Battered by NPLs: UBLs first half profits down 23 percent

Withered by high provisioning against possible bad loans amid declining advance to deposits ratio (ADR), first half net profits of United Bank Limited dropped 23 percent for the six months ending June.
The decline comes despite the fact that banks share in total industry deposits rose by 24 basis points to 12.35 percent during the period - where the ratio of its liquid deposits to total deposits jumped to 0.62 from 0.59 owing to 17 percent growth in current accounts. Persistent hike in UBLs non-performing loans (NPLs) - up 77 bps to 6.4 percent of gross advances in the second quarter - has made the bank more conscious to lend, pushing its ADR by 394 bps to 77 percent.
With banking spreads reversed cycle, UBLs top line earnings grew 20 percent to Rs 15 billion. But extremely high provisioning against non-performing loans (NPLs) and diminution of equity investment eroded all the gains resulting in 12 percent decline in net-mark-up income after provisioning.
Meanwhile, the lenders non-mark up income also stayed put - growing just 12 percent - owing to decline in fees, commissions and securities market gains, as investment and trading activities remained thin during the period in tandem with slowdown in the economy.
The banks operating revenues could not even surpass the nominal GDP growth - rising 17 percent in 1HCY09. And like most banks in the industry, the management prudence to rescue bottom-line was focused on cost cutting which nearly halted its administrative expenses. UBLs admin expense increased just 8 percent during the period - 525 bps lower than June-09 inflation.
UBL - which did not announce any interim payout - has been underperforming the market of late. The banks stock price rose just 13 percent in CY09 to date - compared to 31 percent rise in the benchmark index on Karachi Stock Exchange.
Rainy season for the banking industry is not over yet and UBL is no exception. The sharp decline of 68 bps in banking spreads in June signals further erosion in earnings going forward. And the dearth of prudent lending opportunities with poor balance sheets has made the job of banking executive even more difficult.
Although, UBL maintained its share in advances at 12.4 percent, the banks inability to convert incremental deposits (up by 8%) into advances (up by 2% in second quarter) is a key concern for its management in latter half of year.

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                                UBL PROFIT AN LOSS ACCOUNTS

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RS(MN)                               2Q-09    2Q-08   GROWTH    1H-09    1H-08   GROWTH

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Mark-up earned                      15,512   12,013      29%   31,820   23,170      37%

Mark-up expensed                    (7,743)  (5,193)     49%  (15,989)  (9,954)     61%

Net mark-up Income                   7,769    6,821      14%   15,831   13,216      20%

Provisioning                        (4,195)  (1,348)    211%   (6,424)  (2,544)    153%

Net mark-up income after provision   3,574    5,472     -35%    9,409   10,672     -12%

Non-mark-up income                    3,675    3,082      19%    6,781    6,034      12%

Operating revenues                  11,443    9,902      16%   22,612   19,250      17%

Non-mark-up expenses                 (4,423)  (4,077)      8%   (8,421)  (7,809)   7.85%

Profit before taxation               2,825    4,457     -37%    6,769    8,898     -24%

Profit after taxation                1,752    2,593     -32%    4,288    5,594     -23%

EPS                                   1.57     2.42              3.85     5.03

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