Equity Analysis /
Pakistan

United Bank: Becoming comfortably predictable

  • We have broadly maintained our CY22-25f EPS estimates for UBL

  • Accelerated balance sheet growth and higher interest rates are moderated by higher expected provisions under IFRS-9.

  • A higher risk free rate moderates impact of TP roll over to PKR165, maintain Buy

United Bank: Becoming comfortably predictable
Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
17 November 2021
  • We have broadly maintained our CY22-25f EPS estimates for UBL. Accelerated balance sheet growth and higher interest rates are moderated by higher expected provisions under IFRS-9. We roll over our TP to Dec’22, now at PKR165/sh, which is balanced by a higher risk free rate (11.0% vs. 10.5% previously).

  • Upcoming implementation of IFRS-9 (Jan 2022), leads us to raise our CY22f credit costs from c.50bps to c.70bps as the bank incorporates an incremental ECL charge. This is however balanced by a higher NII as we incorporate higher interest rates and tepid growth in admin expenses.

  • UBL is poised for a rebound on strong medium-term earnings growth momentum while strong capital buffer (CAR: 20.3%) should help maintain above 50% sustainable cash payout (D/Y of 12%). UBL has not corrected as much as peers (due to expected MSCI outflows for latter) and trades at a CY22f P/B of 0.8x and P/E of 5.3x.

Estimates maintained – reiterate Buy

We have largely maintained our CY22-25f EPS estimates. While accelerated balance sheet growth (5-yr deposit CAGR: 13%) and a higher policy rate assumption (CY22/23f: 9.25%, 9.50%) should lift NII across the medium term (12% pa growth on average), these are balanced by higher credit costs from CY22f ahead of the implementation of IFRS-9 (in Jan 2022). Our new cost of risk stands at c.70/80bps in CY22/23f vs. c.50bps previously. Broadly, our CY22/23f EPS estimates remain largely intact at PKR23.49/25.84. We rollover our TP to Dec’22, now at PKR165/sh (from PKR160/sh previously), which is balanced by a higher risk free rate (11.0% from 10.5% previously).

Overseas business remains stable

UBL continues to de-risk in the GCC and the NPL stock has remained largely flat in 9MCY21 (at about US$345mn). Total overseas coverage is now an encouraging 94%. On the asset side, overseas lending remains selective, confined to quality names to contain any new NPL formation, as per the management. The bank is pursuing trade financing opportunities while with excess liquidity primarily deployed in stable sovereign debt securities.

IFRS-9 implementation is around the corner

With IFRS-9 around the corner (Jan 2022), we raise our CY22f cost of risk to c.70/80bps in CY22/23f vs. c.50/80bps previously, before converging to c.50bps over the medium term. This is to account for expected credit loss rather than incurred loss (time based criteria previously). The one-time charge to equity is unlikely to be higher than 5%, in our view. Domestic asset quality remains manageable, where we are comforted by UBL’s conservatively structured domestic loan book and total coverage of 88%. Despite higher expected interest rates, we expect loan growth to accelerate to around 12%/13% in CY22/23f.

Stable payout and capital buffers reinforce our liking

Among the large banks, we continue to prefer UBL which trades at a CY22f P/B of 0.8x and P/E of 5.3x. Payout remains consistent at PKR4.0/quarter, where we estimate a c.55% payout sustainably – translating into a D/Y of c.12%. This is mapped against a strong capital adequacy ratio of over 20% and T1 of over 15%. UBL has not corrected as much as peers (due to MSCI outflows) and does not face any evident supply pressures.

Strong core performance in 3QCY21

UBL posted consolidated 3QCY21 NPAT of PKR6.8bn (EPS: PKR5.52), up 43% yoy but lower by 9% qoq. This took 9MCY21 NPAT to PKR21.7bn (EPS: PKR17.76), up 39% yoy. The result was lower than our projected earnings due to a one-off loss of PKR1.1bn on discontinued operations (UBL Switzerland); excluding which, it would have been an earnings beat.