UBL stays afloat

There is no free lunch. UBL in its efforts to keep cost down at tough times sacrificed its deposits share in the industry, and hence, lower advances. The profit and loss account narrates the same story with a 2 percent decline in core income, net of provisions. Strict control on operating expenses helped the bank post a growth of 2 percent in earnings before taxes, on a consolidated basis.
The third largest lender in country, albeit comfortably maintaining its position, lost its market share by 80 basis points to 8.8 percent in deposits by exhibiting a 2 percent (Rs12 bn) increase during 2009.
UBLs management views this, as a conscious effort to tilt the mix by 8 percent to 67 percent towards less expensive demand liabilities. Although, CASA increased by Rs36 billion, a decline of Rs27 billion in fixed deposits tainted the deposits growth.
UBL is no exception to the industry-wide trend of the declining ADRs. The lenders gross advances fell by 4 percent, thereby shrinking its market share by 40 bps. Had it not classified Rs20 billion unquoted power sector TFCs in investments, UBLs ADR would have improved by half a percentage point to 81 percent versus a decline of 360 bps.
UBL line managers deserve a pat on the back for maintaining the ADR ratio over 80 percent, but they could not maintain the quality of loans as the NPLs soared. The banks infection ratio increased by 3 percentage points to 10.3 percent.
Although the growth in toxic assets is on decline for UBL for the last two quarters, Rs2.2 billion (6%) increase in bad loans during the last quarter requires some attention to revisit banks lending policy. And with 65 percent of the non-performers in the loss category, the bank ought to be prudent going forward.
Some increase in UBLs bad loans is attributed to Dubai debacle, as around 10-15 percent of its provisioning is attributed to its international business.
A better mix in deposits and adequate share in consumers segment helped UBLs top line grow by 17 percent. However, slowdown in economic activities and lower presence in equity market restrict the non-core income growth to 10 percent.
Nonetheless, on the issue of cost cutting, other banks may draw lessons from UBL, containing the growth in domestic operations expense to just 5 percent and no growth in international expenses. Had its international business not been affected by the rupee fall, UBLs administration expense would have grown by just 4 percent.
This helped the bank keep sanity in its return-on-equity, which declined by 1 percent on 16 percent in 2009. Although, the result was better than the market expectations, poor sentiments pushed its stock lower by 2.12 percent yesterday.

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UBL Profit and Loss accounts

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Rs (mn)                                  2009      2008   Growth

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Mark-up  earned                        61,495     52,763     17%

Mark-up  expensed                     (28,323)   (24,247)    17%

Net mark-up Income                     33,172     28,516     16%

Provisioning                          (12,879)    (7,754)    66%

Net mark-up income after provisions    20,293     20,762     -2%

Non-markup  income                     12,320     11,199     10%

Operating revenues                     45,493     39,715     15%

Non-markup  expenses                  (18,911)   (17,781)     6%

Profit before taxation                 14,392     14,052      2%

Profit after taxation                   9,488      8,445     12%

EPS (Rs)                                 8.56       7.51

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Source: KSE Announcement