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United Bank: Q4 19 review: One-offs lead to EPS miss; provisions appear to be in control

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

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    Intermarket Securities
    19 February 2020

    UBL posted consolidated 4Q19 NPAT of PKR4,867mn (EPS: PKR3.98), down 15%yoy / 4%qoq, taking CY19 NPAT to PKR19,095mn (EPS PKR: 15.60), up 23%yoy (pre-tax: 40%yoy). The result was below our projected 4Q19 EPS of PKR4.52, and much lower than street consensus. The deviation appears to mostly stem from non-recurring events including: (i) significantly lower-than-expect fee income possibly due to timing mismatches of certain G2P payments (similar to other banks) and (ii) a capital loss of PKR556mn, possibly on equities. Admin expenses of PKR12,032mn are also slightly above our estimates. Alongside the result, UBL announced final dividend of PKR4.0/sh, which is higher than our projection of PKR3.0/sh, taking the full-year CY19 payout to PKR12.0/sh..

    4Q19 Key result highlights include:

    • Net interest income came inline with estimates at PKR16,884mn, up 16%yoy/6%qoq on lagged asset re-pricing and a likely reduction in borrowings. The sequential increase in NII is similar to MEBL and seems to indicate that UBL’s portfolio of legacy PIBs is now getting reinvested at higher rates. This should result in strong NII growth in CY20f, in our view.
    • Total provisions of PKR1,607mn (down 65%yoy/21%qoq) came in lower than our expectation of PKR1,750mn. We venture that this could be due to further improvement in the GCC business, after a reduction in the stock of overseas NPLs in 3Q19, particularly if impairment on equities has also continued. We await detailed financials to confirm this. 
    • Non-interest income declined by 14%yoy to PKR4,538mn, much lower than expected. The deviation was led by (i) lower than expected fee income of PKR3,578mn (down 19%yoy) which, similar to other banks, may be due to a timing difference on G2P payments, and (ii)  a capital loss of PKR556mn. This miss appears to be largely non-recurring in nature, where we expect fee income to normalize in 2020f.
    • UBL observed an 8%yoy increase in core admin expenses to PKR12,032mn (much higher than the 9M run rate of PKR10.6bn/quarter). This is a high number but falls largely inline with our estimates, after accounting for the usual year-end increase. That said, lower-than-expected non funded income coupled with a relatively high admin expense number has led the Cost/Income to increase to 57%, one of the highest since we maintain quarterly data (from 2004). This is up from 51% in the previous quarter and 42% in 4Q18. 
    • Other highlights for the quarter include: (i) effective tax rate of 42%, and (ii) a PKR243mn profit on discontinued operations (after a loss of PKR PKR1,468mn in 9M19).

    CY19 result highlights include: (i) relatively continued 9%yoy growth in net interest income to PKR63,341mn, with legacy low-yielding PIBs only recently beginning to be reinvested, (ii) non-interest income of PKR23,558mn, down 9%yoy on flattish fee and significantly lower capital gains, (iii) a 12%yoy increase in non-interest expenses which masks a muted 4%yoy increase in core admin expenses, (iv) absence of pension fund top-ups seen in CY18, and (v) loss on discontinued operations of PKR1,225mn (Tanzania). 

    UBL’s result has been marred by tail-end capital losses (likely on equities) and possible timing differences in fee income lines, normalised for which this would be an inline result. In addition, we are encouraged by the lower-than-expected provisioning in 4Q19, which points towards continued improvement in the GCC book. However, we await more colour on this from management. UBL trades at a 2020f P/B of 1.03x and P/E of 7.2x, while offering a dividend yield of 7.2%. We maintain our Buy stance on UBL with a Dec’20 target price of PKR200/sh (ETR: 26%).