UNITED BANK LIMITED - Analysis of Financial Statements Financial Year 2003- Financial Year 2010
United Bank Limited together with its subsidiaries, offers commercial banking and related services in the United States, Pakistan, Europe, and the Middle East. The company operates in Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking, and Asset Management segments.
It operates 1,119 branches, including 5 Islamic banking branches, a branch in Karachi Export Processing Zone, and 17 branches outside Pakistan. The company was founded in 1959 and is headquartered in Karachi, Pakistan.
RECENT RESULTS: FY10
UBL's PAT grew by 21%, going from Rs 9.49 billion in FY09 to Rs 11.20 billion in FY10. The 4th quarter's profit after tax has risen by about 12% to Rs 3.11 billion compared to the Rs 2.78 billion during the same period last year. The PAT figures have shown an excellent rise compared to the 15% growth in the PAT of banking industry. Due to these figures, the standalone EPS for this fiscal year stood at Rs 9.1, compared to the Rs 7.5 a year earlier. Also the Price Earning Ratio 7.0x compared to the industry multiple of 7.5x in FY10.
NII went up by 5% to Rs 34.11 billion this year, compared to the Rs 32.94 billion last year. This was mainly due to the lower cost of funds, which stood at average 4.7% in FY10 compared to 5.4% in FY09. There was a decline of 39% in provision expenses and other write-offs. This led to the Net Credit Loss Ratio coming down to 2.3% compared to the 3.2% last year. There was an increase of 7% in the Operating Expenses to Rs 19 billion. However the Operating Profit still surged, showing an increase of 23% to Rs 18.34 billion in FY10, compared to Rs. 14.86 billion last year. Non-Interest Income declined by 15% this year to Rs 10.89 billion compared to Rs 12.76 billion last year, mainly due to exceptional derivatives gains earned last year. Fee, commission and brokerage increased by 7%, due to an overall growth in trade commissions, income generated on remittances and higher corporate service charges. The launch of 'Bancassurance' in 2009 has contributed nearly 20% to the overall increase in fees and commissions. Income from dealing in foreign currencies went up by 36% while the other income category went down by 53% to Rs 1.4billion. This was due to the record remittances levels in the country as well as due to the higher exports and imports in FY10.
Overall administrative expenses increased by 7% over the corresponding period last year mainly due to higher utilities costs, increased advertising expenditure and Rupee devaluation. An increase of 4% was witnessed in the Personnel Cost, which went up to Rs 7.75 billion. Advertisement and publicity expenses went up by 246% to Rs 766 million. This was mostly due to the higher spending on marketing and launch of new products in the market as well as the existing ones, to counter the rising competition in the market from smaller banks.
Total assets have grown by 12.6% in FY10 to Rs 699 billion, with an average return of 1.7% over the year. Lending to financial institutions is still declining as banks continue to invest in government bonds and securities. Advances have reduced by 6% from Rs 354.1 billion in FY09 to Rs 333.7 billion in FY10 due to the rationalization across the portfolios and more prudent lending in the current economic environment. Also the decline in advances reflects new risk containment strategies by the bank. Comparing with the period in question last year, there is significant decline in lending to financial institutions (6%) and advances (7%) in favor of rise in investments (18%). Industry figures have shown similar trends in this category.
UBL's ratio analysis reveals that the yield on earning assets is 11.8% while the cost of funding these assets is 4.7%. While the yield on performing assets was 12.5%, the cost of deposits stayed constant at around 4%. Furthermore, the equity to assets ratio is on the rise, standing at 13% compared to the first half figure of 9.6%. UBL posted ROE of 19.8%, however the overall major banking leaders had an average ROE of 23.2%.
UBL had total deposits of Rs 551 billion in FY10 compared to Rs 492 billion last year, showing an increase of about 12.7%. Low cost deposits increased by Rs 33 billion, while expensive deposits were decreased by Rs 21 billion. Current And Savings Account (CASA) Ratio stood at 69% in FY10, compared to 67% last year. In figures, the CASA figure stood at Rs 378 billion this year compared to Rs 331 billion last year. This signals that the bank has increased low-cost deposits, which have pushed the average cost down. Industry CASA ratio stood at 67%, however some major banks such as MCB had a CASA ratio of 81. UBL had an NIM of 7.1%, compared to 6.9% last year. Its yield on total assets was 9.6% (10.2% in FY09), whiles its cost on total liabilities was 4.1% (4.7% in FY09). This led to a constant spread of 5.5% in both years.
