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UBL: Leadership change likely to bring more focus on cost-efficiency and digital

  • Bank appoints Shahzad G. Dada (CEO of Standard Chartered Bank Pakistan) as its new chief executive

  • Under the leadership of Dada, SCBPL significantly improved its shareholder returns and cost efficiency

  • UBL is currently trading at 0.7x 2020f book value. However, the sector could remain under pressure in the near term

Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Yusra Beg
Yusra Beg

Senior Investment Analyst

Tellimer Research
7 May 2020
Published byTellimer Research

UBL today informed the stock exchange that it has appointed a new CEO. Shahzad G. Dada, currently CEO of Standard Chartered Bank Pakistan, will take up his new role on 1 July for a three-year term, subject to central bank approval. The three-year tenure of the current CEO, Sima Kamil, ends in June. 

Profile of Shahzad Dada

Shahzad Dada has been CEO at Standard Chartered Bank Pakistan Limited (SCBPL) since 2014. Before that, he was the managing director and CEO at Barclays Bank Pakistan, and chief country officer and head of Global Banking at Deutsche Bank AG (Islamabad Branch). Dada received both an undergraduate degree and an MBA from The Wharton School at the University of Pennsylvania, US.

Positive impact at SCBPL

Under his leadership, SCBPL significantly improved its shareholder returns, with ROE improving from 16.7% in 2014 to 22.9% in 2019. The bank has been scaling down its operations, with the branch network nearly half what it was in 2014, and the cost/income ratio falling to 30% from 44% during that time. That said, total assets still grew by an average 9% pa during 2014-19 (versus the sector’s growth rate of 13% pa over the same period). On the other hand, SCBPL could have been more aggressive is in its Islamic banking business (SCB Saadiq), where assets grew at a muted 5y CAGR of 4%, well below the rate of the industry leader, Meezan Bank (MEBL), at 21% pa. 

Sima Kamil’s tenure at UBL; a mixed report card

Sima Kamil joined UBL as CEO in 2017, having previously worked as Head of Branch Banking at HBL. Under her leadership, UBL has improved its balance sheet strength, with the capital adequacy ratio improving from 15.1% to 17.0%. 

UBL has focused on cost control over the past few years – its administrative expenses rose by just 3% in 2019 and by 6% yoy in 1QCY20 – but the cost/income ratio is still high, at c50%. One negative development in recent years has been the deterioration in the quality of the international loan book (notably in the UAE); although we think many of the underlying issues were present prior to the commencement of her tenure.

Potential challenges and opportunities for UBL

The major challenge for UBL recently has been its international operations, where the bank has been facing asset quality headwinds and is scaling down its business. Covid-19 has also made the banking environment challenging in Pakistan (and in other countries). 

We acknowledge that heading UBL (Pakistan’s third-largest bank, with c9% of the market) will be more of a challenge than running SCBPL (3% market share), but we think Dada has the requisite skills and experience to meet this challenge. Under his leadership, we can perhaps expect a greater focus on cost control UBL. 

In addition, during his stint at SCBPL, Dada repeatedly advocated investment in (i) digital channels, (ii) advisory capabilities and (iii) strengthening internal controls & compliance. All these strategic priorities are likely to carry over to UBL. We think there could be an accelerated push on UBL’s digital/branchless banking proposition, as well as a renewed push to reduce UBL’s international exposure, particularly in the troubled GCC market.

Investment conclusion

We have a Buy recommendation on UBL, with a target price of PKR145/share, generating upside of 46%. UBL is currently trading at an attractive valuation of 0.7x 2020f book value compared with the past five years' median PB of 1.1x. However, we think the sector valuation could remain under pressure in the near term due to the economic slowdown brought by Covid-19 and expected net interest margin declines on the back of lower interest rates (these have been cut by 425bps since March 2020, while further rate cuts cannot be ruled out). In this context, a focus on improving branch productivity, removing excess costs and increasing digital capabilities makes good sense, in our view.