Earnings Report /
Pakistan

United Bank: Q3 19 review: Decent results; future profits likely to accelerate

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    16 October 2019

    UBL has posted consolidated Q3 19 NPAT of PKR5,052mn (EPS: PKR4.13), up 42% yoy and flat qoq, taking 9M 19 NPAT to PKR14,228mn (EPS:11.62), up 46% yoy. The result was in line with our projected EPS of PKR3.98. Growth in Q3 was led by (i) 10% yoy growth in NII and (ii) higher-than-expected FX income & capital gains. These helped offset relatively high provisioning charge of above PKR2bn – we understand this is largely due to an overseas coverage increase, downgrade of a few local accounts and some tail-end impairment on equities. Alongside the result, UBL announced a third interim dividend of PKR3.0/sh, which is higher than our projected DPS of PKR2.50, taking 9M 19 payout to PKR8.0/sh.

    Key highlights 

    • NII growth of 10% yoy, which came in line with our expectations. Legacy PIB holdings is keeping growth in check, but NII should accelerate going forward, in our view.
    • Total provisions of PKR2,029mn came in higher than our expected PKR1,200mn. However, we understand that this is largely due to a 2-3ppts coverage increase on the overseas business (Q2 19 international specific coverage: 76%). In addition, we understand there was some contribution from the downgrade of a few local accounts, and impairment on equities portfolio and the Tanzania business.
    • Non-interest income rose 5%yoy to PKR5,872mn, slightly higher than our projection of PKR5,445mn. This is driven by (i) high FX income (PKR1,198mn) and (ii) higher-than-expected capital gains of PKR462mn. Other income normalised following a large one-off currency translation gain in Q2 19. Fee income rose 5%yoy (inline with estimates).
    • Despite inflationary pressures, non-interest expenses rose by a modest 4% yoy, in line with expectations. Cost/Income however, rose to c51% from 48% average run rate in the last four quarters, as UBL’s revenue pickup is still relatively sluggish. 

    Other highlights for Q3 19 include: (i) loss on discontinued operations from Tanzania, narrowed to PKR138mn vs. PKR545mn in Q2 19 as this business is largely provided for and the winding down process is nearly complete, and (ii) effective tax rate of 40%. 

    This is a decent result by UBL, in our view, particularly if the high provisions number reflects a coverage increase rather than any inordinate new infection. A higher-than-expected cash payout also invites further confidence on the outlook for earnings and capital strength. UBL trades at a 2020f P/B of 0.95x while offering a dividend yield of 8.2%. Our Dec’20 target price of PKR170/sh implies a potential upside of 16%.

    Risks: (i) High provisions on the GCC book, (ii) slow down 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.