Bank: UNITED BANK LIMITED - Analysis of Financial Statements Financial Year 2004 - 3Q 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 bank operates in Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking, and Asset Management segments.
It has a network of 1,119 branches, including 5 Islamic banking branches, a branch in Karachi Export Processing Zone and 17 branches outside Pakistan. The bank was established in 1959 and is headquartered in Karachi, Pakistan.
RECENT RESULTS 3Q10
The performance of UBL on the Karachi Stock Exchange is summarized in the chart below.
REVIEW OF ECONOMIC CONDITIONS
The current fiscal year began with concerns over the large budgetary deficit (6.3% of GDP in June 2010), servicing of the gargantuan IMF loan ($11.3 billion), escalating inflation (15.7% in September 2010) and domestic political issues. With the economic growth rate expected to hover around 2.5% for at least the next couple of years, the loss of massive agricultural output and the ensuing shortages caused in related industries, the current economic condition of the country is at its worst in the last six decades. Today, Pakistan is South Asia's poorest performing economy and its GNI growth rate is one-third that of India and half of that of Bangladesh. While food inflation is expected to stabilize in coming months, given the likely increase in electricity prices, introduction of reformed GST and increasing dependence of the government on borrowings from SBP for deficit financing, the high inflationary pressures are likely to persist in FY11. Considering the challenges to the economic stability, the State Bank of Pakistan raised the Policy Rate consecutively by 50bps each in its past two Monetary Policy announcements in July 2010 and September 2010.
BANKING INDUSTRY'S RECENT PERFORMANCE
Banking industry in Pakistan is faring well despite high discount rates and flood-affected economic conditions. It posted a profit of Rs 50 billion in the third quarter of 2010, 11% higher as compared to Rs 45 billion in the corresponding period last year. The increasing profitability is attributed to a 7.5% YoY growth in the Interest Income, which more than compensated for a 5% YoY decline in non-interest income and a 13% YoY rise in non-interest expenses. Improvements in profits can be attributed for two reasons. Firstly, banks' increasing preference for risk-free investments yields good returns. Secondly, compared to the third quarter last year, banking taxes were significantly lower.
The big five banks of Pakistan namely Allied Bank Limited, Habib Bank Limited, MCB Bank Limited, National Bank of Pakistan and United Bank Limited witnessed a 14% YoY increase in net interest income and a 34% YoY decline in provision against advances. Average earnings per share was Rs 10 with a 14% return on equity. Deposits grew at an average of 6% with focus shifting from risky advances to safer investments. The ADR has shown improvement standing at an average of 62.48%. NPLs increased by 12.20% for the industry, with Provisions rising 17.97%.
RECENT PERFORMANCE (3Q10)
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Income Statement 30-Sep-10 30-Sep-09 % Change
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Interest Earned 43,251,033 46,163,070 -6.30815
Interest Expensed 18,169,640 22,259,499 -18.3735
Net mark-up/interest income 25,081,393 23,903,571 4.927389
Total non-mark-up/interest income 7,293,544 8,250,950 -11.6036
Total non-mark-up / interest expenses 13,199,844 12,808,393 3.056207
PROFIT BEFORE TAXATION 12,924,984 9,951,598 29.87848
PROFIT AFTER TAXATION 8,060,273 6,367,241 26.58973
Earning per share-Basic and Diluted (in Rupees) 6.58 5.2 26.53846
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Balance Sheet 30-Sep-09 31-Dec-09 % Change
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Lendings to financial insitutions 16,348,102 23,162,130 -29.4188
Investments 159,831,959 136,145,524 17.39788
Advances 334,832,651 354,091,713 -5.439
Deposits and other accounts 491,249,451 492,036,103 -0.15988
Equity 65,380,075 60,936,723 7.291748
NPLs 46,373,889 39,101,396 19
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Ratios
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Provisions to NPLs 69.8707973 70.7724655 -1
Advances to Deposits 0.68159394 0.7196458 -5
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United Bank Limited posted profit before tax of Rs 12.92 billion in 3Q10, 29.87% higher than Rs 9.95 billion in the corresponding period last year. This can be attributed to operating efficiency. Meanwhile, profit after tax stood at Rs 8.06 billion in 3Q10, with an EPS of Rs 6.58. Net profit margin of the bank was 1.54%, one of the lowest in the industry and well below the average of the big five banks of 1.82%.