UBL shows a good standing in the stock market with a steadily rising share price. Market value to book value remains fairly consistent and if the bank manages to record further profits, the price to earnings ratio should also remain stable. The company also provided a bonus dividend this year of 10%.
INDUSTRY COMPARISON
As seen in the industry comparison table, UBL has over-performed the industry in many categories.
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Growth Rates UBL Industry Averages
2009 2010 2009 2010
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Profits After Tax 14% 21.4% 26.07% 15%
Advances -4.00% -5.70% 4.2% 1%
Deposits 2% 12% 10.03% 15%
Investments 20% 65% 33.53% 35%
CASA Ratio 67% 69% 68% 69%
Return on Deposits 4.8 4 3.36 3
Return on Equity 19.50% 19.80% 23.8% 24%
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FINANCIAL PERFORMANCE (FY04-FY10)
The year 2010 remained fraught with challenges, which impacted the macroeconomic landscape of the country. In the second half of the year, record floods inundated nearly 20% of the country and inflicted significant damage to the fragile economy. Continuing severe shortages of power and gas have exacerbated the situation and Large Scale Manufacturing (LSM), after exhibiting good growth of 5% in FY10, remained subdued during the first half of the current fiscal year. As a consequence, GDP growth estimates for 2010-11 have been scaled down to 2.8% from pre-flood estimates of 4.3%.
Inflationary pressures remained active throughout the year, with CPI at 15.5% year-on-year in December 2010 and averaging 13.9% for the year. Supply chain interruptions caused by crop damage resulted in volatile food prices and remained a key driver behind surging price pressures. Escalating power tariffs remained a regular feature throughout 2010, further fueling inflation.
Profitability
UBL posted PAT of Rs 11.16 billion, in FY10 compared to the Rs 9.19 billion last year, showing an increase of about 21%. This growth in profit translated in Earning Per Share of Rs 9.0, an increase of 15.4% from last year's EPS of Rs 7.8.
Net Interest Income before provision went up by 4% from Rs 32.94 billion last year to Rs 34.11 billion this year. This increased Net Interest margins to 7.1%, compared to 6.9% in the previous year. Net provisions at Rs 8.07 billion are down by 39% from the corresponding period last year primarily due to higher provisioning on the corporate and international portfolios. Also there has been a huge improvement in the net provision charges on the quarterly basis. The Net Credit Loss (NCL) Ratio went down from 3.2% last year to 2.3% in FY10. Net provisions also include Rs 1.1 billion impairment losses booked on equities. However, the key point to note is the declining trend in NPL formation and an increase in coverage ratio from 68% to 71% in the subsequent quarters from June 2009.
Non-Interest income went down by 11% to Rs 10.12 billion for FY10. Although UBL has a strong diverse income stream, its increase of 7% in fee and commission (Rs 6.3 billion) and 36% increase in exchange income (Rs 1.7 billion) was unable to offset the 53% decline in other incomes (Rs 1.4 billion).
Fee and commission income increased by 7% to Rs 6.3 billion. Although there was a reduction in consumer and corporate lending, this was compensated by higher commodity commission and income from increased trade activity. Exchange went up by 36% from Rs 1.35 billion last year to Rs 1.7 billion this year. This was due to the increased exports and imports in the country as well as due to decrease in losses due to a steady rupee.
The decline in operating revenue of 1.4% led to a trickledown effect on the pre-provision operating profit, which declined by 7.2% compared to last year. Overall the administrative expenses declined by 7% while the advertisement and publicity expenses went up by 246% due to the rising competition in the industry. The rise in advertisement expenses in also reflective of the expanding service line of the bank. Personnel cost went up by 4% to Rs 7.75 billion while the Premises costs declined by 9% to Rs 2.66 billion. Operating expenses to total asset ratio went down to 2.8% from 3.1% last year. This was due to the higher increase in assets than the operating expenses this year.
The non-interest income stood at 1.6% of the average total assets, compared to 1.8% last year. This was because the non-interest income was unable to meet the huge rise in assets. Pre-provision return on assets showed a marginal decrease of 0.1%, as it went from 2.5% last year to 2.4% in FY10.
