United Bank Ltd was established on November 7, 1959 as a public limited company under the Companies Ordinance 1984. The bank and is engaged in commercial banking and related services as defined in the Banking Companies Ordinance, 1962.
It is listed on all the three stock exchanges of Pakistan. The bank operates 1057 branches in Pakistan including the Karachi Export Processing Zone branch and 15 branches abroad.
One of the few banks of Pakistan to issue the GDR, UBL claims to be the largest investment bank of Pakistan. UBL has won "largest investment bank of Pakistan" award consecutively for the third time in 2005. They broadly include general banking, consumer banking, commercial banking, corporate banking, treasury, investment and international banking. It was also awarded Islamic Banking Branch licence by the State Bank of Pakistan on December 16, 2006 and therefore launched "Ameen", UBL's Islamic Banking initiative. The branch is located at M. A. Jinnah Road and initiated its operations on December 22, 2006.
United Bank Limited is one of the largest commercial bank 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.
With such intense competition among the banking sector of Pakistan, we have witnessed a rapid growth of the sector in the country in the past decade. The competition has provided a large consumer base as well as innovation of new products and services by the banks. The sector has also played a significant role in the fast paced economic growth of the country for the past decade. Then we can also see this sector's role in stock market of the country as in the year 2006 banks had a market capitalization 1/3rd of the overall market cap of KSE indicating the large share that the banking sector has in the market, while banks are also increasing their profits due to innovation of products and services to facilitate customers.
The banking sector has shown healthy growth in terms of profitability during the first nine months of the FY07. During this period, the sector enjoyed a 14.95% increase in profitability as the profitability of the 25 listed banks reached at Rs 68.95b in 9mths'07 as against Rs 59.98b in the same period last year. Compared to the first two quarters of the year, however, the third quarter of the fiscal year suffered a 30.12% decline in total profitability. This was largely due to three main reasons. Firstly, the sector witnessed an overall slow down in the credit expansion to private sector. Moreover, the increasing number of non-performing loans of the banks and unstable political and law and order situation in the country also adversely affected profits.
For the 3Q'07, UBL posted a significant growth of 5% in terms of profit before tax, with profit rowing to Rs 11.1 billion. Consequently, Net income stood at Rs 7.1 billion at the end of 3Q'07, up 3% against the same period last year. On profitability basis, UBL now ranks third in the country's banking sector.
The strong stance of SBP over the high interest rate spreads has resulted in a decline in the growth of net interest income. The company's Net mark-up/interest income before provisions has grown by 19% in the 9mths'07, reaching Rs 18.09b as against Rs 15.24b in 9mths'06. This growth came about mainly on the back of advances and investment portfolio, which rose by 13.2% and 72.8% respectively. This is comparable to the 18.05% growth witnessed by the entire banking sector during the same period. However, due to the adoption of the change in the computation method for calculating the provisions against non-performing loans, in accordance with the amendment and removal of the benefit of Forced Sales Value (FSV) by the SBP, the interest income after provisions increased only by 8% against the same period last year.
The non-interest income of the banking sector has grown at an impressive rate of 36.12% so that it stood at the level of Rs 56.95b in 9mths'07, compared to Rs 41.84b in 9mths'06. This translated into a 37% growth in non-funded income for UBL, bringing the figure to Rs 6.4 billion for the 9mths'07. All categories including commission income on trade, corporate finance fee income, dividend income and capital gains on sale of mutual fund units contributed to the growth. The most significant contribution, however, came from the rise in the dividend income and gain on sale of mutual funds units, which was up significantly by 99.7% to Rs 1.1b in 9mths'07 from Rs 0.56b in the parallel period of last year.
At the same time, Administration expenses showed a 28% increase over the three quarters last year. The main reasons are further investment in human resources (particularly in the consumer bank), training, incentive programmes and higher variable costs including advertising, commissions and loyalty programmes. However, administration expenses have remained flat compared to the previous quarter.
The deposits of UBL have shown an increasing trend over the years largely due to increase in saving deposits by customers, except for 2006 where we see a slight decline in saving deposits and large increment in fixed deposits. Likewise deposits by both customer and financial institutions have seen a growth except for the year 2006 in which deposits by financial institutions declined. Profits have also risen due to increase in advances, investments, and lending to financial institutions (Earning Assets). Hence, ROD has also shown an increasing trend. This has been the case because the profits for UBL have risen proportionally more with the increase in deposits. In FY03 the ROD was 1.42 that has inclined to 2.83 by 2006.
