United Bank Ltd was established on November 7, 1959 as a public limited company under the Companies Ordinance 1984. The bank was incorporated in Pakistan and is engaged in commercial banking and related services as defined in the Banking Companies Ordinance, 1962.
UBL was privatised in 2002, with Abu Dhabi Group (UAE) and Bestway Group (UK) each acquiring 25.5% of the shares and management control. The Bank is listed on all the three stock exchanges of Pakistan and operates 1057 branches inside Pakistan including the Karachi Export Processing Zone branch and 15 branches outside Pakistan.
One of the few banks of Pakistan to issue the GDR, UBL claims to be the largest investment bank of Pakistan. Their services broadly include general banking, consumer banking, commercial banking, corporate banking, treasury, investment and international banking. UBL was also awarded the Islamic Banking Branch license by the State Bank of Pakistan on December 16, 2006 and therefore launched "Ameen", UBL's Islamic Banking initiative.
UBL has entered in insurance business by UBL Insurers Limited, which seeks to bring banking and insurance together in offering financial solutions. UBL Insurers Limited is an incorporated insurance company registered as an insurer with the Securities and Exchange Commission of Pakistan.
The Bank's long term rating is AA +, which denotes good credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. The short-term rating is A-1+, which denotes the highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding and safety is just below risk free Government of Pakistan's short-term obligations.
RECENT PERFORMANCE (JANUARY-SEPTEMBER '07):
In the first 9 months of CY07, UBL posted an after-tax profit of Rs 7 billion, slightly higher than the corresponding period of last year. There was a substantial increase in both interest and non-interest income from the comparable last year period. However, there was a significant rise in administrative charges, as well as a much higher debit to the provisions for NPLs account, and a larger bad-debt write-off. Non performing loans rose substantially to Rs 23.8 billion, as compared to Rs 16.25 billion at the end of CY06, thus showing a 47% rise. Advance to deposit increased slightly to 73.5% from 72.4% at the end of last year. The bank has also opened 3 new branches for the purpose of Islamic banking this year, putting the total at 4.
ANALYSIS OF PERFORMANCE CY03-CY06:
The deposits of UBL have increased by 15.9% in 2006 from Rs 289mn to Rs 335mn. Increased forex inflows in the economy, particularly remittances have caused the deposits to swell. There has been a 59% increase in deposits overseas. Till 2006 savings deposits had been rising but the trend reversed in 2006 where a slight decline in saving deposits and large increment in fixed deposits has been seen.
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2006 2005
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Fixed deposits 114,927,897 79,841,687
Savings deposits 121,878,162 122,662,484
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This is generally the trend in the banking sector where banks are looking to increase their capital base and are offering better rates on long term fixed deposits on the back of supportive policies by the SBP. The SBP reduced the CRR on time liabilities from 5% to 3%. Profits have also risen due to increase in the earning assets of the bank. For UBL the EA grew by 20% with a major increase in lending to financial institutions.
ROD has increased to 2.8% from 2.06% in the year 2006. This is an indicative that the bank has been able to successfully mobilise its resources and has functioned in a profitable function. The increasing proportion of fixed deposits ensures availability of capital for making earnings over longer periods and so a higher ROD could be expected for FY07.
The ROA has increased to 2.24% in 2006 from 1.71% in 2005. Compared to industry average of 2.1% UBL is better off. But in comparison to other public sector commercial banks with an ROA of 2.7% UBL needs to further improve its investments portfolio and loaning system for higher incomes.
UBL's equity has risen as a result of its profitability over the studied period. Even then the ROE has shown an increasing trend over the past few years. It rose from 17.5% in FY03 to a high 31.7% in FY06. This puts UBL among the top ten banks of Pakistan in terms of ROE. An industry average of 23.8% is an indicative that UBL has low reliance on external finance compared to other banks.
