UBL: Impressive profits

UBL's increased exposure in government securities, particularly PIBs seems to be yielding the desired results on the income statement. The bank's pre-tax profits grew sizeable during CY15, on the back of healthy

double digit topline growth. Parking deposits in government securities is a recurring phenomenon in the industry, and in times when interest rates have gone down and margins have shrunk - it makes all the sense to beef up investments.

December end 2015 balance sheet numbers are not known yet, taking 9MCY15 numbers as a proxy - it is evident how investments have outpaced advances of late. UBL's IDR had crossed 70 percent by the end of September 2015, whereas the ADR was hovering in the mid 40s. UBL's liability managers have worked hard to bring in more deposits as they have grown at a healthy rate - well above industry average.

The cost of deposits is believed to have come down as efforts are underway to further improve CASA. That said, UBL has a fair distance to go in matching the CASA ratio of its bigger counterparts. A well thought out asset mix strategy coupled with reduced cost of deposits - meant a much improved reading for NIM.

The bank treasury arm's performance continued to support the bottomline. Non-core income was massively up, with the growth shared evenly among dividend income, income from gain on sale of securities and commissions. The capital gains on government securities is an industry wide phenomenon as banks are of the view that interest rates are bottoming out and are extracting juice from it.

The non-core administrative expense was kept in check - as UBL has put in efforts in optimizing staff cost. The cost efficiency has further improved the cost to income ratio. There was a Rs4 per share final dividend to go along with the results, taking the full year DPS to Rs13.

The bank's adequacy ratio sits at healthy levels and NPLs are also on the mend and well provided for. Yields on government securities have come down crashing, opening up ample room for banks to lend aggressively. Just when, if at all, banks come out of the comfort zone of investing in PIBs is anyones guess. Not that UBL faces any profitability pressure continuing with the current strategy though.