Bank: UNITED BANK LIMITED - Analysis of Financial Statements CY 2003 - 2003 Q 02 Bank 2009

UBL was established on November 7, 1959. It is engaged in commercial banking and related services in Pakistan and overseas (United States, Europe, and the Middle East). The bank has a total network of 1,118 branches in Pakistan including a branch at Karachi Export Processing Zone and 5 Islamic banking branches. The bank has 17 branches abroad (two new branches were opened in Qatar and Yemen in 2007). It is listed on all the three stock exchanges of the country.
RECENT RESULT 3Q09

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UBL- FINANCIAL HIGHLIGHTS                                     (PKR mn)

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                   9M FY 09  9M FY08  change  3M FY09  3M FY08  change

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Net Interest Income   24572    21329    15%      8471    7783       9%

Non Interest Income    8715     9759   -11%      2216    3154     -30%

Provisions Expense     9383     3878   142%      2691    1338     101%

Operating Expense     13720    13008     5%      4707    4633       2%

Profit Before Tax     10557    14019   -25%      3470    4809     -28%

Profit After Tax       6926     8964   -23%      2340    3197     -27%

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UBL posted a consolidated profit before tax of Rs 10.6 billion for the nine-month period ending September 30th 2009 which is 25% low from the same period last year. This decline was primarily on the back of higher provision on advances and provisioning required on impairment for investments. The bank followed a deliberate strategy of reducing high cost deposits while concerted efforts were aimed at strengthening low cost deposits.
The bank succeeded in raising its current and saving accounts ratio from 68% at December 31, 2008 to 75% at September 30, 2009. Low cost deposits increased by 5% in the nine months to September while expensive deposits declined by 20%. Consequently, total deposits of the bank are down 6% to Rs 464 billion. Consolidated profit after tax at Rs 6.9 billion translated into diluted earnings per share of Rs 6.22 (September 2008: Rs 8.06). Higher provisioning has significantly impacted the results of the bank, as is evident from a pre-provision operating profit increase of 10% over the same period last year.
Net interest income before provisions grew by 15% on account of higher Kibor rates and a 9% increase in average advances. However, non-interest income (including associates income) lowered by 5% than the corresponding period last year at Rs 9.1 billion mainly on account of lower commission on consumer loans and reduced foreign exchange earnings. Operating revenue for the nine months to September came in higher by 9% at Rs 34 billion compared to the same period last year. Non-interest income at Rs 9.1 billion is 5% down over the same period last year largely as a result of the slowdown in local and global economic activity and reduction in trade volumes across the board. Fee income is down due to reduced investment and acquisition financing activity in the corporate sector.
The commission on consumer loans declined by 35% due to significant reduction in lending portfolio, high risk and sluggish market conditions. Exchange income is down by 61% on account of depreciation in Pak rupee value and reduction in trade volumes as compared to the last year. Administrative expenses increased by only 8% over the same period last year, which is partly due to the devaluation of the rupee, which impacted the expenses of the international operations. Excluding devaluation, administrative expenses are only up by 5%. In spite of high inflationary pressures, the bank managed to improve cost efficiency across the bank and limited operating costs from increasing sharply. The bank achieved a stabilized cost/average asset ratio of 2.7% on a year on year basis despite a reduction in total assets.
Total assets of the bank have decreased by Rs 6 billion to Rs 614 billion during the first nine months of the year due mainly to advances declined by Rs 16 billion to Rs 362 billion.
The bank has continued with its strategy of strengthening its low cost deposit base. This is reflected in the bank's robust improvement in current account saving account (CASA) ratio and reduction in high cost term deposits. The Bank has also placed strong emphasis on efficiency improvement and cost rationalization. Low cost deposits have continued to grow and increased by 5% to Rs 274 billion despite liquidity. The increase in deposits has come mainly from current deposits which grew by 6% to Rs 142 billion while the bank have shed high cost fixed deposits by 20% to Rs 153 billion. This reduction in expensive deposits has resulted in cost of deposits declining from 5.4% in June 2009 to 5.0% in September 2009. Consequently CASA for the bank has also improved from 59% to 65% in September 2009.