LIQUIDITY
Liquidity of the bank has shown mixed trends compared to the previous year. About 80% of the total assets of the bank are comprised of its earning assets (lending to financial institutions, investments and performing advances. Performing advances forming a major chunk of the earning assets showed a 6.5% decline from Rs 335 billion last year to Rs 313 billion in FY10. Advances from the corporate, commodity and foreign sectors were the major contributors.
UBL had total deposits of Rs 551 billion in FY10 compared to Rs 492 billion last year, showing an increase of about 12.7%. This increase in deposits was supported by a 13% increase from domestic sources showing the rising market share for the company. Also the foreign deposits in rupees increased by 8%, while those in foreign currencies increased by 6%. This shows the rising foreign interest in the company. Low cost deposits increased by Rs 33 billion, while expensive deposits were decreased by Rs 21 billion.
The increase in deposits was supported by an increase in current and savings deposits. As a result of shedding domestic high cost fixed deposits by 12%, market share decreased from 8.8% in December 2009 to 8.2% in December 2010. However this decline was offset by the increase in overall deposits. The Current And Savings Account (CASA) Ratio stood at 69% in FY10, compared to 67% last year. In figures, the CASA figure stood at Rs 378 billion this year compared to Rs 331 billion last year. This signals that the bank has increased low-costs deposits, which have pushed the average cost down. Compared to the above figures, MCB had a growth in deposits of 17% with a CASA ratio of 81.5%. Such a high CASA ratio has decreased its average costs on borrowings.
Advances were rationalized during the year leading to a reduction in fresh lending to stand at Rs. 334 billion, lower by 5.7% as compared to the corresponding period last year. This decline was due to a fall in domestic advances of 5% and 9% in international advances. This reduction in advances reflects the bank's new risk containment strategy. Yield on advances declined to 12.5% compared to the 13.3% last year.
Advances to deposits ratio went down to 67% from 78% last year, due to declining advances and rising deposits. Also the loan to deposit ratio went down to 60.2% from 72% last year. This was due to the bank decreasing its fixed term loans and expensive advances.
Earning ratios
Total assets have grown by 12.7%, from Rs 620 billion last year to Rs 699 billion in FY10. This increase in assets was contributed by investments, which increased by 85% to Rs 187 billion. The bank had a return on average asset of 1.6%, compared to 1.5% last year. The yield on earning assets declined as average 6M KIBOR was 39 bps lower in 2010 compared to 2009.
Equity increased by 12.3% to Rs 91 billion due to assets revaluation and issue of new shares. However the return on equity went up 19.8%, compared to the 18.7% last year. The average return on deposits fell down to 1.2%, compared to the 1.87% last year. This was due to the huge rise in deposits.
Over the years UBL's yield on earning assets has been increasing but at the same time the cost of funding them has also risen. It had a yield on earning assets of 11.8%, which was quite similar to the return of 11.85% last year. However the cost of earning assets fell down to 4% from 5.74% last year. This was due to an increase in cheaper deposits and decrease in expensive ones.
ASSET QUALITY
Non-Performing Loans (NPLs) went up by 32% to Rs 49 billion in FY10 from Rs 39.1 billion last year, although the gross advances declined by 2% during the same year. This was mostly due to the post-recession effect as many borrowers are unable to pay back their loans. There has been a major increase in NPLs in the consumer and commercial business and this factor can affect the future profitability of the bank. UBL's rising NPLs are in line with the banking industry trend. NPLs have risen mainly in the agriculture and consumer sectors. Managing credit risk is the main challenge faced by UBL.
Consumers have 18%, textile sector 17% and agriculture industry has 14% of total advances of the bank. Tight monetary policy, rising inflation are decreasing the debt serving ability of the consumers while the textile sector's performance has been dismal. However 2011 is expected to be a better year as textile industry has recorded record exports in the first quarter. Also the agriculture industry is bouncing back from the devastating floods last year.
The Gross NPL to loan ratio stayed at 12.9% this year, compared to the 10.3% last year, due to rise in NPLs and fall in advances. The Net NPL to loan ratio went up to 4% from 3% last year, due to similar reasons. The Interest Coverage ratio however has shown a very slight improvement, as it went up to 72%, compared to 81% last year.