A slight increase of 4.92% was witnessed in Net Interest Income since 3Q09 with NII standing at Rs 25.08 billion in 3Q10, brought about by the decreasing cost of deposits but somewhat offset by declining KIBOR in the current period as compared to the same period last year. The decrease in Interest Earned was largely due to lower earnings on loans and advances to customers and financial institutions and Available-for-Sale securities.
Meanwhile, Interest Earned on Held-to-Maturity securities increased phenomenally by more than 100%. On the other hand, the Interest Expensed declined significantly to Rs 18.16 billion compared to Rs 22.25 billion over the corresponding period last year. This was largely due to mobilization of low-cost deposits of the bank. The Interest Margin of UBL was 57.99%, above the average of the big 5 banks of 56.00%, indicating a lower ratio of Interest Expense as compared to the industry. The Net Interest Margin was 140.58%, lower than the average of the big 5 banks of 148.77%.
Non-Interest Income decreased 11.60% from Rs 8.25 billion to Rs 7.29 billion, largely due to significant derivatives gains in the corresponding period last year. Fees and commissions increased by 9.01% to Rs 4.71 billion due to an overall growth in trade commissions, income generated on remittances and higher corporate service charges. Meanwhile, administrative expenses rose only 4.72% (despite heavy inflation) due to management's cost efficiencies. Provisions against assets declined but Workers' Welfare Fund Contribution and Other Charges increased Non-Interest Expenses by 3.05% YoY to Rs 13.19 billion. NPLs increased 9% since the end of FY09 to Rs 46.37 billion. However the bank made adequate Provisions for the NPLs with Provision coverage ratio equal to 69.87%. Provisions declined due to the cautious lending approach of the bank. NPLs rose on account of losses on agricultural finance owing to the devastating floods in Pakistan.
The bank's earnings ratios are worse than the averages of the big 5 banks. ROA was 1.30%, one of the lowest in the industry. ROD was 1.64% with ROE being 12.33%. This is owing to UBL's lower increase in profitability as compared to the remaining big banks.
United Bank Limited has the lowest Yield on Earning Assets amongst the big 5 banks of 8.46% while at the same time having Cost of Funding Earning Assets on the lower end of the industry at 3.56%. Thus, the spread of the bank is 4.9%, one of the reasons for the comparatively lower profitability of the bank.
The bank went with the trend of shifting from Advances to Investments by reducing focus on Advances and Lendings to Financial Institutions and increasing it on Investments. Lendings decreased 29.41% since the end of FY09 to Rs 16.34 billion, while Advances declined 5.43% to Rs 334.83 billion and Investments increased 17.39% to Rs 159.83 billion. The bank focused on HTM and HFT securities more than on AFS securities. Advances were shifted from Running Finances to Bills Discounted and Purchased.
Composition of Earning Assets was as follows: 3% Lendings to Financial Institutions, 31% Investments (lowest in the industry) and 66% Advances.
Earning Assets constitute 82.19% of total assets while Advances to Deposits is 68.16%. In comparison with the big 5 banks of Pakistan, the Earning Assets to Assets ratio of UBL is average indicating effective use of capital to raise Earning Assets. Meanwhile, ADR of UBL is close to the maximum limit set by SBP of 70%.
As expected, Deposits of the banks decreased 0.15% since the end of FY09 to rise to Rs 491.24 billion. Shifts from Fixed Deposits and Savings Deposits to non-remunerative Current Accounts were seen.
United Bank finances 89% of its Total Assets with Debt and 11% with Equity. This is a highly leveraged position with Debt to Equity being 8.51. Equity amounts to 13.31% of Deposits while Earning Assets are 104.02% of Deposits. Compared to the other banks, UBL is more leveraged and more insolvent in the short-run, however, its assets and deposits are being utilized best.
In terms of Shareholders' Returns, Dividend Payout in 3Q10 was Re 1 per share. Dividend Yield recorded was 1.70% with Dividend Cover of 6.58. The average share price over the year was Rs 58.6 with heavy decline occurring only after the floods hit Pakistan.
The Price to Earnings Ratio is 8.92, lower than the average of the big 5 banks, while the Market Value to Book Value is 1.10, indicating existing but declining investor confidence in the bank.
PROFITABILITY
Despite this fragile operating environment, UBL has achieved profit after tax of Rs 9.5 billion, which is 12% higher than the corresponding period last year translating into earnings per share of Rs 8.56 (December 2008: Rs 7.51).