Due to significant increase in profits over the years, the ROA has shown increasing trend over the past years largely because the bank's earning assets have shown a significant increase combined with the low cost of funding of these Assets have resulted in high profits. Hence we can say that UBL has performed extremely well with respect to industry.
ROE had also shown an increasing trend over the past few years. It rose from 17.5% to 31.7% from FY03 to FY06 respectively due to high profits for the past four years continuously.
In line with the company's past record, the 9mths'07 saw an increase in the yield on earning assets as well as the cost of funding the assets. This bodes well for the future earning potential of the company, indicating that the returns would continue to increase. But increase in interest margin is a positive sign for the bank as it can hope for lower increase in costs in this year.
On July 25th 2005, UBL traded its share on KSE, hence we can see the absence of price in the year 2003 and 2004. UBL is relatively new in the market and up-till now it has performed extremely well. However we cannot claim from just 2 years data about investors confidence in UBL or other policies, hence we cannot say that P/E will increase or remain constant in 2007.
MV to BV ratio cannot be projected on two years data, however on basis of price projection we can say that it might decrease and then increase in the future.
The graph illustrates the performance of UBL stocks relative to the KSE 30 and KSE 100 Indices. The company's stock has generally followed the two Indices but during the third quarter of the fiscal year, the company position deteriorated considerably, falling below both Indices.
Dividend yield is given by DPS/price of share. Dividend yield has been low since due to higher price of share in 2006 compared to dividends declared which were also high but proportionally lesser than Profits. This shows that Bank prefers to reinvest profits rather then giving them out as dividends. This is again reflected in a high market value of share.
Dividend cover is given by DPS/EPS. It seems to be fluctuating but we can generalize that UBL is doing well by keeping stable Div-coverage around 15. Also we can see that UBL is building investor's confidence by gradually increasing the ratio.
The trend of asset quality ratio is similar to industry, as there was a decline in NPLs throughout the industry in 2005. However, banks indulged in aggressive loan policies as a result we again saw an increment in the numbers of defaults and hence NPLs in 2006. There was also a significant role of decreased regulations by banks which were competing to improve customer base, and also due to the increasing trend in interest rates (as most of the loans were on floating rate) thus again increasing the chances of defaults. This is reflected in the graph, as NPL as a percentage of advances declined in 2005 and increased in 2006, while the ratio of provisions to NPLs followed an opposite pattern, showing that the levels of provisions were not rectified in 2005.
Currently banks are trying to minimize NPLs, however there hasn't been significant effect, which maybe due to increasing trend of interest rates in the market.
In the 9mths'07, the banking sector recorded an increase in NPLs, which have negatively affected the profitability of banks. Moreover, a change has been brought about by SBP in the NPL computation requirements. This change has already been implemented in UBL, which has changed the computation method for calculating the provisions against non-performing loans, in accordance with the amendment and removal of the benefit of Forced Sales Value (FSV) by the SBP. This change in method has resulted in the incremental provisioning of Rs 1.97b, which has been accounted for in 9mths'07. Because of which provisioning against non performing loans increased by 88.8% to Rs 3.02b in 9mths'07 against Rs 1.60b in the same period last year.
The above data suggests that UBL is a highly leveraged company; however we can see that it has kept its leverage ratio constant at around 93%. This is also because of large share of deposits (around 88% of total liabilities), which can also be taken as good sign as UBL has succeeded a large number of depositors by strengthening its customer base. This will help in increasing future profits and market value of UBL shares in long term. Likewise UBL has also done excellent work on stabilizing debt to equity ratio; as a result we can see the ratio around '14' throughout the past few years. We have seen a lot of increment in saving deposits due to high foreign inflows in the form of worker remittances and foreign direct investment (FDR) deposits have emerged as the foremost source of financing for banks, and have shown a continuing strong increase. Hence we can forecast that deposits will increase with same pace in future which will lead to increase in assets with same proportion (cash being the major portion of assets). Likewise deposits time capital ratio also reveals a stable trend; ratio being close to '12' which also supports our conclusion that deposits will increase in future as UBL will try to attract more investors in the future to raise its capital.
