Equity Analysis /
Pakistan

United Bank: Q1 CY 19 Results: Earnings beat on low provisions

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Intermarket Securities
    24 April 2019

    UBL has posted consolidated Q1 CY 19 NPAT of PKR4,043mn (EPS: PKR3.30), up 45% yoy. This was significantly above our expected NPAT of PKR2,324mn (EPS: PKR1.90), with the earnings beat emanating from lower-than-expected provisions and admin costs. The result is all the more impressive given the bank has (i) booked effective tax rate of 51% and (ii) recorded a loss of PKR786mn on discontinued operations (Tanzania). Alongside the result, UBL announced a first interim dividend of PKR2.5/sh (our model already assumes a full-year payout of PKR10.0/sh). 

    Key highlights include:

    • NII growth of 5% yoy, in line with expectations. Relative to other banks, UBL will depict a delayed pick-up in margins, due to the structure of its bonds portfolio. That being said, we still expect NIMs to expand by 35bps in 2019f. 
    • Total provisions of just PKR883mn, significantly lower than our expected number of more than PKR3bn. Provided there are no one-off reversals, it appears that the GCC loan book cleanup is nearing completion. If so, this will be a significant positive for UBL, given the high provisions its GCC operations have seen over the last year. 
    • Non-interest income declined by 31% yoy largely due to high capital gains in the same period last year. Fee income grew by 20% yoy, but this is evidently due to a low base. We expect high single-digit fee income growth for UBL in 2019f. 
    • Despite inflationary pressures, non-interest expenses rose by a modest 3% yoy, much lower than expected. Cost/income clocked in at c49% and, on this evidence, has space to reduce going forward.  
    • Other highlights: (i) effective tax rate of 51.1% due to impact of super-tax (pre-tax earnings for UBL have more than doubled) and (ii) loss on discontinued operations (Tanzania). 

    This is a good result from UBL and we can see it resulting in a lift to our 2019f earnings projections. We are encouraged both by the low provisioning number, as well as decisive moves to close those unprofitable foreign operations that the bank deemed non-core. UBL trades at a 2019f PB of 1.0x and PE of 8.6x, while offering a dividend yield of 7.2% (2020f: 0.9x, 6.1x, 8.6%). We reiterate our Buy recommendation on UBL with a Dec’19 target price of PKR175/sh.