The recently announced results of United Bank Limited (UBL) came above analyst expectations, with a growth in profit after tax (PAT) of 36 per cent YoY and 24 per cent on a QoQ basis. This bodes well for the bank, which is shaping itself to strengthen its position in the industry, however, some concerns still remain. We present the key highlights of the analyst briefing held in Abu Dhabi on October 25, 2011.
Key takeaways from the analyst briefing
Net interest income for the bank registered an increase of 18 per cent YoY to stand at Rs29.6 billion for the 9MCY11. Given that net performing advances for the bank declined slightly to stand at Rs326 billion at the end of the quarter, the increase in interest earned comes primarily on two accounts: (i) higher average 3month KIBOR which helped earning yield to increase by 60bps, and (ii) higher yields on investments led by government securities (+150bps) and corporate bonds (+110bps) on a YoY basis. Enhanced yields on advances are driven by corporate advances, which naturally constitute the majority of the advances portfolio (59 per cent). Adding to this, significant improvement was seen with respect to consumer yields, reflecting positively in terms of customer response to the banks efforts to enhance its product range under this segment. The other cause of increased markup income comes from fattening of the investment book mainly sovereign securities – a trend that has continued to grow during this risk averse environment. However, with expectations of declining interest rates in the future as given by an inverted yield curve, the sustainability of this avenue before banks are forced to look towards lending again still remains to be seen.
The jump in interest yields of 70bps YoY was muted somewhat by an increase in cost of funds by 40bps YoY. However, on closer inspection, this seems to be a deliberate strategy followed by the bank to grow the balance sheet through acquisition of profitable, albeit higher cost of deposits. Average deposits increased by 18 per cent YoY over the corresponding period last year and three per cent over the previous quarter, led by growth in funds attracted from international avenues as the domestic mix remained largely the same. In this growth, the key point lies in the maintenance of CASA ratio at 79 per cent. If the management philosophy is to be believed, the bank is positioning itself to capitalise on growth opportunities in terms of future lending avenues as and when they arise. The degree of success that the bank envisions versus the realised quantum is a matter which only time will tell. Nevertheless, for the time being net interest margin realised an increase of 30bps YoY.
The bottom line of the bank was also supplemented by decent growth in non-markup income, up 24 per cent YoY. Frontrunners in this regard were commissions earned, gains on foreign exchange dealing, and derivative income. However, apart from fees charged, other sources of income can hardly be considered to be recurring avenues casting significant doubt once again on the sustainability of this stream. Nevertheless, one positive to stand out was the result of cost control measures adopted by the bank with operating costs remaining flat QoQ.
Another point of concern for the bank lies in asset quality. Gross infection ratio for the bank has seen a rise of 100bps to 14.9 per cent since Jun11 only. It is claimed that this is the result of aging of NPLs rather than fresh infection. As the breakup of classified loans was not provided in the analyst briefing, it is difficult to certify this claim. Regardless, concerns over the bank’s quality still remain which would lead to higher provisioning expectations in the coming quarters.
Anlayst opinion
The scrip price of the bank stands at Rs55.27 as per the last trading session, trading at near lowest levels seen during the past 52 weeks. This translates to a P/BV of 0.95x which is comparatively lower than other peer banks apart from NBP. However, the P/E ratio of the bank stands largely at par with competitors except MCB, despite the sharp fall in share price seen for the latter. Does this relative valuation indicate that the bank is undervalued? Maybe not, as the fundamental analysis of the bank may suggest that concerns over future earning still remain. Investors seem privy to this and have not been attracted to the stock despite valuation. Another reason is a steady decline in cash dividend over the years as the bank has preferred stock payouts to the former, along with declining overall dividend yields. The one-month performance of the scrip has been similar to the general decline seen in banking sector stocks and little supports reason for a reversal of sentiments, at least in the short run.