UBL's impressive performance during the first three quarter of FY08 enabled it to post a 7% higher profit before tax of Rs 13.9 billion as compared to 2007. The Profit after taxation decreased slightly from Rs 8.4 billion in 2007 to Rs 8.33 billion in 2008 due to higher 20% higher taxes.
Net interest income before provisions was 17% higher (Rs 28.1 billion in FY08 as compared to Rs 20.8 billion in FY07) due to a 24% increase in average advances. Along with higher advances, the bank's lending rates also increased, resulting in higher net interest income for the period. Thus, the interest earned during the period was 27% higher in FY08 than that earned during FY07. However, higher deposit rates due to 5% minimum rate of return on savings deposits set by SBP and an overall increase in the bank's cost of funds.
Net provisions against non-performing loans and bad debts written off increased by 26% during FY08. One of the causes of higher provisioning during the 2008 was the deteriorating quality of the bank's asset (advances) and rising NPLs in the consumer and corporate portfolios of the bank. However, the major reason was the inclusion of the Rs 1.88 billion impairment loss booked on equities and an additional Rs 349 million impairment of investment in associates.
Non-interest income continued to grow during FY08, increasing by 16% to Rs 10.4 billion. This was due to 22% higher fee and commission income (due to an overall growth in trade commissions, income generated on remittances and high corporate finance fees) and strong exchange gain income (doubled to Rs 1.8 billion) earned due to volatility in the Pak rupee. Administrative expenses increased by 16% with premises cost contributing to nearly 34% of the increase, largely due to the increase in rent and utilities on the existing branch network and infrastructure along with core banking facilities. The Welfare Fund in the Finance Act 2008 contributed to this increase. Also the personnel and general operating expenses of the bank rose.
EARNING RATIOS:
UBL's earning profile shows that the bank's earnings had been improving every year till 2007. In 2007 the profit after tax decreased by 11.25% while the bank's assets increased by 25%, making ROA decrease. The same situation continued in 2008 as the earning ratios of the bank further deteriorated. The ROA ratio declined from 1.59% in FY07 to 1.38% in FY08. This was because of the decrease in PAT during FY08 while the assets of the company increased by 14%. The asset base of the bank increased in 2007, mainly due to a huge increase in fixed assets (from Rs 5 billion in 06 to Rs 16.9 billion in 2007). The fixed assets further increased to Rs 18 billion in 2008. UBL is investing in premises and expanding its infrastructure. The bank opened around 34 new branches under its new branch expansion programme.
The bank's earning assets increased overall by 16% during FY08 due to 24% increase in advances. There was only a slight increase in investments and an 8% decline in lending to financial institutions. Investments in market T-bills decreased and since these are the major portion of the bank's investments in federal government securities, the impact of the decline was noticeable.
The equity of the bank increased by 3% as more ordinary shares were issued during FY 08 and the share capital of the bank increased from Rs 8,093.750 million in 2007 to Rs 10,117.188 million in 2008. UBL had also decided to increase its authorised capital from Rs 10.2 billion to Rs 20 billion.
As the profit earned during 2008 was lesser compared to previous year while the deposit base and equity of the bank increased, the ROD and ROE both declined.
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. The yield on earning assets reduced in 2007 due to decrease in profit after tax. The interest expense rose by 40%, resulting in the increase of cost of funding earning assets in 2007. In 2008, the performance of earning assets improved as the yield to earning asset ratio increased. Yield on earning assets increased due to higher interest earned during the period owing to higher advances and lending rates of the bank. However, at the same time, the cost of funding earning assets also increased due to 42% higher interest expense during FY08 as the deposits and the return on deposits increased.
ASSET QUALITY
The effect of withdrawal of the Forced Sale Value benefit by SBP is evident in the provisions to NPLs ratio in 2007. During 2Q08 was a 120% increase in the provisioning against loans and advances compared to 1Q08. However, the level of net provisions was much lower than the levels set in 3Q and 4Q of 2007 when the FSV benefit was first withdrawn.