Net interest income before provisions grew by 16% to Rs 33.2 billion from the same period last year reflecting an increase in Net Interest Margins of 40 basis points to 6.5% in 2009 and 8% increase in average interest-earning assets.
Net provisions at Rs 13.5 billion are up by 64% from the corresponding period last year primarily due to higher provisioning on the corporate and international portfolios. Net provisions also include Rs 1.1 billion impairment loss booked on equities. However, the key point to note is the declining trend in NPLs formation and an increase in coverage ratio from 68% to 71% in the subsequent quarters from June 2009.
Non-interest income continued its steady growth by 18% to Rs 13.0 billion which is a testatment to UBL's diverse income streams. Even though fee and exchange income declined year on year, this was offset by strong growth in capital gains and derivatives income.
Fee and commission income decreased by 7% to Rs 6.7 billion due to reduction in consumer and corporate lending, however, this was partially compensated by higher commodity commission and income from increased trade activity. Exchange income declined from Rs 1.7 billion to Rs 1.3 billion as we were able to capitalize on the significant exchange rate volatility in 2008. This year our emphasis has been more on servicing existing clientele where spreads have reduced due to aggressive competition.
Capital gain increased to Rs 697 million reflecting the strong performance of the stock market in 2009 which was up 63% on a YoY basis. In addition, derivative income contributed a healthy Rs 1.7 billion to the non interest income.
Administrative expenses increased by only 7% over the corresponding period last year. This is in spite of significant inflationary pressures with average 2009 inflation coming in at 13.9%. Nearly half of this increase is attributed to increases in premises expenses due to higher utilities and insurance expenses across the branch network.
LIQUIDITY
Liquidity of the bank has slightly decreased as compared to last year. About 80% of the total assets of the bank are comprised of its earning assets (lending to financial institutions, investments and performing advances) as compared to 83% in FY08. Performing advances forming a major chunk of the earning assets showed a 3% declined from last year to Rs 349.715 billion.
Total deposits increased marginally by 2% to Rs 504 billion primarily due to the Bank's conscious strategy of shedding expensive deposits. Expensive deposits decreased by Rs 27 billion to Rs 197 billion at year-end 2009. As a result, the proportion of current and savings account deposits in total deposits (CASA) increased to 67% (Domestic CASA at 75%) at year-end 2009 from 59% at 2008. Deposits this year saw a change in mix relying more on low cost deposits to form the deposit base. Domestic low cost deposit mix improved from 60% in 2008 to 66% in 2009. As a result of shedding domestic high cost fixed deposits by 12%, market share decreased from 9.6% in December 2008 to 8.8% in December 2009.
Advances were rationalized during the year leading to a reduction in fresh lending to stand at Rs 362 billion, lower by 4% as compared to the corresponding period last year. Lending in the consumer and corporate portfolio was controlled as a result of liquidity constraints, attributing to this decrease. The market share concurrently dropped from 9.2% in December 2008 to 8.8% in December 2009.
The advances to deposits ratio decreased from 77% in December 2008 to 72% in December 2009.
EARNING RATIOS
Total assets have grown this year by Rs 20 billion (up 3%) to Rs 640 billion over the corresponding period last year, with investments increasing by 20% to Rs 138 billion. UBL was able to maintain the return on average assets of 1.5%, the same level as of last year.
Deposits grew by 2% to Rs 504 billion. Whereas low cost deposits increased by 14%, this was offset by a 12% reduction in expensive deposits. Profit after taxation increased by 14% to Rs 9.488 billion resulting in an increase in return on deposits from 1.72% in FY08 to 1.88% in FY09.
Equity of the bank has risen by more than 50% to Rs 67.318 billion in FY09. There was a huge increase in surplus on revaluation of assets from Rs 1.64 billion in FY08 to Rs 9.12 billion in FY09. This resulted in a decrease in return on equity from 19% in FY08 to 14% in FY09.
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.
Yield on earning assets improved from 10.24% in FY08 to 12.04% in FY09. The cost of funding earning assets increased from 4.73% in FY08 to 5.55% in FY09.
ASSET QUALITY
The bank's non-performing loans in FY09 exceeded the level of NPLs in FY08. It grew from Rs 27.839 billion in FY08 to Rs 39.101 billion in FY09. 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 16% 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.
Non-performing loans to advances ratio increased from 7.5% to 10.8% over the year. Provisions to NPL also increased from 16.2% to 24.7%.
