Equity Analysis /
Pakistan

United Bank: Q2 CY 19 – Core income falls a little short

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    7 August 2019

    UBL has posted consolidated Q2 CY 19 NPAT of PKR5,133mn (EPS: PKR4.19), up 51% yoy, taking H1 CY 19 NPAT to PKR9,176mn (EPS:7.50), up 48% yoy. This was lower than our expected NPAT of PKR6,001mn (EPS: PKR4.90), with the miss led by higher-than-expected impairment on the equities portfolio and a PKR0.45/sh loss on discontinued operations (likely Tanzania). However, this has been somewhat offset by higher-than-usual other income, which we understand has been driven by currency translation gains after capital was freed upon closure of the New York branch. Alongside the result, UBL announced a second interim dividend of PKR2.5/sh, taking the half-year payout to PKR5.0/sh. 

    Key highlights:

    • Net interest income growth of 6% yoy, slightly lower than expectations. Compared to peers, UBL has had a slower pickup in margins, due to the structure of its bonds portfolio. However, we still expect NIMs to expand by 61bps in 2019f. 
    • Total provisions of PKR2,795mn, are significantly higher than our expected PKR1,250bn. As per management, these largely emanate from impairment on equities, while the international loan book has seen minor deterioration. We await detailed financials to see the exact breakup. 
    • Non-interest income rose 7% yoy to PKR7,637mn. While fee has disappointingly declined by 7% yoy, this has been more than offset by high FX income and a one-off currency translation gain arising from the closure of the New York branch. 
    • Despite inflationary pressures, non-interest expenses rose by a modest 4% yoy, in line with expectations, and continuing the trend of tight cost control. The cost/income ratio has clocked in at 48%, the same as in Q1 CY 19
    • Other highlights include: (i) effective tax rate of 39% and (ii) a loss on discontinued operations (likely Tanzania). 

    This is a mixed result from UBL. The NII pick-up remains sluggish while fees have disappointed. On the flip side, the equities portfolio appears cleaned up, the cost control is good and the initial impression is that asset quality is broadly intact. UBL trades at a 2020f P/B of 0.8x while offering a dividend yield of 9%. We maintain our Buy stance on UBL with a Dec’20 target price of PKR180/sh.

    Risks: (i) High provisions on the GCC book, (ii) slowdown in fee income, (iii) failure to retain control over costs and, (iv) potential slowdown in loan growth and/or a reduction in dividends going forward if CAR constraints come to the fore.