UBL’s after tax profits grew by a third year-on-year in 1HCY21, without breaking much of a sweat. The topline stayed lower 10 percent year-on-year, mainly due to a significant dip in average interest rates during the period, down to 7 percent from 11 percent in the year ago period. UBL’s average earning asset base expanded by 11 percent year-on-year to over Rs1.8 trillion, whereas the Net Interest Margins (NIM) dipped by 110 basis points year-on-year, to 3.9 percent.
UBL continued to consolidate and improve the deposit portfolio, which grew 13 percent over December 2020 to Rs1.85 trillion. The growth in domestic deposit at 16 percent over December 2020, helped UBL increase its domestic deposit share to 8.3 percent. CASA to total deposit ratio continued to improve further from 85 percent at December end 2020, to 86.2 percent at June end 2021.
On year-on-year basis, average current account grew by 22 percent to Rs618 billion, taking the current to total deposit ratio up to 43 percent. Approximately 290,000 new current accounts were added during the period, 25 percent higher than the same period last year. The average domestic cost of deposit came down from 5.5 percent in 1HCY20 to 3.4 percent in 1HCY21 – as a result of improved CASA mix and significantly reduced interest rates.
On the asset side, it was all about investments, averaging Rs1.2 trillion growing 26 percent year-on-year. The domestic investment portfolio is deployed nearly evenly between PIBs and treasury bills. Tenor management in line with the interest rate scenario is aimed at ensuring stable returns, as the bank yielded a healthy 8 percent return on investment portfolio during the period. The international bond portfolio expanded by 10 percent year-on-year, on which UBL earned a steady 5.3 percent yield.
There was not much enthusiasm on the advances front, which went down to Rs557 billion from Rs530 billion as at December end 2020. In year-on-year terms, the decline was more pronounced, from average Rs605 billion in 1HCY20 to Rs537 billion during 1HCY21. UBL puts the lending strategy to “ensuring efficient allocation of capital while maximizing overall returns from relationships”. It is a no-brainer for banks with deep pockets to rather park the liquidity in risk-free government securities offering decent returns. The ADR close to 30 percent is at multiyear low.
The unfunded income continued to offer good support to the bottomline, contributing one-fourth to total income. Nearly all major fee earning business lines returned double-digit growth, with the most sizeable impact coming from gain on sale of securities, primarily at the back of sale on foreign debt securities. Administrative expenses were kept in check, growing in low single digits, year-on-year. Provisioning reversal made the most telling impact to overall profit growth. The infection and coverage ratio improved to 12.9 and 86.7 percent, respectively.
The economy grew in FY21 and is expected to continue the momentum for the ongoing fiscal year. One is not too sure if this will necessarily translate into higher lending from the banks. Not that the banks are under any immediate pressure to lend aggressively anyways – as can be seen from the profits that keep coming.
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