Liquidity has shown a declining trend over the period of analysis, as shown by the bank's increasing advance to deposit ratio (ADR). This decline has been exhibited by the banking sector in general, and has been caused by the fact that while deposits have shown a tremendous increase, banks have also been pursuing more aggressive strategies with respect to credit to consumers and to the private sector. Industry ADR stood at 70.3% in CY06 as compared to 66.5% in CY05, 61.5% in CY04, and 52.5% in CY03. The rise in economic activity has fuelled the rapid growth of deposits, and UBL with its long-standing reputation and widespread presence has been well-placed to take advantage of this situation. Hence deposits increased by a remarkable 24% and 26% in CY04 and CY05 respectively, increasing further in CY06 by 16%. Although growth slowed during the last year, the trend is shown by the industry as a whole in 2006, where deposit growth slowed from 18.3% in CY05 to 13.1% in CY06. Overall deposits increased from Rs 185 billion in CY03 to Rs 403 billion in CY06. The industry has shown a trend towards increasing deposits, a major cause of which is, of course, the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts at marketing. Industry segmented analysis and comparisons reveal that the growth in deposits in the top five banks with respect to assets, including UBL, has actually been less than that in the next five banks. Local Private Banks, have, however, shown the highest deposit growth in the industry. For UBL, the rise in deposits occurred in both local and foreign currencies. The thrust of this increase was displayed by customer deposits, which showed strong growth throughout, and form nearly 99% of all deposits. Institutional deposits showed large variation, and declined in general, bottoming out at a five-year low of Rs 60.6 million by the end of CY06. A significant trend within the deposit structure has been that fixed deposits have shown a much steeper rise than saving deposits. Fixed deposits increased by 19% in CY04, then showed a remarkable 86% climb in CY05, further increasing by 44% in CY06. This extraordinary growth is also shown by the level of fixed deposits, which rose from a mere Rs 36 billion in CY03 to nearly Rs 115 billion in CY06. On the other hand, savings deposits showed dismal growth rates of 16%, 4% and negative 0.6% in CY04, CY05 and CY06 respectively. This general shift towards fixed deposits is also reflected in industry figures, where the share of savings deposits in total deposits declined from 41% in CY05 to 36% in CY06, while that of fixed deposits increased from 26% to 31% in the same period. This shift in the deposit structure has been attributed to the increasing rates of return that banks have been offering on fixed deposits in response to increasing competition for funds and growing pressures from market forces. In the same period, advances showed an even greater rate of increase. From Rs 92.5 billion in CY03, advances showed a growth of more than 50% in CY04, 44% in CY05, and 21% in CY06, reaching a level of Rs 243 billion. Despite the tightening of the monetary policy by SBP, alternate sources of funds and increasing equity levels have allowed the bank to carry on the expansion of its loan portfolio at a rapid pace. But the yearly growth rates in advances also reveal that this growth has slowed down over time, especially in CY06. The reason behind this slowdown is the increasing credit concentration of all markets which makes it difficult for them to continue to absorb credit at the same pace. At the same time, SBP's stricter monetary policy has increased the cost of borrowing. The high infection rate of advances is also responsible, as the industry in general has deliberately decelerated the expansion of its credit portfolio to improve screening, monitoring and regulation of loans. A sectorwise breakdown of credit shows that this deceleration has affected all the major sectors - corporate, consumer and SME. In the corporate sector a major trend identified as responsible for it is the sluggishness in demand for fixed investment credit, which was mainly a result of lack of economic growth in some sub-sectors that reduced their capacity to absorb loans at the same pace, while in some sectors it was also because of increasing reliance on retained earnings or foreign borrowings. The high-growth consumer finance sector also experienced deceleration, industry figures showing a growth of 66% in CY05 but only 29% in CY06. SME finance growth also slowed down from 27% in CY05 to 13% in CY06. Industry figures also reveal a greater level of diversity in loan portfolio and reduced differences between sectors, improving risk diversification and generating more productive alternate avenues of earning.
On the other hand, as it is a common characteristic of banks, the part of total assets maintained as earning assets has remained quite consistent over the period under study.
What has differed, however, is the composition of earning assets. Over the years, deposits have made up an increasing share of earning assets, while investments have declined. Investments made up 18% of total assets in CY03, 13% in CY04, 11.5% in CY05 and 10% in CY06. On the other hand, advances were 30% of assets in CY03, 34% in CY04, and 37% in CY05 and CY06. Industry figures also show that in CY06, the share of advances in total assets increased to 55.8 percent from 54.4 percent in CY05, while the investment portfolio of the banking system further lost its share to 19.2 percent from 21.9 percent in CY05.