The bank's NPLs to Advances ratio had been decreasing over the years showing that the bank had employed a prudent credit policy to control its NPLs, which fell in 2005 and 2006. This was the trend in the entire banking industry however; banks indulged in aggressive loan policies as a result of which there were huge increments in NPLs in 2007. There was also a significant role of decreased regulations by banks which were competing to improve customer base, and also due to the increasing trend in interest rates (as most of the loans were on floating rate) thus again increasing the chances of defaults. NPLs as a percentage of advances declined in 2005 and increased in 2006, the ratio of provisions to NPLs followed an opposite pattern, showing that the levels of provisions were not rectified in 2005.
The bank's non-performing loans at December 08 exceeded the level of NPLs in December 07. 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.
UBL has taken notice of the deteriorating asset quality and taken measures to improve the risk management, control and collection systems. New policy initiatives have been implemented for assessing debt burden and repayment abilities of customers together with more stringent credit verification processes. The bank is allocating more resources towards the collections area and recovery lines.
Consumers have 21% and the textile sector 19% 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.
DEBT MANAGEMENT:
The Debt Management Ratios of UBL suggest that it is a highly leveraged company although UBL's debt to asset ratio (leverage ratio) has slightly fallen. Deposits form 86% of UBL's total debt and the deposit base has been increasing considerably over the years. In 2006 the growth rate of assets was more than the rate of increase in total debt of the bank and thus the bank experienced a decrease in debt to asset ratio. During FY08, liabilities and assets have increased with the almost the same proportion (15% and 14% respectively).
UBL had successfully stabilized its debt to equity ratio up until 2005. It has fallen after that due to rise in equity base. UBL may raise its share capital further as it has recently resolved to increase its authorised capital from Rs 10.2 billion to Rs 20 billion. Like D/E ratio, Deposits time Capital ratio has also revealed a declining trend.
The debt to equity ratio of UBL increased during FY08. It is due to a 15% increase in total liabilities of the bank, with a less than proportionate increase (3.4%) in the equity base of the bank. The deposits of the bank have increased by 21% along with subordinated loan amount.
The debt to asset ratio has been maintained more or less around 0.92. The assets increased by 14% during the FY08. Total assets have grown by to Rs 605 billion with gross advances increasing by 24% and a major increase in the UBL's balances with other banks. Domestic advances accounted for a major portion of this increase due to disbursements to the power, energy, fertilizer and telecom sectors.
LIQUIDITY RATIOS: Liquidity ratios of UBL present a favorable picture. The increasing liquidity of the bank indicates that UBL is in a comfortable position in case any contingencies and credit risks may arise. The bank can also guard against any significant increase in NPLs. About 80% of the total assets of the bank are comprised of its earning assets (lending to financial institutions, investments and performing advances). There was a decrease in the investments and lending to financial institutions during HY08 and therefore the earning assets have grown at a slower pace than that of total assets.
UBL has a large deposit base, which is growing every year but the advances have been growing at a faster pace. Therefore there has been a rising trend in the advances to deposit ratio of the bank. The increasing advances to deposit ratio shows that the volume of advances are growing and covering more and more of the deposits (liability) every year. The liquidity ratios of the bank have remained almost the same during the first 3 quarters FY08.
SOLVENCY RATIOS:
The solvency position of UBL improved in 2007. 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 2006 to Rs 8.1 billion in 2007. Along with the share capital, the reserves of the bank increased to Rs 10.3 billion. The earning assets to deposits ratio has 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.
DIVIDEND PAYOUT RATIOS: The Board of Directors of UBL has recommended a final cash dividend of Re 1/- per share ie 10% (in addition to Interim Dividend of 15% already paid for the year) and bonus issue of 10% for the year ended December 31, 2008.
The average price per share fell slightly to Rs 155.76 during HY08 compared to Rs 163.2 in FY07 as profits fell in FY07. However, there has been a constant decline in the share price and the average share price for FY08 is Rs 75.5.
FUTURE OUTLOOK: SBP has maintained the discount rate at 12.5% in an attempt to stabilize the economy. This does not bode well for the private sector credit off-take that is already reeling from the impact of rise in prices of utilities.
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].
Copyright Business Recorder, 2010