UBL: Prudent management reaped fruits

UBLs credit managers could not cope with the falling lending rate amidst a marginal decline in advances during the past six months as the mark up earned on assets declined by 10 percent during the first half of 2010.
The yield on earning assets declined by 80 basis points, despite the 130 bps fall in benchmark KIBOR in a years time and a 3 percent fall in net advances during the last six months.
Nonetheless, conscious efforts to keep cost of funds down helped the bank post a growth of 5 percent, year-on-year, on net mark-up earnings.
With its deposits mix tilted towards low-cost current and saving accounts, UBLs cost of funds for the period under review declined by 140 bps. Moreover, the cautious fresh lending, while keeping in mind the high non-performance across the industry, helped in reducing the provisioning for 1HCY10.
Thus, the mark-up income net of provisioning increased by a similar amount during the Jan-June period.
Although, the detailed balance sheet numbers have not been published at the time of writing this note, by drawing parallels to HBL and UBLs earning performance, it is safe to assume that the growth in toxic debts must have been subdued, if not declined, in the last quarter. However, its advance-to-deposits ratio is likely to be worse in the first half of 2010.
UBLs non-core income, which was exceptionally good last year due to one off high derivates gain, is reduced by 24 percent for the period under review. Nonetheless, fee and commission income and income generated on remittances showed some positive growth amidst higher corporate charges that brought some decency to the banks other income.
Despite persistent inflation, higher depreciation charges on international business and effective cost cutting solutions employed by UBL management have reaped fruit. As against 13 percent inflation and four percent real GDP growth, UBLs operating expenses have grown by a mere 2 percent in 1HCY10 versus the same period last year.
Thus, prudent management practices shaved off the impact of lower operating cost, lower provisioning against bad debts and falling yields on earning assets by tilting the deposits mix towards low cost demand liabilities, restricting operating expenses, and cautious lending and recovery against bad debts.

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UBL P&L

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Rs (mn)                  1HCY10     1HCY09   % chg   2QCY10   2QCY09   % chg

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Mark-up earned           28,480     31,628    -10%   14,285   15,409     -7%

Mark-up expensed        (11,965)   (15,944)   -25%   (5,969)  (7,725)   -23%

Net mark-up Income       16,515     15,684      5%    8,316    7,683      8%

Provisioning             (4,094)    (6,703)   -39%   (1,978)  (4,474)   -56%

Net mark-up income

after provisions         12,421      8,981     38%    6,338    3,209     97%

Non-markup income         4,728      6,209    -24%    2,367    4,039    -41%

Operating revenues       21,243     21,893     -3%   10,683   11,723     -9%

Non-markup expenses      (8,584)    (8,421)     2%   (4,400)  (4,423)    -1%

Profit before taxation    8,566      6,769     27%    4,305    2,825     52%

Profit after taxation     5,201      4,288     21%    2,417    1,752     38%

EPS (Rs)                   4.25       3.50             2.50     2.28

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Source: KSE Announcement

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