This also shows that advances form a lower share of assets for UBL than is the industry norm, suggesting that the bank would also have lower risk-weighted assets and corresponding capital requirements. However, the increasing rate in loans would also lead to higher risk-weighted assets, suggesting that the industry is aiming for higher yield on earning assets by exploiting its higher than required capital adequacy.
The earning assets have, in general, shown a trend of increasing yields and costs. Yield increased from 8% in CY05 to 10.6% in CY06, while industry figures rose from 7.6% to 9.3% in the same period. Thus UBL achieved a generally higher level of yields on its earning assets. There had been a declining trend in both yield and cost of earning assets till CY05 due to a corresponding downward trend in interest rates. However, since CY05, interest rates have been on the rise.
This led to an increase in yield because the high liquidity carried over from the previous period allowed banks to penetrate into new business ventures carrying higher yields, while at the same time shifting assets from investments to advances, a trend also explained elsewhere. On the other hand, although the cost of earning assets also increased, factors, like steady inflows, relatively less interest rate sensitivity of the depositor, not to mention the liquidity preference of the depositors for maintaining checking/transactional accounts (saving and current) caused a relatively smaller increase in the cost of funds of the bank.
The advance portfolio grew by 21% to Rs 247 billion with domestic share of advances coming in at 9.2% by the end of 2006 (2005: 9.3%). Their asset quality also improved with net NPL to gross loans ratio dropping to 1.56% from 1.67% last December based on a provisioning coverage of 75%. The NPL has declined by 4.2% to Rs 16.2bn which is an indicator of prudent lending policies of the bank. This followed an industry-wide trend, where NPLs decreased to Rs 177 billion in CY05 from Rs 211 billion in CY03.
UBL like other banks has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors. Industry NPLs stood at Rs 175 billion at the end of CY06. Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs.
The debt management figures show that the bank has been following a very stable policy regarding its leverage position. Debt to equity of the bank has also seen a decline to 14.0 in 2006 (2005: 14.9). Debt to assets declined only marginally from 93.7% to 93.3% in this year. The banks debts have increased from Rs 325bn to Rs 393bn in 2006, an increase of 21%. Similarly, the bank's assets have grown by 22% to Rs 423bn in 2006 (2005: Rs 347bn). Besides, with increase in share capital, reserves and retained profits, the bank's equity also expanded by 38% which is the cause for the decline in debt to equity ratio of the bank.
In general, the solvency situation for UBL showed a decline till CY05, after which it picked up in CY06. From financing 7% of total assets in CY03, equity financed 6.4% in CY04 and 6.2% in CY05, although after that it financed 7.1% in CY06. Similarly, equity to deposits decreased from 8.1% in CY03 to 7.5% in CY05, then increased to 8.9% in CY06, while earning assets to deposits dropped from 0.43 in CY03 to 0.28 in CY05, then rose to 0.29 in CY06. In the period of analysis, UBL did not issue any bonus shares till 2006, and while reserves and unappropriated profit showed steady yearly increases, the equity growth rates of 15% and 25% in CY04 and CY05 were not enough to balance the 25% increase in deposits in both years.
In CY06, however, a combination of a slowdown in the deposit growth rate to 15% and an issue of bonus shares increased the solvency of the bank. SBP also recently increased the MCR for banks to Rs 3 billion by the end of CY06, with yearly increments of Rs 1 billion to reach Rs 6 billion by the end of CY09. The effect of these regulations on UBL is minimal since being the second largest bank in Pakistan it already meets foreseen increases in capital requirements till CY09.
UBL got listed on the KSE on July, 25th 2005. UBL is relatively new in the market but has performed well. Earnings as mentioned earlier have remained high for UBL giving an EPS of 14.62 in 2006. Since privatisation UBL has aggressively pursued its goals of increasing and diversifying its customer base and has attained appreciable success. This is reflected in the investors confidence who are ready to trade the share at a p/e multiple of 9.72(FY06). The prices of UBL share fluctuated between Rs 114 and Rs 180 averaging Rs 142 for the year 2006.
With the increase in the equity of UBL the bank's BV has risen considerably. But again this increase is matched by the increase in the share price. At a multiple of 3.08 the share is overvalued but the expectations of the investors of a progressive banking sector and a tight monetary policy still favouring it makes UBL a suitable long term investment.
