We broadly maintain our CY22-25f EPS estimates for UBL and our Dec’22 target price remains PKR165/sh. Legacy asset quality issues have ended, while a stronger CAR should sustain a c.70% payout ratio. UBL trades at a CY22f P/B of 0.8x and P/E of 5.2x while offering a solid D/Y of 14%.
Domestic asset quality is strong and is being joined by significant improvement from overseas. UBL International, about 10% of assets, is profitable for the first time since 2016. We see a sub-50bps cost of risk going forward vs. about 105bps over the last 5yrs. This should help deliver a double-digit profit CAGR and mid-cycle ROEs approaching 17%.
Capital buffers are strong, with CAR at 19.5%, particularly as UBL is not a systemically important bank at present. This has enabled a 70% cash payout ratio, which we think is sustainable over the medium term. UBL’s dividend yield is the highest within our banks coverage.
Estimates and TP maintained – reiterate Buy
Our EPS estimates are broadly unchanged and we retain our Buy stance on UBL with a TP of PKR165/sh. Management has focused on deposit mix improvement and de-risking to deliver improved profitability in the last few years. It should now deliver more balanced growth – we see a 5yr deposit CAGR of 11% vs. last 5yr CAGR of 9%. Two changes are key; (i) the cost of risk is projected to average below 50bps vs. 65bps earlier, and (ii) cash payout is expected to sustain near 70% vs. 55% earlier. These are offset to some extent by a higher cost-to-income as UBL spends on improving its digital offerings and workforce quality.
Credit costs coming off
Significant de-risking in the GCC has improved UBL’s overall asset quality outlook. New lending remains selective and limited to quality names as per management. Total overseas coverage is now 94% and international operations are profitable for the first time since 2016. Domestic asset quality is strong, backed by conservative lending, with the local loan book flat compared with that in 2018. Much improved asset quality is a major departure from the issues faced in the last several years. This leads us to reduce UBL’s CY22/23f cost of risk from 70/80bps to 35/50bps.
Strong revenues to offset slippage in costs
We expect UBL’s NII to rise 22%/14% in CY22/23f, on a combination of improved balance sheet growth and margin expansion (NIMs at c. 4.0% in CY22/23f). However, higher revenue may be offset to some extent by higher admin costs, as UBL invests in IT infrastructure and its people. While UBL may not eventually end up acquiring Telenor Microfinance Bank or Samba Bank, in our view, we believe this indicates a push towards growth. Accordingly, we see UBL’s cost-to-income at 47% going forward vs 44% previously.
Aiming to sustain a 70% payout
Capital buffers are strong (CAR: 19.5%, T1: 14.8%) and should continue to support a c.70% cash payout ratio over the next few years even if UBL is again classified as a systemically important bank. This high payout translates into a D/Y of c.14%, the highest within our banks coverage. Together with a projected double-digit earnings CAGR, the stock is offering a solid blend of growth and yield.
Strong performance in 4QCY21
UBL posted consolidated 4QCY21 NPAT of PKR8.7bn (EPS: PKR7.08), up 64% yoy and 28% qoq. This took CY21 NPAT to PKR30.4bn (EPS: PKR24.84), up 45% yoy. The result was a beat due to a very strong NFI showing. The final cash dividend of PKR6.0/sh was much higher than our estimated PKR4.0/sh, taking the full year payout to PKR18.0/sh.