectations. UBL booked sizeable capital gains of PKR1.9bn, rising 4x yoy led by realisation of mark-to-market surplus on its equity and international fixed income portfolio. Fx income declined 30%yoy and 44%qoq to PKR532mn.
Core admin expenses rose by a modest 5%yoy to PKR10.8bn, (in line with estimates). UBL continues to exhibit strength on controlling costs where the C/I has reduced to 47% vs. 55% in 4QCY20, and at par with 47% SPLY.
The tax rate normalised to 39% in 1QCY21 vs. 35% in 4QCY20, albeit lower vs. 41% SPLY.
Improved outlook in the GCC and strong dividend payout invites immense confidence in UBL’s ability to deliver in the remainder of CY21f. We believe there is likelihood of reversals in the overseas general provisions (c. PKR7bn at the end of Dec’20). We await detailed financials and the investor call before potentially building a lower cost of risk for CY21/22f (assumed c.180/100bps). UBL trades at a CY21f P/B of 0.7x and P/E of 6.3x offering a DY of 10%, where our Dec’21 TP of PKR160/sh implies a Buy stance (ETR of 44%).