SOLVENCY
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.
DEBT MANAGEMENT
UBL had successfully stabilized its debt to equity ratio up until FY05. It had fallen after that due to rise in equity base. It then increased during FY08 due to a 15% increase in the total liabilities of the company with a less than proportionate increase (3.4%) in the equity base of the bank.
However, it again decreased from 12.79 to 8.51 in FY09. This decrease is a result of increase in equity by 38% over the previous year with only an increase of 2% in total liabilities. Deposits time capital decreased from 10.25 to 8.88 due to the increase in assets by 6%. Debt to asset also decreased from 0.93 to 0.89 as a result of increased assets.
DIVIDEND PAYOUT
The Board of Directors recommended a cash dividend of Rs 2.50 per share ie 25% and bonus issue of 10% for the year ended December 31, 2009. The cash dividend in FY08 was Re. 1 per share ie 10%. This resulted in an increase in dividend yield from 2.31% in FY08 to 3.90% in FY09. Dividend cover reduced from 8.31 to 3.42 times due to the higher DPS in FY09.
MARKET VALUE
Price-to-earnings ratio increased by 29% from 5.80 in FY08 to 7.50 in FY09. This was due to the increase in share price from Rs 43.3 to Rs 64.1. Market to book ratio increased from 1.00 to 1.10 over the year.
FUTURE OUTLOOK
During the year, State Bank of Pakistan continued to gradually ease monetary policy by reducing the discount rate by 250 bps from 15 percent at the start of the year to 12.5 percent in December 2009. These measures led to a substantial decrease in inflation from as high as 24.7 percent in November 2008 to 10.5 percent in December 2009. The lowering of interest rates should provide impetus for future lending and should also improve asset quality, which were impacted by the high borrowing rates. With the stock market registering a 63% YoY growth, narrowing current account deficits and strengthening foreign exchange reserves, we expect the economy to continue to stabilize and recover in 2010.
For UBL the key focus areas in 2010 will be liability management, acquisition of quality assets, controlling costs and improving efficiencies, right sizing the consumer business, building on our non fund income streams, risk management and restructuring of affected assets.
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UBL
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2004 2005 2006 2007 2008 2009
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Earnings Ratios
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Return on Assets (%) 1.36% 1.71% 2.24% 1.59% 1.38% 1.48%
Return on Deposits (%) 1.61% 2.06% 2.83% 2.10% 1.72% 1.88%
Return on Equity (%) 21.32% 27.46% 31.71% 19.81% 19.00% 14.09%
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Assets Quality Ratios
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NPL to Advances 13.95% 8.28% 6.57% 7.35% 7.50% 10.80%
Provisions to NPLs 2.17% 7.53% 12.14% 24.96% 16.20% 24.67%
Non Performing Loans (Rs in bn) 20.103 16.960 16.255 22.012 27.839 39.101
NPLs Growth 6.27% -15.63% -4.16% 35.42% 26.47% 40.45%
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Market Value Ratios
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Price to Earnings - - 13.00 18.40 5.80 7.5
Market Value to Book Value - - 3.70 3.40 1.00 1.1
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Debt Management Ratios
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Debt to equity 14.70 15.02 13.18 11.50 12.79 8.51
Deposit times capital 12.81 13.31 12.11 10.18 10.25 8.88
Debt to asset 0.94 0.94 0.93 0.92 0.93 0.89
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Liquidity Ratios
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Earning assets to assets 78.13% 81.27% 80.33% 82.95% 84.33% 79.73%
Advance to deposit 57.85% 67.17% 72.42% 74.27% 75.80% 74.26%
Yield on earning assets 4.34% 7.15% 9.70% 9.33% 10.24% 12.04%
Cost of funding earning assets 0.81% 2.14% 3.57% 3.85% 4.73% 5.55%
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Solvency Ratios
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Equity to assets (%) 6.37% 6.24% 7.05% 8.00% 7.25% 10.51%
Equity to deposits (%) 7.80% 7.51% 8.25% 9.82% 9.75% 11.26%
Earning assets to deposits (%) 92.50% 97.52% 101.49% 182.83% 180.36% 101.35%
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Dividend Payout Ratios
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Dividend yield - 2.92% 2.11% 1.84% 2.31% 3.90%
Dividend cover - 3.68 4.87 2.77 8.31 3.42
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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].
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