United Bank Limited (UBL) was established on November 7, 1959. It opened 34 new branches in 2007 and aimed to open 40 more branches during 2008. The bank has a total network of 1,112 domestic branches. UBL established two more corporate centres and now it has five corporate centres offering financial solutions to corporate clients in all main business centres of the country.
The bank became the second largest network provider in Pakistan with 326 ATMs installed in 83 cities. For the convenience of its customers, UBL started the utility bills payment system facility through its vast ATM network. UBL became the first bank to introduce UBL Orion, the first complete mobile payment solution in Pakistan. With UBL Orion, the bank's account holders can use their GSM mobile phones for purchase of prepaid mobile cards, payment of utility bills and for transfer of funds to other UBL Orion members.
On the international front, the bank opened two new branches in Qatar and Yemen in 2007. With this, the bank's total overseas network expanded to 17 branches. Increase in the cost of borrowing due to continued tightening of the monetary policy and slow down in the LSM sector of the country had decreased the domestic demand for credit. Despite this, UBL's advances increased by 24% during 2008. The total advances stood at Rs 371 billion at December 2008 as compared to Rs 299 billion at December 2007. Demand for credit was seen in the corporate financing sector and due to this, 46% increase in UBL's advances portfolio is on account of growth in domestic advances.
During the 2QF08, the bank faced a liquidity crunch and had compelled to slowdown its lending rate. This caused the bank's market share in advances to fall from 9.4% in 2007 to 9.2% in 2008. Strong growth in advances portfolio has led to a 17% increase in net interest income to Rs 28.1 billion. Strong growth in UBL's corporate business has contributed towards the increasing volume of advances. UBL financed four largest IPP projects in 2007 and became the major lender to the power and energy sector of the country.
Advances were extended to power, energy, fertiliser and telecom sectors. The bank increased its focus to telecom and defence sectors and strived to increase its customer base from the existing portfolio. During FY08, the corporate advances grew by 27%, followed by a 26% increase in commercial and 51% increase in international advances. However, the consumer advances of the bank could not match this performance and decreased by 23%. Consumer banking of the bank may have suffered due to the rising interest rates and inflationary pressure in the economy that have reduced the debt servicing ability of the consumers.
UBL has been a market leader in the consumer business segment with a 13% overall market share in previous years. The bank's consumer business stood at Rs 42.7 billion and formed 17% of its total loan portfolio in 2007. However, there was a 9% decline in the consumer segment of the bank during the period Jan-Jun FY08. The bank has made efforts to sustain its position in this sector by developing loyalty programmes and improving its products eg, it launched the Galleria Picture Card, which is the first chip enabled picture credit card in Asia Pacific region. The consumer business was not able to fully recover during FY08 and stood at Rs 36.4 billion and formed 13% of UBL's total loan portfolio. Corporate business of the bank contributes 61%, while commercial advances account for 22% in total advances portfolio of the bank.
UBL's international business contributes 30% to overall bank profits and 25% to total assets. The international business is based more on commercial banking, including real estate development and civil construction contracting. UBL started mortgage loans in the UAE and Bahrain, and auto loans in Qatar in 2007, showing that the bank was trying to further expand its consumer business overseas. It is focusing on a strategy to expand its overseas franchise and obtained a licence to establish a representative office in Beijing by the Chinese Banking Regulation Commission. The international business has shown strong growth during FY08 and the profit before tax through international operations increased by 30% to Rs 2.7 billion.
The balance sheet position of the business has also been strengthened with deposits growing by 46% to Rs 104 billion and advances by 51% to Rs 97 billion. The deposits of the bank have been increasing over the years and by December 2008 the deposit base grew by 21% to Rs 484 billion. Low cost deposits accounted for 33.3% of the increase. The domestic deposits of UBL increased by 15% to Rs 380 billion, during FY08.
Thus, bank's market share grew from 9.1% in December 2007 to 9.6% in December 2008. Generally, there is excess liquidity in the market and banks do not need to raise their deposit rates to attract depositors. Instead they compete by offering new and innovative products. UBL has managed to expand it deposit base, especially the low cost deposits by introducing new products eg it offered a higher yielding saving product with the advantages of a checking account facility in 2007. Low cost CASA deposits have a share of 59% in the total deposit base of the bank.
