Voices of cost control seem to echo in UBLs head offices; but its so loud that calls to improve asset quality easily fade away. United Bank Limited kept on losing its deposits share on account of conscious efforts to tame its cost of funds.
This is a generic move in the industry and perhaps only time can tell about the success of this strategy. But at this junction, UBL is leading the marathon, as its long-term leveraging is getting restricted. After increasing marginally by just 2 percent last year, the banks deposits base declined by a massive 8 percent during the quarter ending March.
Its mix, which tilted by 8 percentage points in favour of low cost demand liabilities during 2009, improved slightly by 1 percent to 68 percent in the last quarter. The seasonal impact nearly offset the efforts of bank managers to slash time liabilities by Rs32 billion, as the banks current and saving account eroded by Rs9 billion as well.
Hence, the cost of deposits, which was reduced by 150 bps to 4.1 percent between March and December 2009, virtually remained at same level in the quarter in question. This helped first quarter mark-up expense fall by 27 percent year-on-year.
Cyclical slowdown and a close eye on toxic assets didn leave much numbers to appreciate the performance of the banks line managers. Thanks to retirement in commodity financing and other seasonal loans, while keeping a flat corporate portfolio, net advances for the bank dropped by 9 percent during Jan-Mar 10.
To add to the agony, UBLs gross infection ratio soared by 100 bps to 11.3 percent in the last three months. However, out of roughly R2 billion increase in bad debts, Rs750 million was booked to non-payment by KESC. Hence, the energy sector loans and TFCs are not only crowding out the private investment directly but also reducing banks confidence to lend.
UBLs advance-to-deposits ratio fell from 77 percent to 73 percent in a years time. Unlike its peers, UBLs net interest margin improved by 30 bps to 7.1 percent over the corresponding period last year, amid a reduction of 130 bps in earning assets yield. This helped register a 3 percent increase in pre-provisioning core-income during 1QCY10.
A slight decline in provisioning facilitated the bank to post a growth of six percent in net core-income. With about seven percent growth in non-core earnings, operating revenues improved by a meagre 4 percent. Thankfully, the managements cost efficiencies came to rescue the bank once again, as its operating expense recorded a growth of just 5 percent. But, lately, that strategy is also well implemented by its peers, HBL and MCB, implying that UBL essentially needs to work like MCB to improve its operating cost to revenue ratio.
Nonetheless, UBLs overall cost effectiveness helped it register 10 percent year-on-year increase in after tax profits - which is better than its peers. This helped the bank maintain in its return-on-equity, which remained flat at 16 percent during the last quarter.
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UBL P&L
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Rs (mn) 1QCY10 1QCY09 % chg
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Mark-up earned 14,129 16,143 -12%
Mark-up expensed (5,996) (8,244) -27%
Net mark-up Income 8,133 7,899 3%
Provisioning (2,116) (2,229) -5%
Net mark-up income
after provisions 6,017 5,670 6%
Non-markup income 2,429 2,272 7%
Operating revenues 10,562 10,170 4%
Non-markup expenses (4,184) (3,998) 5%
Profit before taxation 4,262 3,943 8%
Profit after taxation 2,784 2,536 10%
EPS (Rs) 2.50 2.28
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Source: KSE Announcement