Remember how the full-scale impact of US housing crises - that triggered the global financial meltdown - was rather under voiced during its initial days. Well on the same note, the relative silence on Dubai does not mean that threats of catastrophe are over. Likewise, the potential impact of Dubais fallout on United Bank Limited seems to be understated.
According to banks notification, direct exposure to Dubai World on UBLs book is a mere $20 million which is 2 percent and 0.3 percent of its UAE and total book value respectively. But assuming that just like the US housing crises, the impact of Dubai World could jolt the whole of UAEs banking system, the recent Dubai crises could have graver consequences on UBL.
Considering that UBLs exposure to UAE is around Rs84 billion ($1 bn) and assuming that 70 percent of it is being leveraged, the size of its UAE loan book is likely around Rs60 billion. Now, even if on a conservative note, 10 to 12 percent of these advances turn bad, the lenders non-performance would soar by Rs6 to Rs7 billion - i.e. about 12 to 15 percent of its equity reserves worth Rs49 billion at the end of September 2009.
And keeping in mind UBLs coverage ratio as of its last released nine-month financial results, the bank would likely account for Rs5 billion of these potential NPLs - lopping its equity by 10 percent to Rs 44 billion. This could subsequently threaten the banks valuations.
To add the agony is UBLs concentration of non-core income in its revenue mix at 25 percent, much higher than its peers, HBL (19%) and MCB (13%). This is largely due to its strong presence in the Middle East which is responsible for healthy fee commission and other income. The brunt of slowdown in the region is visible even in the third quarter, when UBLs other operating income fell by 6 percent on quarter-on-quarter.
No wonder the firms stock price has withered sharply since it all began - falling 13 percent after Eid, compared with 3 percent decline in benchmark KSE index.
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IMPACT OF DUBAI DEBACLE ON UBL
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After crises
Rs (bn) Actual impact
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Gross Advances 379 379
Net Advances 352 347
Provisioning 27 32
Prov/Gross Adv 7% 9%
Total NPLS 38 45
Coverage 72% 72%
NPLS/Gross Adv 10% 12%
Shareholders Equity 49 44
BVPS(Rs) 44.1 39.5
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PBV (as of Dec 8, 2009) 1.22 1.36
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Assumptions
Rs (bn)
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UBL exposure to UAE 84
Loan book at 70% of exposure in UAE 59
12% NPLs 7
72% Provisioning Cover 5
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Source: UBL accounts, UBL notice, BR Research
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