PROFITABILITY
UBL has experienced strong growth in profits over the past years. However, the bank could not maintain this rising trend of profitability in 2007 when it posted a profit after tax of Rs 8.4 billion, which was 11.25% lower than 2006. The profits decreased despite a substantial growth in the interest and non-interest income of the bank. This was due to a substantial increase in the interest expense (cost of funds) of the bank. The bank's interest expense started increasing since 2004, as the proportion of low cost CASA deposits declined while that of fixed accounts increased.
Also, the SBP withdrew the benefit of Forced Sale Value and the banks were expected to change the computation of provisions from September 2007. Increased provisioning under the SBP Regulations for the year limited the positive impact of increase in interest income. Thus increased provisioning and high administration expenses due to higher personnel cost in the consumer business and the introduction of Early Retirement Scheme (ERS caused an impact of Rs 345 million) had a negative impact on profits in 2007. UBL was also incurring increasing expenses in order to upgrade and expand its branch network over the years.
QUARTERLY TREND OF PBT AND PAT
After a decline in UBL's profitability in 2007, the profits of the bank picked up considerably in the first quarter of 2008. Although the PBT and PAT of 1Q08 were lower than that of the same period in 2007, the PBT of 1Q08 reached the same level of Rs 4.4 billion, from which it had dropped in 2Q07. The PAT was Rs 0.3 million higher than the mark from which it had fallen in 2Q07. During HY08, the net interest earned grew by 17% as compared to same period last year to Rs 23 billion due to growing volume of advances and strong yields on the portfolio. However due to increased provisioning against advances and consumer loans and bad debts written off, the net interest income decreased by 4% vis-à-vis HY 07.
The non-interest income of the bank grew mainly due to increased fee income, income from dealing in foreign currencies and derivatives gains. UBL is a main player in the derivatives market and this help boost the non-interest income of the bank considerably. For the period Apr-Jun 2008 (2Q08) UBL posted a PBT of Rs 4.5 billion. The PBT for HY08 was limited by the combined impact (Rs 0.8 billion) of Workers' Welfare Fund (WWF), increased provisioning of NPLs under SBP's regulations and Early Retirement Scheme (ERS). Administrative expenses increased with premises costs increasing due to addition of five new branches, ongoing branch renovations and investments in call centre and core banking facilities.
PAT for 2Q08 was lower than that posted in the previous quarter. During the first nine months of FY08 the bank achieved total profit before tax of Rs 13.7 billion. It was 24% higher than the PBT earned during the same period last year. However, in the last quarter of FY08, the bank's profits fell considerably. The PBT in the 4QFY08 amounted to only Rs 0.1 billion while the bank incurred a loss after tax of Rs 0.6 billion. The main reason behind this was the bank's decision to absorb 50% of the impairment loss on the equities portfolio during FY08. SBP had provided the relaxation to the banks to absorb this loss in 2009, but UBL's management decided to include 50% of it in the current year. Thus, UBL included a pre-tax impairment loss of Rs 1.88 billion in its profit and loss account of FY08, depressing its profits for the period.
ANNUAL RESULTS
UBL's impressive performance during the first three quarters of FY08 enabled it to post a 7% higher profit before tax of Rs 13.9 billion in 2008 as compared to 2007. The profit after taxation decreased slightly from Rs 8.4 billion in 2007 to Rs 8.33 billion in 2008 due to higher 20% higher taxes. Net interest income before provisions was 17% higher (Rs 28.1 billion in FY08 as compared to Rs 20.8 billion in FY07) due to a 24% increase in average advances. Along with higher advances, the bank's lending rates also increased, resulting in higher net interest income for the period.
Thus, the interest earned during the period was 27% higher in FY08 than that earned during FY07. However, higher deposit rates due to 5% minimum rate of return on savings deposits set by SBP and an overall increase in the bank's cost of funds. Net provisions against non-performing loans (NPLs) and bad debts written-off, increased by 26% during FY08. One of the causes of higher provisioning during 2008 was the deteriorating quality of the bank's asset (advances) and rising NPLs in the consumer and corporate portfolios of the bank. However, the major reason was the inclusion of the Rs 1.88 billion impairment loss booked on equities and an additional Rs 349 million impairment of investment in associates.
