Profits are a little harder to come by for the local banking industry these days. Much like other big banks, doom also befell the profitability at UBL Bank Limited for the half-year period ended June 30, 2018. Let’s discuss UBL Bank’s standalone results, which account for the bulk of group (consolidated) financials.
There are three main reasons behind the UBL Bank’s 54 percent slump in pre-tax profitability over 1HCY17. Up the line, the 0.1 percent, paltry growth in net interest income (NII) came on the heels of 9 percent growth in interest-earned and a proportionally-higher, 20.5 percent growth in interest-expensed.
The mark-up earning growth has come about as the bank lent aggressively. Amid rising interest rates, the bank’s net advances went up 12 percent, in the six months since December 2017, to Rs675 billion – thanks mainly to growth in local corporate and commodity loans. Hence, there was a strong, 27 percent growth in mark-up from ‘advances to customers’.
However, the overall mark-up-earned growth was subdued thanks to lower earnings from ‘lending to financial institutions’ and earnings from ‘investments’. Investment yields have come down lately, even as the bank reduced its investment portfolio by 27 percent since December 2017 to Rs800 billion as of June-end 2018.
On the mark-up-paid front, the disproportionately-higher growth didn’t owe to deposits, whose size grew 2 percent in the six-month period to Rs1.315 trillion. (In fact, domestic CASA had improved by nearly 6.5 percentage points over 1HCY17 to 89.6 percent, besides the cost of domestic deposits came down 15bps to 2.6 percent). The culprit here was big jump in mark-up expensed, by about 51 percent on ‘securities sold under repurchase agreements’ and about 83 percent on ‘other short-term borrowings’.
The second factor that was over Rs4 billion booked under provisioning. As per bank data, UBL’s domestic operations saw a net reversal of Rs544 million in 1HCY18; but the bank took a provisioning of Rs5.1 billion on its international operations – to beef up coverage to 71 percent (June 2018), up from 58 percent (December 2017). The bank’s domestic asset quality, however, improved from 6.2 percent in December 2017 to 5.2 percent in June 2018.
Some fillip was provided in the middle by almost 16 percent year-on-year growth in non-interest income. The ‘fee income’ grew by 14 percent over 1HCY17 on account of healthy growth in home remittance revenues, trade commissions, Bancassurance revenues and commissions on cash-management. The bank also scored well on account of capital gains (mainly from PIBs) and forex income (due to higher volumes).
But those gains were wiped by an item rather extraordinary – Rs8.4 billion “pension liability” accrued in 1HCY18 in pursuance of an apex-court order passed earlier this year. In the end, the standalone bank posted a net profit of Rs6.3 billion, down 53 percent year-on-year. At this pace, the bank will close CY18 with profits roughly half of the year before.
The era of blockbuster profits seems over, until another one arrives under benign macroeconomic fundamentals. Going forward, UBL will need to lend cautiously as interest rates rise further. There is indeed an opportunity to boost spreads by lending more; but doing so may also raise NPL concentration in the loan book. A lot now also rides on how well the bank handles its investment portfolio.
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