Equity Analysis /
Pakistan

United Bank: Earnings momentum to unlock rerating

  • We raise our TP for UBL to PKR170/sh, where the strong earnings beat in 1QCY22 is highly encouraging

  • EPS growth is 15%+ in CY22/23f, together with a D/Y of 14.6%. Mid-cycle ROE projected at 17% vs. 5yr average of 12%

  • UBL’s strong earnings momentum and rising ROE should unlock mean reversion on valuations. Discount to 5yr P/B is 21%

Raza Jafri
Raza Jafri

Executive Director, Research

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
9 May 2022

We broadly maintain our EPS estimates for UBL but raise our Dec’22 TP to PKR170/sh, from PKR165/sh previously, where the strong earnings beat in 1QCY22 (EPS: PKR7.60; DPS: PKR5.0) is highly encouraging.

UBL offers earnings growth north of 15%yoy in each of CY22/23f, together with an exceptional D/Y of 14.6%. Mid-cycle ROE is projected at 17%, much improved compared to the previous 5yr average of 12%.

With legacy asset quality issues in the GCC firmly in the past, UBL’s delivery of normalized profits should unlock mean reversion on valuations. The stock trades at a 21% discount to 5yr P/B.  

Strong earnings beat in 1QCY22

UBL posted NPAT of PKR9.3bn (EPS: PKR7.60) in 1QCY22, up 22%yoy / 7%qoq, versus our projected NPAT of PKR8.0bn (EPS: PKR6.50). The first interim DPS of PKR5.0 was inline. Net interest income and fee were notable positives, more than offsetting the swift growth in admin expenses. Asset quality is in control, as the bank recorded loan provisioning reversals for the first time since 2017. 

Better positioned for margin expansion

Floating rate PIBs have a c 40% weight on UBL’s investment book, making the bank’s margins more responsive to higher interest rates than in previous cycles. This has reflected in very strong NII growth of 28%yoy / 18%qoq in 1QCY22, with room for acceleration following April’s steep 250bps rate hike. We see CY22/23f NIMs at 4.2%/4.6% vs. 3.7% in CY20. Revenue growth is backed by a powerful fee franchise, with traditional strength in the remittances business (c 20% market share) being complemented by more cross-sell such as bancassurance. 

Costs growing but more than offset by strong revenue

Admin expenses rose by a quick 18%yoy in 1QCY22, but revenue growth kept Cost/Income under 45%. Operating costs are likely to remain elevated in the near term with the bank revamping its branches and improving compensation structures for field staff. However, the strong revenue momentum should keep the Cost/Income in the mid-40%s, in line with management guidance. This would represent an improvement over an average of more than 48% in the last 5yrs.

Asset quality is much better

UBL International has stayed profitable (albeit by a small quantum), with overseas NPLs continuing to gradually reduce. The GCC book has been cleaned up, and a charge on Yemen already taken. However, exposure to Sril Lankan US$-denominated bonds has come in for a charge. We estimate a minor EPS of impact of PKR1 or less than 0.5% of equity in case of a 30% haircut. The overall thesis of much-improved asset quality for UBL International remains intact. At the same time, domestic asset quality continues to be very strong, with the local NPL stock continuing to reduce, a trend in place for the last few years. UBL recorded loan provisioning reversals in 1QCY22. 

Valuations should rerate

With legacy issues behind it, and the bank looking more focused on the core business, UBL is beginning to deliver the sort of consistent profitability it is capable of. We see earnings growth of more than 15% in each of CY22/23f, with room for positive earnings surprises. Mid-cycle ROE is projected at 17%, pushed up by better operational performance and a high 60-70% cash payout ratio. UBL trades at a CY22f P/B of 0.8x and P/E of 4.7x, while offering an excellent dividend yield of 14.6%. On P/B, the discount to the 5yr average multiple stands at 21%.