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Morning Call about United Bank Limited – Arif Habib Limited

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by August 24, 2011 Brokerage

Karachi: United Bank (UBL) recently reported its financial results for 1HCY11.

According to Arif Habib Limited, The bank posted net profit of PKR 6,705mn (EPS: PKR 5.48) in 1HCY11 as against PKR 5,201mn (EPS: PKR 4.25) in the corresponding period last year, an increase of 29%YoY. This growth is primarily emanating from investments, which have grown by 57% YoY resulting in average earning assets to improve by 17% YoY and higher KIBOR. On sequential basis, UBL’s 2QCY11 net earnings have depicted a rise of 5% QoQ to stand at PKR 3,432mn (EPS: PKR 2.80) compared to PKR 3,273mn (EPS: PKR 2.67) as net interest income grew by 16.6% on account of rising NIMs (up by 27bps YoY). The bank along-with the result has declared an interim cash dividend of PKR1.5/share.

NII showed 11%YoY rise

UBL net interest income grew by 17% YoY in 1HCY11 to stand at PKR19,261mn as:

• Average earnings assets improved by 17% YoY (7% YTD) mainly due to 57% YoY (19% YTD) rise in investments to PKR 275bn by 1HCY11, as the bank’s exposure towards the T-Bills has increased by 27% since December 2010. Moreover, higher KIBOR during the period effectively resulted in 40bps rise in yield on earning assets. This led to the bank’s interest income to grow by 20% YoY to PKR 34,052mn

• While advances on the account of bank’s stringent lending policy witnessed a decline of 1% YoY leading to ADR to decline from 67% in CY10 to 63% by 1HCY11. On the other hand, deposits rose by 19% YoY to PKR 593bn. However the bank was able to increase its low cost deposits from 65.8% in December 2010 to 67.4% by 1HCY11 while cost of deposits augmented by 15bps during the period. UBL’s interest expense during 1HCY11 has jumped by 24% YoY to reach PKR 14,791mn.

Provisioning against NPLs rises by 32% YoY due to aging of bad loans

Provisioning against NPLs, which witnessed a decline of 29% YoY in CY10, has risen by 32% to PKR 4.5bn during 1HCY11 while impairment expense is up by 3.2xto PKR 206mn. This is mainly due to aging of already classified loans. On QoQ basis the bank’s Non performing loans have declined by 2% to stand at PKR 51.7bn by end of 2QCY11, however, on YTD basis its still up by 6% YoY. The decline in NPLs is attributed to reversal in government guaranteed loan. Consequently coverage ratio has improved from 69% in December 2010 to 73.9% while infection ratio stood at 13.9% compared to 13.2%.

Non interest income registered a rise of 24% YoY

Non-interest income during 1HCY11 jumped by 24% YoY to stand at PKR 5,881mn compared to PKR 4,728mn in the corresponding period last year. This growth is primarily attributed to 2x jump in other income to reach PKR 1,076mn as the bank realized profits on derivatives and 55% YoY rise in income from dealing in foreign currencies on account of higher trading volumes.

Recommendation

At yesterday’s closing price of PKR 56.45/share, the scrip has an upside potential of 22% to our Dec 2011 target price of PKR 72.8/share. The scrip is trading at a CY11F P/BV and P/E of 0.9 and 5.1x respectively.

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