Dividend yield as given by DPS/Price of share has been low. Unlike other banks UBL is not too inclined on retaining profits. In fact its dividend policy has been consistent over the years. Not only bonuses but it has also been giving cash dividends to investors. This is also the reason for the rise in price of UBL's share and hence a decline in its yield. Dividend cover has improved for 2006. At the end of the year 2006 there was a cash dividend of Rs 3 per share. A dividend of Rs 1,942,500 was paid. The dividend cover has increased due to higher earning of the bank but the dividends haven't been equally high. This indicates that the bank has been reinvesting some profits for expanding its services.
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2003 2004 2005 2006
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Dividends Paid in Cash 1,165,500 777,000 1,295,000 1,942,500
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GDR of UBL:
UBL is one of the few banks of Pakistan to issue GDR, which were used as a means by the Government to divest part of its holding in the bank. The issue has been quite successful, attracting a demand of USD 2.5 bn, which is the largest bookbuild for a Pakistani international offering. The books closed 3.5x over subscribed, including interest from top quality long-only funds along with some of the world's leading momentum investors. The GDRs were priced at a tight discount of 5.3% to last sale despite a price increase of 27% from the time Merrill Lynch/KASB were mandated the launch in March end to June 22nd.
Premium valuation was achieved with UBL's offering pricing at a Price/Book of 5.31x, which was a premium of more than 63% to the mean of its Pakistani peers. The GDRs have resulted in a hugely enhanced international profile for UBL, with 56 international investors allocated in the order-book with wide representation across regions and fund types. The share price stayed at an avg. 8% above the offer price in the days following pricing.
FUTURE PROSPECTS:
The banking sector seems set to continue its strong growth trend. The boom in the economy has particularly favoured the services sector, and of course banking is a vital part of the economic growth of any country. Thus the current growth momentum is likely to sustain into the near future at the least. The trend in remittances and foreign direct investment is also likely to continue, which would aid banking sector growth. The loan portfolio of banks would, however, depend on the growth and the capital demand in the corporate and consumer sectors, and future interest rates will of course exert an influence on overall demand as well as NPLs.
Banks are likely to use current high capital adequacy to expand their loan portfolios, and tap different markets. The ongoing implementation of the Basel II capital accord provides a comprehensive and more risk sensitive capital allocation methodology. This will enable banks to optimise their resources in terms of their risk exposures. Its implementation, however, has become a very challenging task for the regulators around the world, keeping in view the fact that it prescribes significant up-gradation of risk management standards and technological advancement within banks.
If the current slowdown in loan growth continues, banks are likely to further increase their investment portfolios. The Government has also shown heavy borrowing needs from banks, and this is also likely to draw funds away from loans.
The challenge facing the banking industry, according to SBP's industry overview, is to increase the monitoring and regulation of loans to reduce NPLs while at the same time keeping loans high to sustain the high ROEs prevalent at the moment, especially when growth in capital is expected. This could be accomplished by tapping new, less risky areas, broadening the base of credible borrowers, adoption of strict monitoring and improving corporate governance standards.
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2003 2004 2005 2006
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LIQUIDITY
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Earnings Assets to Assets 79.35% 78.13% 81.27% 80.33%
Yield on earning assets 11.23% 12.08% 26.14% 37.13%
Advance to deposits 51.94% 57.85% 67.17% 72.42%
Cost of Funding earning assets 2.37% 2.47% 2.25% 6.80%
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SOLVENCY
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Equity to Assets 6.94% 6.37% 6.24% 7.05%
Equity to Deposits 8.13% 7.54% 7.49% 8.91%
Earning Assets to Deposits 0.43 0.32 0.28 0.29
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EARNING
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Return on Assets 1.21% 1.36% 1.71% 2.24%
Return on Equity 17.51% 21.32% 27.46% 31.71%
Return on Deposits 1.424% 1.608% 2.057% 2.826%
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MARKET VALUE RATIO
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Price-Earnings ratio 0.00 0.00 9.32 9.72
Market-Book value ratio 0.00 0.00 2.05 3.08
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DEBT MANAGEMENT
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Debt to Equity 13 14 15 14
Debt to Asset 93.062% 93.379% 93.701% 93.311%
Deposits time Capital 12.30 12.81 13.31 12.11
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