Non-interest income continued to grow during FY08, increasing by 16% to Rs 10.4 billion. This was due to 22% higher fee and commission income (due to an overall growth in trade commissions, income generated on remittances and high corporate finance fees) and strong exchange gain income (doubled to Rs 1.8 billion) earned due to the volatility in the Pak rupee. Administrative expenses increased by 16% with premises cost contributing to nearly 34% of the increase, largely due to the increase in rent and utilities on the existing branch network and infrastructure along with core banking facilities. The Welfare Fund in the Finance Act 2008 contributed to this increase. Also the personnel and general operating expenses of the bank rose.
EARNING RATIOS
UBL's earning profile shows that the bank's earnings had been improving every year till 2007. In 2007 the profit after tax decreased by 11.25% while the bank's assets increased by 25%, making ROA decrease. The same situation continued in 2008 as the earning ratios of the bank further deteriorated. The ROA ratio declined from 1.59% in FY07 to 1.38% in FY08. This was because of the decrease in PAT during FY08 while the assets of the company increased by 14%.
The asset base of the bank increased in 2007, mainly due to a huge increase in fixed assets (from Rs 5 billion in 2006 to Rs 16.9 billion in 2007). The fixed assets further increased to Rs 18 billion in 2008. UBL is investing in premises and expanding its infrastructure. The bank opened around 34 new branches under its new branch expansion programme. The bank's earning assets increased overall by 16% during FY08 due to 24% increase in advances. There was only a slight increase in investments and an 8% decline in lending to financial institutions. Investments in market T-bills decreased and since they are a major portion of the bank's investments in federal government securities, the impact of the decline was noticeable.
The equity of the bank increased by 3% as more ordinary shares were issued during FY08 and the share capital of the bank increased from Rs 8,093.750 million in 2007 to Rs 10,117.188 million in 2008. UBL had also decided to increase its authorized capital from Rs 10.2 billion to Rs 20 billion. As the profit earned during 2008 was lesser compared to previous year while the deposit base and equity of the bank increased, the ROD and ROE both declined. 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.
The yield on earning assets reduced in 07 due to the decrease in profit after tax. The interest expense rose by 40%, resulting in the increase of cost of funding earning assets in 2007. In 2008, the performance of earning assets improved as the yield to earning asset ratio increased. Yield on earning assets increased due to higher interest earned during the period owing to higher advances and lending rates of the bank. However, at the same time, the cost of funding earning assets also increased due to 42% higher interest expense during FY08 as the deposits and the return on deposits increased.
ASSETS QUALITY
The effect of withdrawal of the Forced Sale Value benefit by SBP is evident in the provisions to NPLs ratio in 2007. During 2Q08, there was a 120% increase in the provisioning against loans and advances compared to 1Q08. However, the level of net provisions was much lower than the levels set in 3Q and 4Q of 2007 when the FSV benefit was first withdrawn. The bank's NPLs to advances ratio had been decreasing over the years showing that the bank had employed a prudent credit policy to control its NPLs, which fell in 2005 and 2006.
This was the trend in the entire banking industry however; banks indulged in aggressive loan policies as a result of which there were huge increments in NPLs in 2007. 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. As NPLs as a percentage of advances declined in 2005 and increased in 2006, the ratio of provisions to NPLs followed an opposite pattern, showing that the levels of provisions were not rectified in 2005.
The bank's non-performing loans at Dec-2008 exceeded the level of NPLs in Dec-2007. 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 19% 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.
DEBT MANAGEMENT
The debt management ratios of UBL suggest that it is a highly leveraged bank although UBL's debt to asset ratio (leverage ratio) has slightly fallen. Deposits form 86% of UBL's total debt and the deposit base has been increasing considerably over the years. In 2006 the growth rate of assets was more than the rate of increase in total debt of the bank and thus the bank experienced a decrease in debt to asset ratio. During FY 08, liabilities and assets have increased with the almost the same proportion (15% and 14% respectively).
