UBL profits grow

That UBL managed to post year-on-year growth in 1QCY16 profits is testament to how well the bank has managed to cope with challenging market conditions. The 4 percent year-on-year growth in pre-tax profit may not be huge, but when seen in perspective, seems a job well done. The bank's balance sheet expansion is showing the results on the income statement.

The mark-up income surged by a modest 2 percent year-on-year, despite a massive 26 percent year-on-year growth in average earning assets. Recall that the interest rates have gone down by 300 bps, putting pressure on banking spreads. UBL managed to increase its advances portfolio by 8 percent over 1QCY15. The bank puts the well-diversified portfolio as the key reason behind absorbing the impact of low interest margins.

The cost of deposits has come down to 3 percent for 1QCY16, which is a 111 bps reduction from a year ago period. Domestic deposits have grown by 3 percent over December 2015. UBL's total deposits now exceed Rs1 trillion, and the deposit mix continues to improve, with addition of more current accounts, as the bank's distribution channels continue momentum.

The non-core income continues to support the bottom line, as capital gains and fee and commissions continue to surge. Trading in fixed income securities has yielded good dividends to UBL, and the contribution becomes more crucial, especially when dividend income has gone down.

Provisioning charges were up for the quarter as the bank took prudent actions, to build reserves with domestic and international loan books. The loan quality stays good with the coverage ratio based on total provision increasing to almost 92 percent. The increase in overall costs reflected growth across business segments. Cost to income ratio slightly inched up to 38.5 percent.

UBL's ADR as at the end of 1QCY16 stood at 42 percent, whereas the IDR has increased to 74 percent. Advances portfolio slid in absolute terms - a result of relatively lower commodity financing. UBL also announced an interim dividend of Rs3/share, much in line with industry expectations.

With interest rates likely to remain on the lower side, UBL is likely to continue its drive to improve CASA ratio and further reduce cost of deposits. Non-interest income is likely to continue supporting the overall revenues, especially when it is well diversified unlike most its peers. The big question, however, remain on advances. Not that UBL faces any pressure in terms of profit, but with investment yields coming down, UBL may well look into lending more than it has been, of late.