SOLVENCY RATIOS
The solvency position of UBL improved in FY07. The Equity to asset ratio and equity to deposit ratio increased in 2007 because the equity of the bank increased as 161.875 million ordinary shares were issued, raising the share capital of the bank from Rs. 6.5 billion in FY06 to Rs. 8.1 billion in FY07. Along with the share capital, the reserves of the bank increased to Rs. 10.3 billion. The earning assets to deposits ratio had increased because the earning asset (excluding non performing advances) of the bank has been growing at a faster pace than the deposits.
During FY08, the equity to deposit and equity to asset ratios were more or less maintained, however, the earning assets to deposit ratio decreased because the deposit base increased by a major 21% while earning assets experienced a less than proportionate increase of 16% because of a decrease in investments.
For FY09, equity to assets showed a major jump from 7.25% to 10.51%. Equity of the bank increased from Rs 49.4 billion to Rs 67.3 billion mainly due to the increase in unappropriated profits and reserves. Equity to deposits also increased from 9.75% in FY08 to 10.51% in FY09. The deposit base increased by 4% while equity increased by 38%. Earning assets to deposits showed a major decline back to the level of FY06 due to the decrease in performing advances which forms a major part of the earning assets.
For FY10, equity to assets went up to 13% from 10.51% last year. Equity figures showed an improvement 12%, going to Rs 91 billion, compared to Rs 81 billion last year mostly due to an increase in the unappropriated profits and reserves. Equity to deposits ratio stood at at 16.5%, compared to the 10.51% last year. This was due to the higher increase in equity compared to the deposits. Earning assets to deposits ratio declined to 101.27%, compared to the 104.34% last year. Earning assets to deposits showed a major decline back to the level of FY06 due to the decrease in performing advances, which forms a major part of the earning assets.
MARKET VALUE
The price to earning ratio declined to 7.0x, compared to the 7.76x last year. This was below the industry average PER of 7.54x. Also the market-book value ratio declined to 1.45x due to declining market prices. This shows the decreasing trust in the bank from the investor's side.
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UBL
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2004 2005 2006 2007 2008 2009 2010
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Earnings Ratios
Return on Assets (%) 1.36% 1.71% 2.24% 1.59% 1.38% 1.48% 1.60%
Return on Deposits (%) 1.61% 2.06% 2.83% 2.10% 1.72% 1.88% 15.50%
Return on Equity (%) 21.32% 27.46% 31.71% 19.81% 19.00% 14.09% 1.04%
Assets Quality Ratios
NPL to Advances 13.95% 8.28% 6.57% 7.35% 7.50% 10.80% 12.90%
Provisions to NPLs 2.17% 7.53% 12.14% 24.96% 16.20% 24.67% 9.81%
Non Performing Loans (Rs. in bn) 20.103 16.960 16.255 22.012 27.839 39.101 49,000,000,000
NPLs Growth 6.27% -15.63% -4.16% 35.42% 26.47% 40.45% 32.00
Market Value Ratios
Price to Earnings 13.00 18.40 5.80 7.5 7.00
Market Value to Book Value 3.70 3.40 1.00 1.1 1.05
Debt Management Ratios
Debt to equity 14.70 15.02 13.18 11.50 12.79 8.51 6.68
Deposit times capital 12.81 13.31 12.11 10.18 10.25 8.88 8.20
Debt to asset 0.94 0.94 0.93 0.92 0.93 0.89 0.86
Liquidity Ratios
Earning assets to assets 78.13% 81.27% 80.33% 82.95% 84.33% 79.73% 0.80
Advance to deposit 57.85% 67.17% 72.42% 74.27% 75.80% 74.26% 0.69
Yield on earning assets 4.34% 7.15% 9.70% 9.33% 10.24% 12.04% 0.12
Cost of funding earning assets 0.81% 2.14% 3.57% 3.85% 4.73% 5.55% 0.04
Solvency Ratios
Equity to assets (%) 6.37% 6.24% 7.05% 8.00% 7.25% 10.51% 13.00%
Equity to deposits (%) 7.80% 7.51% 8.25% 9.82% 9.75% 11.26% 16.50%
Earning assets to deposits (%) 92.50% 97.52% 101.49% 182.83% 180.36% 101.35% 101.27%
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].