UBL had successfully stabilized its debt to equity ratio up until 2005. It has fallen after that due to rise in equity base. UBL may raise its share capital further as it has recently resolved to increase its authorized capital from Rs 10.2 billion to Rs 20 billion. Like D/E ratio, deposits time capital ratio has also revealed a declining trend. The debt to equity ratio of UBL increased during FY08. It is due to a 15% increase in total liabilities of the bank with a less than proportionate increase (3.4%) in the equity base of the bank.
The deposits of the bank have increased by 21% along with subordinated loan amount. The debt to asset ratio has been maintained more or less around 0.92. The assets increased by 14% during the FY08. Total assets have grown by to Rs 605 billion with gross advances increasing by 24% and a major increase in the UBL's balances with other banks. Domestic advances accounted for a major portion of this increase due to disbursements to the power, energy, fertilizer and telecom sectors.
LIQUIDITY RATIOS
Liquidity ratios of UBL present a favourable picture. The increasing liquidity of the bank indicates that UBL is in a comfortable position in case any contingencies and credit risks may arise. The bank can also guard against any significant increase in NPLs. About 80% of the total assets of the bank are comprised of its earning assets (lending to financial institutions, investments and performing advances). There was a decrease in the investments and lending to financial institutions during HY08 and therefore the earning assets have grown at a slower pace than that of total assets.
UBL has a large deposit base which is growing every year but the advances have been growing at a faster pace. Therefore there has been a rising trend in the advances to deposit ratio of the bank. The increasing advances to deposit ratio shows that the volume of advances are growing and covering more and more of the deposits (liability) every year. The liquidity ratios of the bank have remained almost the same during the first 3 quarters of FY08.
SOLVENCY RATIOS
The solvency position of UBL improved in 2007. 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 06 to Rs 8.1 billion in 07. Along with the share capital, the reserves of the bank increased to Rs 10.3 billion. The earning assets to deposits ratio has 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.
DIVIDEND PAYOUT RATIOS
The Board of Directors of UBL has recommend a final cash dividend of Re 1/- per share ie 10% (in addition to interim dividend of 15% already paid for the year) and bonus issue of 10% for the year ended December 31, 2008.
The average price per share fell slightly to Rs 155.76 during HY08 compared to Rs 163.2 in FY07 as profits fell in FY07. However, there has been a constant decline in share price and the average share price for FY08 is Rs 75.50.
FUTURE OUTLOOK
SBP has relaxed the monetary policy slightly by decreasing the key discount rate to 14 percent. This will not have any major impact on the banking sector as the market had already incorporated this cut in its estimations. This will hamper the asset quality of UBL, especially the consumer advances portfolio. Consumer banking has a major share in the total advances of the bank. With rising inflation and interest rates the NPLs may increase and higher provisioning may dampen the profitability of the bank. Tight monetary policy and rising inflation may also lower the credit off take (advances) and affect the consumer business on which the bank relies and focuses a lot.
However, recently SBP has allowed banks to avail 30% FSV benefit of collateral for calculating provisioning requirement. 30% FSV is allowed against pledged stocks and mortgaged commercial and residential properties only. This will reduce the provisioning and have a positive impact on the profitability of the banks. Also SBP has increased the minimum deposit rates for banks to 5% in May 2008. This may result in an increase in the cost of deposits of the banking industry. Since the UBL has lowered fixed deposits as compared to low cost savings and current accounts, it may not experience a significant rise in cost of funds.
Also, the interest rates on loan and advances are expected to rise at the same time so the spreads of the bank may decline to a small extent only. UBL has been changing its deposits structure. Higher proportion of low cost CASA and the introduction of high value wealth management products will prevent the bank's spread from shrinking.
The impact of the 2008-09 Budget on the banking industry is expected to be neutral. The withholding tax on cash withdrawals of over Rs 25,000 has been increased by 0.1% to 0.3%. This increase in WHT is not expected to impact the profitability of banks because the increase is insignificant and will likely be passed on to consumers. FED on banking services has been increased by 10 % but this too in not expected to have any affect as it may be passed on to the consumers.
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].