The ratio of earning assets to total assets of the bank shows increment from 2003 to 2005. In 2006 however it rightfully fell to 93% as it had gone to high from where it had to fall. The advance to deposit ratio (ADR) on the other hand has shown an incline over this period for that is the industry trend due to an aggressive loans policy overtaking the strong growth in deposits. Thus we can see that bank has giving proportionally more loans with the passing of each year, this is actually a good sign as banks should invest or lend the money greater than MCR to maximize their profits, and thus we can also say that UBL is trying to stop the wastage of money by not keeping it idle.
The figures for FY07 show that the bank has maintained the ratios. We have seen a slight increment in earning assets to assets which is due to slightly higher earning assets this year. The industry as a whole has also experienced an ease in the liquidity position as a result of slower growth in loans. This slowdown in lending was caused by an increase in interest rates accompanied by less credit capacity in the market. Industry figures also show that banks have shown an increase in investment portfolios somewhat corresponding to the decline in loans, showing a shift in banks' policy towards lower risks and returns.
The positive trend in the earning assets to assets and advances to deposits trend is a good omen for UBL, reflecting the future earning potential of the bank. The increase in advance to deposit ratio also indicates the bank's efficiency in utilizing its deposits.
The solvency situation for the industry as a whole has shown marked improvement in recent years, caused by increasing profitability and fresh inflows of capital. The figures for the bank show that there was a decline in the solvency position in 2004 and 2005 but it improved in 2006 due to the increment in equity of bank. The increase in MCR by the SBP has also led to banks increasing their capital share and so we see an increase in solvency in 2006 after slight decline from 2003 to 2005.

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                               HY2007    HY2006
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Equity to Assets                 6.69%     6.8%
Equity to deposits               8.25%     8.5%
Earnings Assets to Deposits    105.17%   107.6%
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The half-yearly figures of 2007 suggest that the bank is advancing toward solvency due to increases in capital. However, it should be noted that the general trend of industry is also similar.
FUTURE PROSPECTS: With such an excellent performance by banking sector, we can hope that the banking sector will continue to perform remarkably well in the long term. Not only the banking sector is dependent on the economy now, but the country's own economy is becoming more and more dependent on banks. Thus, we can say that the banks will play a very important role in country's economy in future. 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 also have a tendency to stabilize in the future, however, it will be directed by the growth and the capital demand of business and consumer sectors. Also the trend of future interest rates will direct the demand as well effecting NPLs. Besides this, new Islamic and other foreign banks are expanding banking industry in Pakistan and foreign and Islamic banks' presence, besides mergers and acquisitions will enhance competition in the banking sector.
The bank has been actively spreading its branch network, which has risen to 1,056 with the opening of 8 new branches during 3Q'07. Other expansion plans undertaken by the company include; the introducing of restructuring of business processes, launch of new facilities like "UBL PayPlus" and launch of UBL's fifth fund (which is the second Islamic fund by UBL).
NPL has also an important role to play in future because SBP has identified it as one of the challenges in banking industry. SBP is in struggle to not only reduce NPLs in long term but also to increase the advances. Therefore SBP will aim at more regulation, and will keep check on banking sector. Hence SBP needs to tighten its regulatory system to minimize defaults and risks by keeping track of borrowers, their credibility, their past records and also the type of assets they own.
Moreover, as an additional effort for further tightening the monetary policy, SBP has recently decided to raise the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. The high earning asset ratio of UBL suggests that the bank will benefit from the zero rating of CRR on the >1 year deposits by having more to lend.
Financial stability will further benefit from State Bank efforts to operationalise Real-Time Gross Settlement System (RTGS) named as PRISM (Pakistan Real Time Interbank Settlement Mechanism) in June 2008 that will allow shift from traditional paper-based, end-of-the-day settlement system to electronic payment system for large value, low volume interbank funds' transfers and settlements.
Additionally, stance of SBP to reduce the banking sector spreads shall result in a further decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit as mentioned above.
However it is expected that the political situation in the country will stabilize as the recently elected party assumes government office. This will have a positive impact on the banking sector profitability.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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