Earnings Report /

United Bank: 2QCY20 Review – Earnings beat on strong NII

  • UBL has posted consolidated 2QCY20 NPAT of PKR6,068mn (EPS: PKR4.96), up 18%yoy and 24%qoq, a sharp earnings beat.

  • This was led by higher than expected NII, which helped offset a high provisioning charge, low fee income & capital gains

  • Revenue outlook remains strong but asset quality pressures in GCC persist. UBL trades at a CY21f P/B and P/E of 0.7x/6.

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
6 August 2020

2QCY20 Review: Earnings beat on strong NII        

UBL has posted consolidated 2QCY20 NPAT of PKR6,068mn (EPS: PKR4.96), up 18%yoy and 24%qoq, taking 1HCY20 NPAT to PKR10,946mn (EPS: PKR8.94), up 19%yoy. The reported EPS was much higher than our projected earnings of PKR4.0/sh. The earnings beat was primarily led by higher than expected NII, which helped offset (i) a sizeable rise in the provisioning charge, (ii) low fee income (likely to normalize going forward), and (iii) absence of significant capital gains. UBL did not announce any dividend in 2QCY20, under the SBP moratorium on the sector.

2QCY20 Key result highlights include:

  • NII depicted a 43%yoy/25%qoq jump to PKR22,280mn, much higher than our expectations. This is likely due to lagged re-pricing on advances and the bank continuing to hold onto its legacy PIBs, together with the early re-pricing of deposits. Retention of PIBs should prevent UBL’s NII from coming off sharply in 2HCY20, in contrast to peers.  

  • Provisions & Impairment are a high PKR6,251mn vs. our expectation of PKR4,175mn. This is majorly due to the ongoing macroeconomic pressures in the GCC, where we understand fresh overseas NPLs have come through. On the domestic side, the SBP has given a 1yr relaxation on principal repayments to borrowers and we understand that no meaningful infection has taken place as yet.

  • Fee income is down 35%yoy to PKR2,595mn, a much more prominent decline vs. HBL, but understandable given the impact of lockdowns on trade and bancassurance lines. Overall non-funded income is down 39%yoy, led by a c80%yoy drop in ‘other income’ due to a high base (vs. PKR1.33bn booked in 2QCY19 as exchange translation reserve income on NY branch closure). Moreover, UBL has only realized capital gains of PKR400mn during 2QCY20 (down 13%qoq). Going forward, we expect fee income to rebound quickly, which should help lift non-funded income.

  • Admin expenses came in line with expectations at PKR10,630mn (down 5%yoy), possibly due to lower branch operations during lockdowns amidst an overall focus on cost control. This, in addition to a robust NII, has taken the Cost/Income to 40% in 2QCY20 vs. 47% in 1QCY20 and 57% in 4QCY19.  

This is a good result by UBL, with the strong lift to NII finally coming through. While NII may come off in 2HCY20 due to lower interest rates, the sequential decline may be lower compared to peers as UBL continues to hold significant legacy PIBs in the HTM category. Together with a likely rebound in fee income, UBL’s revenue outlook remains strong. However, there are continuing asset quality pressures on the GCC business, which may lead to an increase in our cost of risk estimates ( currently c 140/110bps for CY20/21f).

We await detailed financials and the bank’s investor call tomorrow before revisiting our estimates. At current estimates,  UBL trades at a CY21f P/B of 0.7x and P/E of 6.9x (together with a DY of 9.1%), where our Dec’20 TP of PKR145/sh implies a Buy stance.