UBL: Banking on income diversification

The quarter ending March saw UBL’s core earnings drop marginally. Thanks to UBL’s income diversification, however, the bank managed to post modest growth in after-tax profits.
Earning assets of the third largest commercial bank posted a phenomenal 18 percent growth in 1QCY13. However, the growth remained highly skewed towards investments. The similar trend is also evident in the first quarterly performance of the other two big banks - HBL and ABL – that have announced their results so far.
With burgeoning Investment-to-Deposit ratio (IDR) and shrinking Advance-to-Deposit ratio (ADR), the top line couldn’t sustain its growth momentum. Low interest rate scenario during the period also limited the top line growth.
To add to ado, a downtick in low cost deposits (see CASA ratio) coupled with an increase of 100 basis points in the floor rate of saving deposits, propped up the bank’s mark-up expenses. This further contained the net interest income (NII) for the period.
Restrictive lending of late enabled UBL keep a check on its NPLs. (see infection ratio). Resultantly, provisioning expense took a dip, providing UBL’s bottom line a little respite.
What really kept UBL’s body and soul together was its non-mark-up income. A staggering growth in UBL’s non mark-up income specially “gain on sale of securities” shielded its bottom line from the trickledown impact of skimpy top line growth and high mark-up expenses.
According to a bank source, after rate cut of 250bps in CY12, debt securities held by the bank have increased in value and the bank vigilantly realized these gains. Besides, UBL also booked capital gains on its holdings in equity markets and foreign markets.
In the times to come, UBL’s peers will be exposed to further shrinkage in margins owing to SBP instruction to pay at least six percent rate on average deposits instead of minimum deposits. UBL, however, is likely to stay immune because of its diversification in the international market – both in terms of core and non core functions.
According to InvestCap Research, around 27 percent of the bank’s gross advances are payable outside Pakistan with 28 percent of its deposits being in foreign currency.
Besides income diversification being a good omen for UBL, innovative services like UBL Omni will further strengthen UBL’s foothold in the local and international markets.

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United Bank Limited

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Rs (mn)                             Chg   1QCY13   1QCY12

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Markup Earned                       -2%   17,709   18,008

Markup Expenses                      4%    8,567    8,215

Net Markup Income                   -7%    9,142    9,793

Provisioning                       -24%      579      761

Net Markup Income after provision   -5%    8,563    9,032

Non Mark-up / Interest Income       27%    4,802    3,789

Operating Revenues                   4%   13,365   12,821

Non Mark-up / Interest Expenses     10%    6,786    6,166

Profit Before Taxation              -5%    6,874    7,243

Taxation                           -19%    1,925    2,380

Profit After Taxation                2%    4,949    4,864

EPS (Rs.)                                   3.82     3.97

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UBL - Key ratios

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Indicators             1QCY13      1QCY12

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Infection Ratio           15%         17%

Coverage Ratio            78%         70%

Spread Ratio              52%         54%

Capital Ratio             10%         10%

IDR                       59%         53%

ADR                       49%         57%

CASA                      63%         66%

ROA                      0.5%        0.6%

ROE                        5%          6%

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Source: Company Accounts